Form N-2 for MACC Private Equities Inc.
As filed with the Securities and Exchange Commission on September 24, 2004
Securities Act Registration No. 333-______
_______________________________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ____
[ ] Post-Effective Amendment No. ____
and/or
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment No. ____
MACC PRIVATE EQUITIES INC.
Exact name of Registrant as Specified in Charter
15 West South Temple Street, Suite 520
Salt Lake City, UT 84101
(Number, Street, City, State, Zip Code)
(801) 524-8939
Registrant's Telephone Number, including Area Code
Kent I. Madsen
President and CEO
MACC Private Equities Inc.
15 West South Temple Street, Suite 520
Salt Lake City, UT 84101
Copy to:
David E. Gardels, Esq.
Blackwell Sanders Peper Martin LLP
1620 Dodge Street, Suite 2100
Omaha, Nebraska 68102
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the registration statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box: [X]
It is proposed that this filing will become effective (check appropriate box)
[ ] when declared effective pursuant to section 8(c)
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective
date for a previously filed [post-effective amendment]
[registration statement].
[ ] This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
and the Securities Act registration number of the earlier
effective registration statement for the same offering is
___-_______.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
____________________________________________________________________________________
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE (1) PRICE(1) FEE(1)
____________________________________________________________________________________
Common Stock,
$.01 par value 768,654 $3.50 $2,690,289 $341.00
Subscription Rights 768,654 -- -- --
____________________________________________________________________________________
(1) Estimated for purposes of calculating the registration fee pursuant to Rule
457(c) under the Securities Act of 1933, as amended (the "1933 Act"), based
on the average of the high and low price per share of Common Stock on
September 21, 2004 as reported on the Nasdaq SmallCap Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE 1933
ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
MACC PRIVATE EQUITIES INC.
FORM N-2
CROSS REFERENCE SHEET
PARTS A AND B OF PROSPECTUS
ITEM CAPTION LOCATION IN PROSPECTUS
_____ _________ _________________________
Item 1. Outside Front Cover Front Cover Page
Item 2. Inside Front and Outside Back Cover Front Cover Page; Outside
Page Back Cover Page
Item 3. Fee Table and Synopsis Summary; Fee Table and Example
Item 4. Financial Highlights Selected Financial Data; Selected Per
Share Data; MD&A
Item 5. Plan of Distribution "The Offering"
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds; Investment Objectives
Item 8. General Description of the Registrant Cover Page; Summary; Risk Factors;
Description of MACC; Investment
Objectives
Item 9. Management Management; Custodian & Transfer Agent
Item 10. Capital Stock, Long-Term Debt, and Dividends and Dividend Reinvestment
Other Securities Plan; The Offering; Description of
Common Stock
Item 11. Defaults and Arrears on Senior Not Applicable
Securities
Item 12. Legal Proceedings Description of MACC - Legal Proceedings
Item 13. Table of Contents of the Statement of Not Applicable
Additional Information
Item 14. Cover Page Front Cover Page
Item 15. Table of Contents Back Cover Page
ITEM CAPTION LOCATION IN PROSPECTUS
_____ _________ _________________________
Item 16. General Information and History Description of MACC
Item 17. Investment Objective and Policies Investment Objectives
Item 18. Management Management; Description of Common
Stock--Convertible Debt
Item 19. Control Persons and Principal Holders Principal Shareholders
of Securities
Item 20. Investment Advisory and Other Services Information About MACC's Officers
and the Investment Adviser; Description
of MACC-Investment Advisers Act of 1940
and the Investment Advisory Agreement
Item 21. Brokerage Allocation and Other Practices Not Applicable
Item 22. Tax Status Federal Income Tax Considerations
Item 23. Financial Statements Financial Statements
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED SEPTEMBER 24, 2004
[Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale for these securities
in any state in which such offer, solicitation or sale is not permitted.]
768,654 SHARES OF COMMON STOCK
Issuable upon the Exercise of Transferable Rights to Subscribe for such Shares
|
MACC Private Equities Inc. (the "MACC") is issuing to its shareholders of
record ("Record Date Shareholders") as of the close of business on ___________,
2004 (the "Record Date") transferable rights ("Rights") entitling you to
subscribe for an aggregate of 768,654 shares of common stock, $.01 par value
("Common Stock"), of MACC (such shares, together with all outstanding shares of
MACC's Common Stock, "Shares"). You will receive one Right for each three Shares
you hold on the Record Date. The number of Rights issued to you will be rounded
up to the nearest number of Rights. The Rights entitle you to subscribe for
Shares at the rate of one Share for every one Right held (the "Primary
Subscription"). The Rights further entitle you to subscribe, subject to certain
limitations and subject to allotment, for any Shares not acquired by other
holders in the Primary Subscription (the "Over-Subscription Privilege"). The
offering (the "Offering") will expire at 5:00 p.m., Eastern time, on
______________, 2004 (the "Expiration Date"), unless extended by MACC. The
Rights are transferable and will be listed for trading on the Nasdaq SmallCap
Market under the symbol ["MACCR."] The Shares trade on the Nasdaq SmallCap
Market under the symbol "MACC."
The subscription price for each Share to be issued pursuant to the Offering
will be 95% of the volume-weighted average of the last reported bid price per
Share on the Nasdaq SmallCap Market on the Expiration Date and the four
preceding business days (the "Subscription Price"). You will not know the actual
Subscription Price at the time of exercise. You therefore will be required
initially to pay for the Shares at the estimated Subscription Price of $______
per Share, based on the volume-weighted average of the last reported bid price
per share on the Nasdaq SmallCap Market on the commencement date of the Offering
and each of the four preceding business days ("Estimated Subscription Price").
Once you subscribe for Shares and your payment is received, you will not be able
to change your decision.
Shareholders who do not exercise their Rights should expect that they will,
at the completion of the Offering, own a smaller proportional interest in MACC
than they would if they exercised. In addition, because the Subscription Price
per Share will be less than the net asset value per share on the Pricing Date,
you will experience an immediate dilution, which could be significant, of the
aggregate net asset value of your shares. This dilution will disproportionately
affect you if you do not exercise your Rights in full. MACC cannot state
precisely the extent of this dilution at this time because MACC does not know
what the net asset value per share will be when the Offering expires, what the
Subscription Price will be or what proportion of the Rights will be exercised.
See "Risk Factors - Dilution."
The net asset value per share at the close of business on September 30,
2001, September 30, 2002 and September 30, 2003 were $8.60, $6.72 and $5.47,
respectively, and the last reported bid price per share on the Nasdaq SmallCap
Market on ___________, 2004 was $____.
1
MACC does not have a dividend distribution policy, and does not currently
pay to its shareholders a minimum annual distribution. MACC has paid no
dividends in cash to its shareholders since inception in 1995.
MACC is a non-diversified, closed-end management investment company that
has elected to be treated as a business development company ("BDC") under the
Investment Company Act of 1940 (the "1940 Act"). The investment objective of
MACC is to provide shareholders with long-term capital appreciation by investing
primarily in privately-placed convertible debt or equity securities of private
companies. MACC's mailing address is 15 West South Temple Street, Suite 520,
Salt Lake City UT 84101; its telephone number is (801) 524-8941.
MACC files period reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). The public may read and copy any
materials filed by MACC at the SEC's Public Reference Room at 450 Fifth Street,
NW., Washington, DC 20549, or on the SEC's Web site at http://www.sec.gov.
FOR A DISCUSSION OF CERTAIN RISK FACTORS AND SPECIAL CONSIDERATIONS WITH RESPECT
TO OWNING SHARES, SEE "RISK FACTORS," "DESCRIPTION OF MACC" AND "INVESTMENT
OBJECTIVES AND POLICIES" IN THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Per Share Total (4)
--------- -----
Estimated Subscription Price(1) $________ $________
Sales Load None None
Estimated Proceeds to MACC (2) (3) $________ $________
-------------------
(1) The Estimated Subscription Price is computed as 95% of the volume-weighted
average of the last reported bid price of MACC's Common Stock on the Nasdaq
SmallCap Market on __________, 2004 and each of the four preceding business
days.
(2) Before deduction of Offering costs incurred related to this Offering,
payable by MACC, estimated at $_____.
(3) Funds received prior to the final due date of the Offering will be
deposited into a segregated interest-bearing account (which interest will be
paid to MACC) pending proration and distribution of Shares. Interest on
subscription monies will be paid to MACC regardless of whether shares are issued
by MACC.
(4) Assumes all Rights are exercised at the Estimated Subscription Price.
This Prospectus sets forth concisely the information about MACC that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus and to retain it for future reference.
ALL QUESTIONS AND INQUIRIES RELATING TO THE OFFERING SHOULD BE DIRECTED TO THE
INFORMATION AGENT, _____________, TOLL FREE AT TELEPHONE NUMBER __________ OR
EMAIL ADDRESS ______________. THE MAILING ADDRESS OF __________________ IS
_________________________.
The date of this Prospectus is ________________, 2004
2
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE OFFERING FULLY, YOU
SHOULD READ THE ENTIRE DOCUMENT CAREFULLY, INCLUDING THE RISK FACTORS.
Purpose of the Offering
The Board of Directors of MACC has determined that it is in the best
interests of MACC and its shareholders to increase the number of outstanding
Shares of MACC and to increase the assets of MACC available for investment
(primarily made through MACC's subsidiary, MorAmerica Capital). The Board of
Directors of MACC approved the Offering because it believes the Offering may:
• increase the level of market interest in MACC and the liquidity of the
Shares;
• provide a source of funds (other than distributions from MorAmerica
Capital, which are currently restricted) for MACC to be able to pay
its operating expenses;
• reduce expenses per Share due to the spreading of fixed expenses over
a larger number of outstanding Shares and lower MACC's expenses as a
proportion of net assets;
• allow MACC to achieve greater breadth in its investment portfolio by
increasing the total number and amount of portfolio investments;
• increase MorAmerica Capital's maximum single investment size, which
may permit MorAmerica Capital to make larger portfolio investments and
may make more portfolio investment opportunities available to
MorAmerica Capital on more competitive terms; and
• to enhance MorAmerica Capital's regulatory capital position as a Small
Business Investment Company under rules and regulations of the Small
Business Administration.
The Board considered the effect that the issuance of the Shares would have
on the net asset value per Share of MACC and also considered the dilutive effect
on current shareholders, particularly those who determine not to exercise their
Rights to purchase additional Shares. The Board considered that
non-participating shareholders would have the opportunity to sell their Rights
for cash and would derive a benefit if MACC invests additional amounts that earn
a return that exceeds the dilution, thus mitigating the dilutive effect of the
Rights Offering on those shareholders.
The Board believes that the Offering would permit MACC to accomplish these
objectives, while allowing shareholders an opportunity to purchase additional
Shares at a price below market value without paying a brokerage commission.
Important Terms of the Offering
Maximum Number of Shares to be Issued 768,654
Number of Rights Issued 768,654
Number of Rights Issued Per Existing Shares 1 Right for each 3 Shares
held
Subscription Ratio 1 Right to buy 1 Share
Estimated Subscription Price $__________
3
Shares Outstanding at ________________, 2004 2,329,255
Key Elements of the Offering
• One-For-Three Offering
The Offering will give shareholders of record the "right" to purchase one
new Share of MACC for every three Shares held on the record date. For
example, if you own 300 Shares on the announced record date, you will
receive 100 Rights entitling you to purchase 100 new Shares of MACC.
Shareholders will be able to exercise all or some of their Rights. The
number of Rights issued to a Record Date Shareholder will be rounded up to
the nearest number of Rights. However, Record Date Shareholders who do not
exercise all of their Rights in the primary subscription will not be able
to participate in the Over-Subscription Privilege. See "Over-Subscription
Privilege" below.
• Transferable Rights
The Rights issued in the Offering will be transferable, are expected be
traded on the Nasdaq SmallCap Market and will afford non-subscribing
shareholders the option of selling their Rights on the Nasdaq SmallCap
Market or through the subscription agent, ____________________ (the
"Subscription Agent"). Selling the Rights allows a non-exercising
shareholder (i.e., a shareholder who does not wish to purchase additional
Shares in the Offering) the ability to offset some of the dilution which
would otherwise occur. In contrast, in a non-transferable rights offering
(i.e., an offering where the rights cannot be traded), non-exercising
shareholders would experience full dilution.
There can be no assurance that a liquid trading market will develop for the
Rights or that the price at which such Rights trade will approximate the
amount of dilution otherwise realized by a non-exercising shareholder. The
period during which Rights will trade will be limited and, upon the
Expiration Date, the Rights will cease to trade and will have no residual
value.
• Subscription Price
Under the Offering, new Shares will be sold at a price equal to 95% of the
volume-weighted average of the last reported bid price per Share on the
Nasdaq SmallCap Market on the Expiration Date and the four preceding
business days. Management believes that this pricing formula (versus a
higher or lower percentage discount or a pre-determined fixed price) will
provide an incentive to shareholders (as well as others who might trade in
the transferable Rights) to participate in the Offering.
• Over-Subscription Privilege
If all of the Rights initially issued are not exercised by Record Date
Shareholders, any unsubscribed Shares will be offered to other Record Date
Shareholders and Rights holders who have exercised all Rights held by them
and who wish to acquire more than the number of Shares they are entitled to
purchase pursuant to the exercise of their Rights. You must exercise all of
your Rights in order to participate in the Over-Subscription Privilege. If
shares are insufficient to honor all over-subscriptions, the available
shares will be allocated pro-rata among those who over-subscribe based on
the number of Rights held by them.
How to Exercise Rights
• If your existing Shares are held in a brokerage account or by a custodian
bank or trust company, contact your broker or financial adviser for
additional instructions on how to participate in the Offering.
• If your existing Shares are held by you of record, complete, sign and date
the enclosed Subscription Certificate.
4
• Make your check or money order payable to "MACC Private Equities Inc." in
the amount of $___________ for each Share you wish to buy including any
Shares you wish to buy pursuant to the Over-Subscription Privilege. This
payment may be more or less than the actual Subscription Price. Additional
payment may be required when the actual Subscription Price is determined.
You should mail the subscription certificate and your payment in the
enclosed envelope to the Subscription Agent in a manner that will ensure
receipt prior to 5:00 p.m., Eastern time, on _________, 2004, unless
extended. Its mailing address is ___________________.
Once you subscribe for Shares and your payment is received, you will not be
able to change your decision.
You will have no right to rescind a purchase after the Subscription Agent
has received the Subscription Certificate or Notice of Guaranteed Delivery. See
"The Offering."
The Subscription Agent will deposit all checks received by it prior to the
final due date into a segregated interest-bearing account pending distribution
of the shares from the Offering. All interest will accrue to the benefit of
MACC, and you will not earn interest on payments submitted.
Important Dates to Remember
Record Date __________, 2004
Final Date for Sales of Rights __________, 2004
Expiration Date (Payment for Shares and Notices of __________, 2004
Guaranteed Delivery Due) (unless extended)
Due Date for Delivery by Brokerage Firms or Custodian __________, 2004
Banks of Payment and Subscription Certificates to (unless extended)
Subscription Agent pursuant to Notice of Guaranteed
Delivery
Mailing of Shares and Confirmations of Purchases of Not later than
Shares __________, 2004
(unless extended)
Additional Terms of the Offering
The Rights entitle you to subscribe for Shares at the rate of one Share for
every one Right held by you. You will receive one Right for each three Shares
you hold on the Record Date. These Rights are transferable. The holders of the
Rights may exercise them at any time from the date of this Prospectus until 5:00
p.m., Eastern time, on _____________, 2004, unless extended.
In addition, if a Record Date Shareholder or a purchaser of Rights
subscribes for the maximum number of Shares to which it is entitled, such holder
may also subscribe for Shares that were not otherwise subscribed for by other
shareholders. Shares acquired pursuant to the Over-Subscription Privilege are
subject to allotment, which is more fully discussed below under "The Offering -
Over-Subscription Privilege." MACC will not offer or sell in connection with the
Offering any Shares that are not subscribed for pursuant to the Primary
Subscription or the Over-Subscription Privilege.
No fractional Rights will be issued.
The Subscription Price per Share will be 95% of the volume-weighted average
of the last reported bid price per Share on the Nasdaq SmallCap Market on the
Expiration Date and each of the four preceding business days.
5
The Rights are transferable and will be listed for trading on the Nasdaq
SmallCap Market under the symbol ["MACCR."] There is no assurance that a market
for the Rights will develop.
Before exercising your Rights pursuant to the Offering, you should consider
the factors described in this Prospectus, including without limitation, the
factors described under "Description of MACC," "Investment Objectives and
Policies" and "Risk Factors." These factors include the effects of the Offering
and the fact that Shares generally trade below their net asset value. In
addition, the Offering involves the risk of an immediate dilution of the
aggregate net asset value of your Shares, if you do not fully exercise your
Rights.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE METHOD OF SUBSCRIBING
FOR SHARES OR FOR ADDITIONAL COPIES OF THIS PROSPECTUS OR SUBSCRIPTION
CERTIFICATES OR NOTICES OF GUARANTEED DELIVERY MAY BE DIRECTED TO THE
INFORMATION AGENT, ______________________, TOLL FREE AT TELEPHONE NUMBER
_____________, EMAIL ADDRESS _____________________ OR THE MAILING ADDRESS OF
______________________________________________ ______________________________.
SHAREHOLDERS MAY ALSO CONTACT THEIR BROKERS OR NOMINEES FOR INFORMATION WITH
RESPECT TO THE OFFERING.
MACC
MACC is a non-diversified, closed-end management investment company that
has elected to be treated as a BDC under the 1940 Act. The investment objective
of MACC is to provide shareholders with long-term capital appreciation by making
primarily later-stage venture capital investments using borrowed funds. Although
there is significant risk inherent in this strategy, we believe that over the
long term, we will be able to achieve higher returns on our invested capital if
we deploy our available capital in primarily later-stage venture capital
investments and increase the funds we have available for investment by borrowing
additional funds.
MACC has one subsidiary, MorAmerica Capital Corporation ("MorAmerica
Capital"). MorAmerica Capital is an Iowa corporation incorporated in 1959, which
has been licensed as a small business investment corporation since that year. It
is also a BDC under the 1940 Act. MACC's investing activities are conducted
primarily through MorAmerica Capital.
MACC does not currently pay to its shareholders a minimum annual
distribution or other dividend. MACC has paid no dividends in cash to its
shareholders since inception in 1995.
As discussed more fully in this Prospectus, investment in MACC involves a
number of significant and substantial risks, including:
• risks associated with MACC's investments in higher risk securities of
private companies;
• risks associated with MACC's investments in certain restricted and
illiquid securities;
• the fluctuation of MACC's net asset value in connection with changes
in the value of its portfolio securities; and
• interest rate risks on borrowed funds.
No assurance can be given that MACC will achieve its investment objectives.
In addition, the Rights Offering involves the risk of an immediate dilution
of the aggregate net asset value of your Shares if you do not fully exercise
your Rights.
6
The Investment Adviser
Atlas Management Partners, LLC., a Utah limited liability corporation
("Atlas" or the "Investment Adviser"), with its executive offices at 15 West
South Temple Street, Suite 520 Salt Lake City, Utah 84101, is the investment
advisor to MACC and MorAmerica Capital and is registered as an investment
advisor under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"), and subject to its reporting and other requirements. Atlas currently is
the investment manager of no other funds. Atlas is primarily responsible for the
selection, structure and administration of MACC's investment portfolios.
InvestAmerica Investment Advisors, Inc., an Iowa corporation
("InvestAmerica" or the "Subadviser"), has been retained by MACC, MorAmerica
Capital and Atlas to serve as a subadvisor. Prior to March 1, 2004,
InvestAmerica was the investment advisor to MACC and MorAmerica Capital. For
additional information on the Adviser, the Subadviser and the terms of their
contracts, see "DESCRIPTION OF MACC - INVESTMENT ADVISORS ACT OF 1940 AND THE
INVESTMENT ADVISORY AGREEMENTS."
FEE TABLE AND EXAMPLE
The following Fee Table and Example are intended to assist investors in
understanding the costs and expenses that an investor in MACC bears directly or
indirectly.
FEE TABLE
________________________________________________________________________________
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of the Subscription Price per Share) None
________________________________________________________________________________
ANNUAL EXPENSES (AS A PERCENTAGE OF MACC'S AVERAGE NET ASSETS)(1)
Management Fee(2) 6.39%
________________________________________________________________________________
Interest Expense
15.53%
________________________________________________________________________________
Other Expenses 11.68%
________________________________________________________________________________
Total Annual Expenses(2) 33.60%
_________________________________________________________________________________
(1) Fiscal year ended September 30, 2003
(2) Management Fee is net of fees waived during the fiscal year ended September
30, 2003. Management fee percentage is 7.66% before adjustment for waived
management fees. Total annual expenses before adjustment for waived
management fees is 34.88%. In addition to its management fees, Atlas is
entitled to receive an incentive fee payable quarterly that is equal to 20%
of MACC's realized capital gains in excess of realized capital losses,
after allowance for any unrealized capital losses in excess of unrealized
capital gains on the portfolio investments of MACC incurred during MACC's
fiscal year. No incentive fees were paid in the fiscal year ended September
20. 2003.
7
EXAMPLE
_______
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
______ _______ _______ ________
You would pay the following expenses
on a $1,000 investment, assuming a 5%
annual return throughout the periods $344 $1,086 $1,903 $4,332
The purpose of the foregoing table and example is to assist investors in
understanding the various costs and expenses that an investor in MACC bears,
directly or indirectly. It should be noted that if any portion of the assumed
return on investment includes net realized gain, an incentive fee of 20% of such
realized gain may be incurred and would further increase expenses reflected in
the table above. The example set forth above assumes an annual expense ratio of
33.60%. The Fee Table above and the assumption in the Example of a 5% annual
return are required by Securities and Exchange Commission (the "Commission")
regulations applicable to all management investment companies. The Example and
Fee Table should not be considered as a representation of past or future
expenses or annual rates of return, which may be more or less than those assumed
for purposes of the Example and Fee Table. The percentage for "Other Expenses"
set forth on the Fee Table is based on estimated amounts for the current fiscal
year.
8
SELECTED FINANCIAL DATA
The following selected financial data for the period from September 30,
1999 through September 30, 2003 is derived from MACC's audited financial
statements. The selected data presented for the nine months ended June 30, 2003
and June 30, 2004 is derived from unaudited financial statements of MACC which,
in the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of MACC as of and for these periods. Results
of operations for the nine months ended June 30, 2004 are not necessarily
indicative of the results of operations that may be achieved for the full fiscal
year. The Data should be read in conjunction with MACC's financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Nine Months Ended June 30, Fiscal Years Ended September 30,
========================== ===================================================================
2004 2003 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
Investment (1,847,444) (1,664,818) (2,206,134) (926,634) (284,263) 50,810 (7,459)
(expense)
income, net
Net realized 2,506,339 (1,893,048) (3,600,749) (4,592,480) 2,488,350 (2,266,652) 3,293,177
(loss) gain on
investments,
net
Net change in (484,199) (502,937) 2,896,291 1,132,647 (8,477,187) 4,478,415 (607,771)
unrealized --------- --------- --------- --------- ----------- --------- ---------
appreciation/
deprecation
on investments
Net change in 174,696 (4,060,803) (2,910,592) (4,386,467) (6,273,100) 2,262,573 2,677,947
net assets from ======= =========== =========== =========== =========== ========= =========
operations
Net change in 0.08¹ (1.74¹) (1.25¹) (1.88¹) (2.69¹) 0.97² 1.15³
net assets from ===== ======= ======= ======= ======= ===== =====
operations per
common share
Total assets 42,064,897 40,706,883 41,233,118 44,013,701 41,395,958 46,607,466 38,535,445
========== ========== ========== ========== ========== ========== ==========
Total long term 27,940,000 27,938,910 27,940,000 27,934,004 20,972,463 20,320,922 13,763,123
debt ========== ========== ========== ========== ========== ========== ==========
Net assets 12,920,608 11,595,701 12,745,912 15,656,504 20,042,941 25,645,569 23,394,148
========== ========== ========== ========== ========== ========== ==========
Net assets per 5.55¹ 4.98¹ 5.47¹ 6.72¹ 8.60¹ 11.01² 10.04³
share
¹Computed using 2,329,255 shares outstanding at June 30, 2004, September 30,
2003, June 30, 2003, September 30, 2002 and September 30, 2001.
²Per share data have been restated to reflect a 20% stock split effected in the
form of a stock dividend on March 31, 2001.
³Per share data have been restated to reflect a 20% stock split effected in the
form of a stock dividend on March 31, 2001 and a 20% stock split effected in the
form of a stock dividend on March 31, 2000.
9
SELECTED PER SHARE DATA
Nine Months Ended
June 30, June 30, FOR THE YEARS ENDED SEPTEMBER 30:
2004¹ 2003¹ 2003¹ 2002¹ 2001¹ 2000² 1999³
--------- --------- --------- --------- ---------- --------- ---------
(Unaudited)
Investment income 0.86 0.84 1.09 1.28 1.30 1.20 0.97
Other operating expenses (0.96) (0.84) (1.10) (0.82) (0.68) (0.60) (0.49)
Interest expense (0.69) (0.71) (0.94) (0.86) (0.74) (0.58) (0.48)
--------- --------- --------- --------- ---------- --------- ---------
Investment (expense)
income, net (0.79) (0.71) (0.95) (0.40) (0.12) 0.02 -
Net realized gain
(loss) on investments 1.08 (0.81) (1.54) (1.97) 1.07 (0.97) 1.41
Net change
in unrealized appreciation/
depreciation of investments (0.21) (0.22) 1.24 0.49 (3.64) 1.92 (0.26)
Allocation of income tax
benefit to additional
paid-in capital - - - - 0.28 - 0.51
--------- --------- --------- --------- ---------- --------- ---------
Net change in net assets
from operations 0.08 (1.74) (1.25) (1.88) (2.41) 0.97 1.66
Net asset value,
beginning of period 5.47 6.72 6.72 8.60 11.01 10.04 8.38
--------- --------- --------- --------- ---------- --------- ---------
Net asset value,
end of period 5.55 4.98 5.47 6.72 8.60 11.01 10.04
========= ========= ========= ========= ========== ========= =========
¹Computed using 2,329,255 shares outstanding at June 30, 2004, September 30,
2003, June 30, 2003, September 30, 2002 and September 30, 2001.
²Per share data have been restated to reflect a 20% stock split effected in the
form of a stock dividend on March 31, 2001.
³Per share data have been restated to reflect a 20% stock split effected in the
form of a stock dividend on March 31, 2001 and a 20% stock split effected in the
form of a stock dividend on March 31, 2000.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
MACC's primary goal is to create long-term appreciation of shareholder
value based upon the successful management of later stage venture capital
investments.
Sources of Operating Income
The major source of operating income for MACC is investment income, either
in the form of interest on debentures, dividends on stock, or interest on
securities held pending investment in portfolio companies. However, MACC also
generates income through capital gains. Further, MACC in some cases receives due
diligence, commitment, and closing fees, as well as other similar types of
revenue. Director's compensation received by Atlas (or its personnel) for
services to a portfolio company is paid to the account of MACC.
Financial Condition, Liquidity and Capital Resources
To date, MACC has relied upon several sources to fund its investment
activities, including MACC's cash and money market accounts and the Small
Business Investment Company ("SBIC") leverage program operated by the 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 leverage program to
fund a portion of its investment capital requirements. At present, committed
leverage with a commitment period of up to four years is available through the
SBIC leverage program and MACC anticipates that leverage may be available in
future periods. MACC has not currently budgeted to borrow any funds through the
SBIC leverage program during fiscal year 2004.
As of June 30, 2004, MACC's cash and money market accounts totaled
$7,884,630. MACC has commitments for an additional $3,500,000 and $6,500,000 in
SBA guaranteed debentures, which expire on September 30, 2005 and September 30,
2007, respectively. Subject to the risks and uncertainties described in this
Prospectus, MACC believes that its existing cash and money market accounts, the
$10,000,000 of SBA commitments, and other anticipated cash flows, will provide
adequate funds for MACC's anticipated budgeted cash requirements during the
current fiscal year, including portfolio investment activities, principal and
interest payments on outstanding debentures payable and administrative expenses.
MACC's budgeted investment objective is to invest $2,500,000 in new and
follow-on investments during the current fiscal year. Based upon current
economic and operating conditions, actual investment results for fiscal year
ending September 30, 2004 may be somewhat below budget. MACC has invested
$481,934 in follow-on investments through June 30, 2004.
Debentures payable are composed of $27,940,000 in principal amount of
SBA-guaranteed debentures issued by MACC's subsidiary, MorAmerica Capital.
Subject to the risks and uncertainties described in this Prospectus, it is
anticipated MorAmerica Capital will be able to roll over these debentures with
new ten-year debentures when they mature. The following table shows our
significant contractual obligations for the repayment of debt and other
contractual obligations as of June 30, 2004.
11
Payments due by period
--------------------------------------------------------------------------------
Contractual Obligations
Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
----- ---------------- --------- --------- -----------------
SBA Debentures $27,940,000 2,150,000 --- 2,000,000 23,790,000
Loan Agreement¹ $ 270,000 67,500 202,500 --- ---
MACC currently anticipates that it will rely primarily on its current cash
and money market accounts and its cash flows from operations to fund its
investment activities and other cash requirements during the remainder of fiscal
year 2004. Although management believes these sources will provide sufficient
funds for MACC to meet its fiscal 2004 investment level objective and other
anticipated cash requirements, there can be no assurances that MACC's cash flows
from operations will be as projected, or that MACC's cash requirements will be
as projected. MACC's cash flow has been negatively affected by expenses
associated with the pending arbitration proceedings described in Note 3 to the
Unaudited Condensed Consolidated Financial Statements. An adverse outcome on
such arbitration proceedings could further adversely affect MACC's cash flow.
As an SBIC, MorAmerica Capital is required to comply with the regulations
of the SBA (the "SBA Regulations"). These regulations include the capital
impairment rules, as defined by Regulation 107.1830 of the SBA Regulations. As
of June 30, 2004, the capital of MorAmerica Capital was impaired less than the
maximum impairment percentage permitted under SBA Regulations. If MorAmerica
Capital continues to experience negative operating results, no assurances can be
given that MorAmerica Capital will continue to be less than the maximum
impairment percentage in future periods. If MorAmerica Capital would exceed the
maximum impairment percentage in future periods, a number of events could occur
which could have a material adverse effect on the financial position, results of
operations, cash flow and liquidity of MACC and MorAmerica Capital.
MorAmerica Capital is currently limited by the SBA Regulations in the
amount of distributions it may make to MACC. MACC historically has relied in
large part on distributions from MorAmerica Capital to fund its operating
expenses and other cash requirements. While the paragraphs above describe MACC's
liquidity on a consolidated basis, due to current limitations on MorAmerica
Capital's ability to make distributions to MACC, MACC has limited liquidity to
pay its holding company operating expenses. During the second quarter of the
current fiscal year, MACC entered into a loan agreement providing for advances
of up to $400,000 through a loan made by one of its directors. MACC obtained
$200,000 and $70,000 under this loan agreement in the second quarter and third
quarter, respectively, of the current fiscal year. It is anticipated that no
additional drawings will be necessary in the fourth quarter of the current
fiscal year. In addition to utilizing this loan facility, MACC is currently
evaluating a number of alternatives to provide for its liquidity, including one
or more of the capital transactions approved by shareholders at the 2004 annual
meeting. This Offering is one such transaction, and the net proceeds of this
Offering will enhance MACC's liquidity.
Results of Operations
MACC's investment income includes income from interest, dividends and fees.
Investment expense, net represents total investment income minus total operating
expenses. The main objective of portfolio company investments is to achieve
capital appreciation and realized gains in the portfolio. These gains and losses
are not
--------
¹ During the second quarter of the current fiscal year, MACC entered into a
loan agreement with one of its directors, Geoffrey T. Woolley, providing for
advances of up to $400,000 on a revolving credit basis through February 28,
2005. The outstanding principal amount of the loan as of March 1, 2005 will be
due and payable in four equal installments on the first day of June, September,
December, and March, commencing June 1, 2005 and concluding March 1, 2006. The
payment obligations in the table set forth above are based on the amount
outstanding under the loan agreement as of June 30, 2004. The entire unpaid
amount of the loan is convertible into shares of MACC's common stock at the
option of the lender.
12
included in investment expense, net. 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.
Third Quarter Ended June 30, 2004 Compared to Third Quarter Ended June 30, 2003
For the three months ended
June 30,
--------------------------------
2004 2003 Change
------------------------------------------------
Investment income $ 672,573 715,734 (43,161)
Net operating expenses (975,141) (1,472,428) 497,287
----------- ----------- ---------
Investment expense, net (302,568) (756,694) 454,126
----------- ----------- ---------
Net realized gain on investments 29,875 899,234 (869,359)
Net change in unrealized appreciation/
depreciation on investments (80,659) (2,955,958) 2,875,299
----------- ----------- ---------
Net loss on investments (50,784) (2,056,724) 2,005,940
----------- ----------- ---------
Net change in net assets from operations $ (353,352) (2,813,418) 2,460,066
=========== =========== =========
Net asset value:
Beginning of period $ 5.70 6.74
====== ====
End of period $ 5.55 4.98
====== ====
Investment Income
During the current year third quarter, total investment income was
$672,573, a decrease of $43,161, or 6%, from total investment income of $715,734
for the prior year third quarter. In the current year third quarter as compared
to the prior year third quarter, interest income decreased $65,294, or 13%,
dividend income increased $36,738, or 17%, processing fees decreased $5,556, or
100%, and other income decreased $9,049, or 78%. The decrease in interest income
is mainly due to the receipt of $2,159,800 in principal payments on five
portfolio investments during the current fiscal year. In the current year third
quarter, MACC received dividends on six existing portfolio companies, as
compared to dividend income received in the prior year third quarter on seven
existing portfolio companies. The distributions from limited liability companies
in the current year third quarter were larger than in the prior year third
quarter. Processing fees decreased due to no new or follow-on portfolio company
investments made in the current year third quarter, compared to one restructure
of an existing portfolio company investment in which MACC received a processing
fee at closing in the prior year third quarter. The decrease in other income is
due to advisory fees received from one portfolio company in the prior year third
quarter.
Operating Expenses
Total operating expenses for the third quarter of the current year were
$975,141, a decrease of $497,287, or 34%, as compared to total operating
expenses for the prior year third quarter of $1,472,428. Interest expense
decreased $18,706, or 3%, in the current year third quarter due to a reduction
in the interest rate on $2,150,000 of SBA-guaranteed debentures to 3.125% in the
current year second quarter, from 6.12% in the prior year third quarter.
Following the expiration of the terms of the investment advisory agreements
between each of MACC and MorAmerica Capital and InvestAmerica, MACC and
MorAmerica Capital each entered into an investment advisory agreement with the
Investment Adviser. Contemporaneously with this change in investment advisor,
MACC, MorAmerica Capital, the Investment Adviser and InvestAmerica entered into
an a agreement pursuant to which InvestAmerica will act as a subadvisor with
respect to the companies' existing investment portfolio as of the transition
date. Management fees increased $53,448, or 26%, in the current year third
quarter due to a voluntary reduction in management fees taken by InvestAmerica
in the prior year third quarter which terminated on February 29, 2004.
Professional fees decreased $374,102, or 80%, in the current year third quarter
primarily due to decreased legal expenses in connection with arbitration
proceedings related to the sale of a former portfolio company and legal
13
and accounting fees to comply with new securities and exchange corporate
governance requirements in the prior year third quarter. Professional fees are
expected to be high in the next three to six months due to the item identified
in Note 3 to the Unaudited Condensed Consolidated Financial Statements and legal
advice in implementing the future direction of MACC. Other expenses decreased
$157,927, or 64%, in the current year third quarter as compared to the prior
year third quarter mainly due to the change in the other assets loss provision.
The other assets loss provision was higher in the prior year third quarter
because an additional loss provision of $205,433 was recorded with respect to
other securities which had been classified as other assets.
Investment Expense, Net
For the current year third quarter, MACC recorded investment expense, net
of $302,568, as compared to investment expense, net of $756,694 during the prior
year third quarter.
Net Realized Gain (Loss) on Investments
During the current year third quarter, MACC recorded net realized gain on
investments of $29,875, as compared with net realized gain on investments of
$899,234 during the prior year third quarter. In the current year third quarter,
MACC realized an additional gain of $3,380 from the sale of one portfolio
company which occurred in the current year second quarter and the adjustment of
$26,495 in deferred incentive fees due to the revaluation of the deferred gain.
Management does not attempt to maintain a comparable level of realized gains
quarter to quarter but instead attempts to maximize total investment portfolio
appreciation through realizing gains in the disposition of securities and
investing in new portfolio investments.
Net Change in Unrealized Appreciation/Depreciation of Investments
MACC recorded net change in unrealized appreciation/depreciation on
investments of ($80,659) during the current year third quarter, as compared to
($2,955,958) during the prior year third quarter. This net change in unrealized
appreciation/depreciation on investments of ($80,659) is the net effect of
increases in fair value of three portfolio companies totaling $652,732 and
decreases in fair value of four portfolio companies totaling $733,391.
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation net of
unrealized depreciation on MACC's total investment portfolio. When MACC
increases the fair value of a portfolio investment above its cost, the
unrealized appreciation for the portfolio as a whole increases, and when MACC
decreases the fair value of a portfolio investment below its cost, unrealized
depreciation 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 or writes off a depreciated portfolio investment for a loss, unrealized
depreciation for the portfolio as a whole decreases as the loss is realized.
Net Change in Net Assets from Operations
MACC experienced a decrease of $353,352 in net assets at the end of the
third quarter of fiscal year 2004, and the resulting net asset value per share
was $5.55 as of June 30, 2004, as compared to $5.47 as of September 30, 2003.
General economic conditions have recently appeared to have a positive impact on
the operating results and financial condition of a number of MACC's portfolio
companies and the majority of MACC's thirty-two operating portfolio companies
continue to be valued at cost or above. MACC has ten portfolio investments
valued at cost, has recorded unrealized appreciation on nine portfolio
investments and has recorded unrealized depreciation on thirteen portfolio
investments.
General economic conditions adversely affected a number of MACC's portfolio
companies during fiscal year 2003, which contributed to a decline in MACC's
operating performance and liquidity during the period. In an effort to improve
operating performance and liquidity in the current fiscal year, MACC projected
no new borrowings under the SBIC leverage program in the fiscal year 2004 budget
and has actively pursued opportunities to liquidate a number of portfolio
investments. As a result of these efforts and improvements in general economic
conditions, MACC's operating performance and liquidity through the first nine
months of the current fiscal year
14
have significantly improved, as compared to the comparable period during fiscal
year 2003. Management anticipates that if general economic conditions continue
to be conducive to portfolio investment liquidity events, subject to the risks
described in this report, MACC will experience further improvements in its
operating performance.
Nine Months Ended June 30, 2004 Compared to Nine Months Ended June 30, 2003
For the nine months ended
June 30,
--------------------------------
2004 2003 Change
--------------------------------------------------
Investment income $1,993,163 1,965,985 27,178
Net operating expenses (3,840,607) (3,630,803) (209,804)
----------- ----------- ----------
Investment expense, net (1,847,444) (1,664,818) (182,626)
----------- ----------- ----------
Net realized gain (loss) on investments 2,506,339 (1,893,048) 4,399,387
Net change in unrealized appreciation/
depreciation on investments (484,199) (502,937) 18,738
----------- ----------- ---------
Net gain (loss) on investments 2,022,140 (2,395,985) 4,418,125
---------- ----------- ---------
Net change in net assets from operations $ 174,696 (4,060,803) 4,235,499
========== =========== =========
Net asset value:
Beginning of period $ 5.47 6.72
====== ====
End of period $ 5.55 4.98
====== ====
Investment Income
During the current year nine-month period, total investment income was
$1,993,163, an increase of $27,178, or 1%, from total investment income of
$1,965,985 for the prior year nine-month period. In the current year nine-month
period as compared to the prior year nine-month period, interest income
decreased $81,976, or 6%, dividend income increased $219,311, or 49%, processing
fees decreased $22,741, or 100%, and other income decreased $87,416, or 90%. The
decrease in interest income is the net result of only three follow-on
investments made during the current year nine-month period, one investment which
converted all interest accrued and reserved to an equity investment, the placing
of debt portfolio securities issued by three portfolio companies on non-accrual
of interest status in the current year nine-month period which were accruing
interest in the prior year nine-month period and the receipt of $2,159,800 in
principal payments on five portfolio investments. In the current year nine-month
period and in the prior year nine-month period, MACC received dividends on eight
existing portfolio companies, however dividend payments were greater in the
current year nine-month period. Processing fees decreased due to no fees
received on the three follow-on investments made in the current year nine-month
period, compared to one follow-on investment and two existing portfolio company
investments in which MACC received processing fees in the prior year nine-month
period. The period-over-period decrease in other income is due to a decrease in
advisory fees received from two portfolio companies in the prior year nine-month
period.
Operating Expenses
Total operating expenses for the nine-month period of the current year were
$3,840,607, an increase of $224,804, or 6%, as compared to total operating
expenses for the prior year nine-month period of $3,615,803. Interest expense
decreased $56,119, or 3%, in the current year nine-month period due to a
reduction in the interest rate on $2,150,000 of SBA-guaranteed debentures to
3.125% in the current year nine-month period, from 6.12% in the prior year
nine-month period. Management fees increased $1,724, or 1%, in the current year
nine-month period mainly due to the termination of the agreement with
InvestAmerica to a voluntary, temporary reduction in management fees to reduce
the expenses of MACC. This voluntary, temporary reduction in management fees
terminated at February 29, 2004. Professional fees decreased $250,523, or 31%,
in the current year nine-month period primarily due to decreased legal expenses
in connection with arbitration proceedings related to the sale of a former
portfolio company and various corporate governance changes. Professional fees
are expected to be high for at least the next three to six months as a result of
the item identified in Note 3 to the Unaudited Condensed
15
Consolidated Financial Statements and legal advice in implementing the future
direction of MACC. Other expenses increased $529,722, or 112%, in the current
year nine-month period as compared to the prior year nine-month period mainly
due to the change in the other assets loss provision. The other assets loss
provision increased because depreciated portfolio securities were reclassified
as other assets in the current year nine-month period, which required the
unrealized depreciation on such assets in the amount of $532,760 to be recorded
as other assets loss provision, and because an additional loss provision of
$197,727 was recorded in the current year nine-month period with respect to
other securities which had been classified as other assets in a prior period.
Investment Expense, Net
For the current year nine-month period, MACC recorded investment expense,
net of $1,847,444, as compared to investment expense, net of $1,664,818 during
the prior year nine-month period.
Net Realized Gain (Loss) on Investments
During the current year nine-month period, MACC recorded net realized gain
on investments of $2,506,339, as compared with net realized loss on investments
of $1,893,048 during the prior year nine-month period. In the current year
nine-month period, MACC realized a gain of $328,968 from the sale of warrants of
one portfolio company, and $3,024,756 from the sale of equity interests of three
portfolio companies of which $3,259,790 was previously recorded as unrealized
appreciation. MACC also realized a loss of $847,385 from the write-off of one
portfolio company of which $847,384 was previously recorded as unrealized
depreciation. Management does not attempt to maintain a comparable level of
realized gains quarter to quarter but instead attempts to maximize total
investment portfolio appreciation by appropriately realizing gains in the
disposition of securities and investing in new portfolio investments.
Net Change in Unrealized Appreciation/Depreciation of Investments
MACC recorded net change in unrealized appreciation/depreciation on
investments of ($484,199) during the current year nine-month period, as compared
to ($502,937) during the prior year nine-month period. This net change in
unrealized appreciation/depreciation on investments of ($484,199) is the net
effect of increases in fair value of seven portfolio companies totaling
$2,166,255, decreases in fair value of four portfolio companies totaling
$770,809, the reversal of $3,259,789 of appreciation resulting from the sale of
warrants of one portfolio investment and the sale of equity interests of three
portfolio investments referenced above, the reversal of $847,384 of depreciation
resulting from the write-off of the investment in one portfolio investment, and
the reversal of $532,760 of depreciation resulting from the restructure of one
portfolio investment to other assets.
Fiscal 2003 Compared to Fiscal 2002
For the years ended
September 30,
-----------------------------
2003 2002 Change
----------------------------- -----------
Investment income $ 2,544,725 2,997,551 (452,826)
Operating expenses (4,735,859) (3,825,185) (910,674)
Income tax expense (15,000) (99,000) 84,000
-------------- ----------- -----------
Investment expense, net (2,206,134) (926,634) (1,279,500)
-------------- ----------- -----------
Net realized loss on investments (3,600,749) (4,592,480) 991,731
16
Net change in unrealized appreciation/
depreciation on investments 2,896,291 1,132,647 1,763,644
-------------- ----------- -----------
Net loss on investments (704,458) (3,459,833) 2,755,375
-------------- ----------- -----------
Net change in net assets from $ (2,910,592) (4,386,467) 1,475,875
operations ============== =========== =========
Net asset value:
Beginning of period $ 6.72 8.60
============= ==========
End of period $ 5.47 6.72
============= ==========
Investment Income
During the fiscal year ended September 30, 2003, total investment income
was $2,544,725, a decrease of 15% from fiscal year 2002 investment income of
$2,997,551. The decrease during the fiscal year 2003 was the net result of
decreases in interest income of $342,804, or 16%, dividend income of $64,840, or
10% and processing fees of $80,195, or 78%, and an increase in other income of
$35,013, or 37%. MACC attributes the decease in interest income primarily to no
new investments made during fiscal year 2003, the placing of debt portfolio
securities issued by five portfolio companies on non-accrual of interest status
during fiscal year 2003, MACC's receipt of $1,425,013 in principal payments on
several of its debt portfolio investments and the write-off of two portfolio
company debt security investments totaling $1,723,857. In most cases, MACC is
subordinated to senior secured financing and its ability to collect interest is
subject to the terms of the senior financing and subordination agreements. A
significant number of the portfolio investments that were placed on non-accrual
of interest status during fiscal years 2003 and 2002 had ceased making current
interest payments to MACC as a result of these subordination provisions.
Dividend income for fiscal years 2003 and 2002 represents dividends received on
eight existing portfolio companies, five of which are distributions from limited
liability companies. Dividend income decreased in fiscal year 2003 because the
distributions from the limited liability companies during fiscal year 2002 were
larger than the distributions in fiscal year 2003. Processing fees decreased in
fiscal year 2003 primarily as a result of fewer new and follow-on investments
made during fiscal year 2003. The increase in other income is due to advisory
fees received on two portfolio companies during fiscal year 2003, as compared to
advisory fees received on only one portfolio company in fiscal year 2002. The
timing and amount of dividend income, income from the collection of processing
fees on new investments and other income are difficult to predict.
Operating Expenses
Net operating expenses of MACC increased by 24% in fiscal year 2003 to
$4,735,859 from $3,825,185 in fiscal year 2002. The relative increase in net
operating expenses is the net result of increases of $185,548, or 9%, in
interest expense, $705,014, or 194%, in professional fees, $288,743 in net
unrealized loss on other assets, and a decrease of $217,000, or 19%, in
management fees (net of management fees waived). Interest expense increased due
to the accrual of a full year of interest during fiscal year 2003 on additional
borrowings of $6,955,000 from the Small Business Administration in fiscal year
2002. Professional fees increased primarily due to increased legal expenses due
to arbitration proceedings related to the sale of a former portfolio company and
compliance with new Securities and Exchange Commission and NASDAQ corporate
governance requirements. Because these arbitration proceedings are expected to
conclude during the first half of fiscal year 2004, MACC expects legal expenses
for fiscal year 2004 to be less than in fiscal year 2003. Net unrealized loss on
other assets increased $288,743 primarily due to the change in the other assets
loss provision which was recorded in fiscal year 2003. Management fees (net of
management fees waived) decreased due to MACC's investment advisor agreeing to a
voluntary, temporary reduction in management fees to reduce the expenses of
MACC.
17
Net Investment Expense
MACC had investment expense, net in fiscal year 2003 of $2,206,134, an
increase of 138% from investment expense, net of $926,634 in fiscal year 2002.
The increase in investment expense, net is the net result of the decrease in
investment income and increase in operating expenses described above.
Realized Loss on Disposition of Investments
MACC recorded a net realized loss on investments in fiscal 2003 of
$3,600,749, as compared to a net realized loss of $4,592,480 in fiscal year
2002. The fiscal year 2003 net realized loss is the net result of $875,137 of
realized gains from three portfolio companies and the recovery of $42,605 from
one portfolio company investment which was written off in a prior period, offset
by a realized loss of $236,785 from the sale of one portfolio company, of which
$335,002 was previously recorded as unrealized depreciation, and realized losses
of $4,281,706 from the write-off of four portfolio companies, of which
$3,716,076 was previously recorded as unrealized depreciation. Management does
not attempt to maintain a comparable level of realized gains quarter to quarter
but instead attempts to maximize total investment portfolio appreciation through
realizing gains in the disposition of securities and investing in new portfolio
investments.
Changes in Unrealized Appreciation/Depreciation of Investments
MACC had unrealized depreciation of $278,560 at September 30, 2003, a
positive change of $2,896,291, or 91%, from the $3,174,851 of unrealized
depreciation at September 30, 2002. This resulted in a net loss on investments
for fiscal year 2003 of $704,458, as compared to a net loss on investments of
$3,459,833 for fiscal year 2002. The fiscal year 2003 change in unrealized
appreciation/depreciation is the net effect of increases in fair value of seven
portfolio companies totaling $2,820,241, decreases in fair value of thirteen
portfolio companies totaling $3,673,462, the reversal of appreciation of
$301,566 in one portfolio investment from the sale of warrants resulting in a
realized gain, the reversal of depreciation of $335,002 in one portfolio
investment from the sale of the investment resulting in a realized loss, and the
reversal of $3,716,076 of depreciation resulting from the write-off of the
investment in four portfolio investments.
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation net of
unrealized depreciation on MACC's total investment portfolio. When MACC
increases the fair value of a portfolio investment above its cost, the
unrealized appreciation for the portfolio as a whole increases, and when MACC
decreases the fair value of a portfolio investment below its cost, unrealized
depreciation 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 or writes off a depreciated portfolio investment for a loss, unrealized
depreciation for the portfolio as a whole decreases as the loss is realized.
Changes in Net Assets from Operations
As a result of the items described above, MACC experienced a decrease of
$2,910,592, or 19%, in net assets during fiscal year 2003, and the resulting net
asset value per share was $5.47 at September 30, 2003, as compared to $6.72 at
September 30, 2002. Management attributes these disappointing results primarily
to the negative effect that general economic conditions during fiscal year 2003
had on MACC's investment income and the valuation of certain portfolio
investments, and the negative effects that increased professional fees and
interest expense had on MACC's operating expenses. Nevertheless, the majority of
MACC's forty portfolio companies continued to perform well at September 30,
2003. MACC realized gains on three portfolio companies and seven portfolio
investments increased in value during fiscal year 2003.
To mitigate the effects of the economic environment on MACC's operating
performance during fiscal 2003, MACC's investment advisor voluntarily agreed to
reduce the amount of management fees payable by MACC from January 1, 2003
through February 29, 2004. In addition, MACC reduced its projected investment
rate and projected borrowing rate in the revised fiscal 2003 budget.
18
Fiscal 2002 Compared to Fiscal 2001
For the years ended
September 30,
-----------------------------
2002 2001 Change
----------------------------- -----------
Investment income $ 2,997,551 3,024,842 (27,291)
Operating expenses (3,825,185) (3,239,105) 586,080
Income tax expense (99,000) (70,000) 29,000
------------ ----------- -----------
Investment expense, net (926,634) (284,263) (642,371)
------------ ----------- -----------
Net realized (loss) gain on investments (4,592,480) 2,488,350 (7,080,830)
Net change in unrealized appreciation/
depreciation on investments 1,132,647 ( 8,477,187) 9,609,834
------------ ----------- -----------
Net loss on investments (3,459,833) (5,988,837) 2,529,004
------------ ----------- -----------
Net change in net assets from $ (4,386,467) (6,273,100) 1,886,633
operations ============== =========== ==========
Net asset value:
Beginning of period $ 8.60 11.01
============= ==========
End of period $ 6.72 8.60
============= ==========
Investment Income
During the fiscal year ended September 30, 2002, investment income was
$2,997,551, a decrease of 1% from fiscal year 2001 investment income of
$3,024,842. The decrease during the 2002 fiscal year was the net result of an
increase in interest income of $94,930, or 5%, and decreases in dividend income
and processing fees of $134,182, or 17%, and $885, or 1%, respectively. MACC
attributed the increase in interest income primarily to the $5,251,849 of new
investments made during fiscal year 2002 which were structured as subordinated
debentures, partially offset by the effects of placing the debt portfolio
securities issued by two portfolio companies on non-accrual status during fiscal
year 2002, MACC's receipt of $2,102,621 in principal payments on several of its
debt portfolio investments and the write-off of three portfolio company debt
security investments totaling $4,414,887. In most cases, MACC is subordinated to
senior secured financing and its ability to collect interest is subject to the
terms of the senior financing and subordination agreements. The decrease in
dividend income represents dividends received on eight existing portfolio
companies, seven of which are distributions from limited liability companies, as
compared to dividends received on ten portfolio companies during fiscal year
2001. Processing fees decreased only slightly due to four new portfolio company
investments made in the current year, a restructuring of an existing portfolio
company investment and two follow-on portfolio investments in which MACC
received processing fees at the losing, compared to four new portfolio company
investments and four follow-on investments made in the prior year in which MACC
received a processing fee at closing.
19
Operating Expenses
Total operating expenses of MACC increased by 18% in fiscal year 2002 to
$3,825,185 from $3,239,105 in fiscal year 2001. The relative increase in
operating expenses is primarily due to increases of $277,113, or 16%, in
interest expense, $55,583, or 5%, in management fees, $235,742, or 185%, in
professional fees, and $17,642, or 6%, in other operating expenses. These
increases were generated from additional borrowings from the Small Business
Administration, increased assets under management, increased legal expenses due
to arbitration proceedings related to the sale of a former portfolio company and
compliance with new securities and exchange corporate governance requirements,
increased accounting fees and a change in the other assets loss provision,
respectively.
Investment Expense, Net
MACC had investment expense, net in fiscal year 2002 of $926,634, an
increase of 226% from an investment expense, net of $284,263 in 2001. The
increase in investment expense, net is the net result of the decrease in
investment income and increase in operating expenses described above.
Realized (Loss) Gain on Disposition of Investments
MACC recorded a net realized loss on investments in fiscal year 2002 of
$4,592,480, as compared to a net realized gain of $3,168,350 in fiscal year
2001. The fiscal year 2002 net realized loss is the net result of $947,539 of
realized gains from five portfolio companies and realized losses of $5,540,019
from the write-off of three portfolio companies, of which $4,115,424 was
previously recorded as unrealized depreciation. Management does not attempt to
maintain a comparable level of realized gains quarter to quarter but instead
attempts to maximize total investment portfolio appreciation through realizing
gains in the disposition of securities and investing in new portfolio
investments.
Changes in Unrealized Appreciation/Depreciation of Investments
MACC had unrealized depreciation of $3,174,851 at September 30, 2002, a
positive change of $1,132,647, or 26%, from the $4,307,498 of unrealized
depreciation at September 30, 2001. This resulted in a net loss on investments
for fiscal year 2002 of $3,459,833, as compared to a net loss on investments of
$5,988,837 for fiscal year 2001. The fiscal year 2002 change in unrealized
appreciation/depreciation is the net effect of increases in fair value of twelve
portfolio companies totaling $3,266,069, decreases in fair value of eleven
portfolio companies totaling $5,608,130, the reversal of appreciation of
$538,000 in one portfolio investment in which the portfolio company was part of
a recapitalization resulting in a realized gain, the reversal of appreciation of
$102,716 in one portfolio investment in which an outstanding cash escrow was
received, and the reversal of $4,115,424 of depreciation resulting from the
write-off of the investment in three portfolio investments.
MARKET RISK
MACC is exposed to market risk from changes in the market price of publicly
traded equity securities held from time to time in the MACC consolidated
investment portfolio. At June 30, 2004, MACC held only one publicly traded
equity security in its consolidated investment portfolio, and the fair value of
that portfolio investment was not material. Therefore, a hypothetical 10%
adverse change in quoted market price of that portfolio investment would not be
material.
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, 2004, was
$30,341,000, with a cost of $27,940,000. 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.
20
_____________________________________________________
June 30, 2004
______________________________________________________
Fair Value of Debentures Payable $30,341,000
Amount Above Cost $ 2,401,000
Additional Market Risk $ 719,000
______________________________________________________
TRADING AND NET ASSET VALUE INFORMATION
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. Based on the consolidated balance sheet at June 30, 2004, the net asset
value per share is $5.55 per share.
In calculating the value of the 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 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 Commission's guidelines which
utilize only a one day price measurement. All future financial reports of MACC
will note this difference in approaches to valuation.
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 are valued initially at cost, but such valuation is subject to
quarterly adjustments if the Board of Directors determines in good faith that
cost no longer represents fair value. The Board of Directors values loans and
non-convertible debt securities for which there exists no public trading market
at cost plus amortized original issue discount, if any, at the time such assets
are acquired and thereafter unless adverse factors lead to a determination of a
lesser value. In valuing convertible debt securities and equity securities for
which there exists no public trading market, the Board of Directors values such
investments at cost at the time of acquisition, and quarterly thereafter will
determine fair value on the basis of collateral, the issuer's ability to make
payments, its earnings, prevailing interest rates and other pertinent factors.
A substantial portion of MACC's assets consists of securities carried at
fair values determined by the Board of Directors. MACC's independent registered
public accounting firm may review and express an opinion on the reasonableness
of the procedures applied by the Directors in valuing such securities and the
appropriateness of the underlying documentation. Their opinion also indicates
that 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.
Shares of MACC's Common Stock are traded on the Nasdaq SmallCap Market
under the symbol "MACC". The following table sets forth, for the periods
indicated, high and low bid prices as quoted on Nasdaq, the net asset value per
share at the end of each quarter and the premium (discount) to net asset value
at the end of each quarter. The Nasdaq bid quotations represent prices between
dealers, do not include retail markups, markdowns or commissions, and may not
represent actual transactions.
21
NET ASSET VALUE BID PRICE PREMIUM
PER SHARE AT END (DISCOUNT) TO
YEAR AND QUARTER BID PRICE OF NET ASSET VALUE
HIGH LOW QUARTER HIGH LOW
Current Fiscal Year
3 Q 3.78 3.03 5.55 (35.9%) (39.1%)
2 Q 3.80 2.66 5.70 (33.3%) (53.3%)
1 Q 3.35 2.46 5.31 (36.9%) (53.7%)
Fiscal Year Ended Sept. 30, 2003
4 Q 3.13 2.43 5.47 (42.8%) (55.6%)
3 Q 3.40 2.20 4.98 (31.7%) (55.8%)
2 Q 3.18 2.05 6.19 (48.6%) (66.9%)
1 Q 4.04 2.75 6.74 (40.1%) (59.2%)
Fiscal Year Ended Sept. 30, 2002
4 Q 4.00 3.25 6.72 (40.5%) (51.6%)
3 Q 4.58 3.76 8.12 (43.6%) (53.7%)
2 Q 6.40 4.56 7.96 (19.6%) (42.7%)
1 Q 8.75 5.55 8.33 5.1% (33.4%)
The net asset value per share at September 30, 2001, September 30, 2002 and
September 30, 2003 were $8.60, $6.72 and $5.47, respectively, and the last
reported bid price per share on the Nasdaq SmallCap Market on _________, 2004
was $_____.
As of ___________________, there were approximately 2,209 record holders of
Common Stock.
DIVIDENDS AND DIVIDEND REINVESTMENT PLAN
MACC does not currently pay dividends or any other form of distribution.
MACC does not currently have any type of dividend reinvestment plan.
RISK FACTORS
AN INVESTMENT IN MACC IS SUBJECT TO A NUMBER OF RISKS AND SPECIAL
CONSIDERATIONS, INCLUDING THE FOLLOWING:
22
Higher Risk Investments
MACC is designed for long-term investors. Investors should not rely on MACC
for their short-term financial needs. The value of the higher risk securities in
which MACC invests will be affected by:
• general economic conditions
• the securities market
• the markets for public offerings and corporate acquisitions
• specific industry conditions
• the management of the individual issuer
Additionally, MACC may not achieve its investment objectives.
Dilution
You may experience an immediate dilution of the aggregate net asset value
of your Shares if you do not fully exercise your Rights pursuant to the
Offering. This is because the Subscription Price per Share will likely be less
than MACC's net asset value per Share on the Expiration Date, and the number of
Shares outstanding after the Offering is likely to increase in a greater
percentage than the increase in the size of MACC's assets. In addition, if you
do not fully exercise your Rights you should expect that you will, at the
completion of the Offering, own a smaller proportional interest in MACC than
would otherwise be the case. Although it is not possible to state precisely the
amount of any such decrease in net asset value, because it is not known at this
time what the net asset value per share will be at the Expiration Date or what
proportion of the Shares will be subscribed, such dilution could be significant.
For example, assuming that all Rights are exercised at the Estimated
Subscription Price of $_______, expenses associated with the Offering were
$________, and MACC's net asset value otherwise remained constant, MACC's net
asset value per Share on such date would be reduced by approximately $_______
per Share (or ___%). Your ability to transfer your Rights allows you to receive
cash for such Rights should you choose not to exercise them. However, it is not
certain that a market for the Rights will develop, and no assurance can be given
as to the value, if any, that such Rights will have.
Investments in Private Companies
As a BDC, MACC invests a large portion of its assets in restricted
securities issued by small, private companies, some of which have operated at
losses or have experienced substantial fluctuations in operating results. There
is generally little or no publicly available information about such companies
and MACC must rely on the diligence of its investment advisor to obtain the
information necessary for MACC's decision to invest in these companies. In order
to maintain its status as a BDC, MACC must have at least 50 percent of its total
assets invested in these types of portfolio companies, as described in Sections
55(a)(1) through 55(a)(3) of the 1940 Act. Typically, such companies depend for
their success 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 them. Moreover, smaller
companies frequently have narrower product lines and smaller market shares than
larger companies and, therefore, may be more vulnerable to competitors' actions
and market conditions, as well as general economic downturns. Such companies may
face intense competition, including competition from companies with greater
financial resources, more extensive research and development, manufacturing,
marketing and service capabilities, and a larger number of qualified managerial
and technical personnel. Because these companies will generally have highly
leveraged capital structures, reduced cash flow resulting from an adverse
business development, shift in customer preferences, or an economic downturn or
the inability to complete a public offering or other financing may adversely
affect the return on, or the recovery of, MACC's investment in them. Investment
in such companies therefore involves a high degree of business and financial
risk, which can result in
23
substantial losses and, accordingly, should be considered highly speculative. No
assurance can be given that some of MACC's investments will not result in
substantial or complete losses.
Long-Term Character of Portfolio Investments
MACC's investments yield a current return for most of their lives, but
generally only produce a capital gain, if any, from an accompanying equity
feature only after five to eight years. Both the current yield and a capital
gain must be achieved on most investments in order to meet MACC's investment
goals. There can be no assurance that either a current return or capital gain
will actually be achieved on MACC's investments.
Restricted Securities and Illiquidity
Most of the investments of MACC consist of securities acquired directly
from their issuers in private transactions. They are usually subject to
restrictions on resale and are generally illiquid. Usually there is no
established trading market for such securities into which they could be sold. In
addition, most of the securities are not eligible for sale to the public without
registration under the Securities Act, which would involve delay and expense.
Restricted securities generally sell at a price lower than similar securities
that are not subject to restrictions on sale.
Market Price Disparities
Shares of closed-end investment companies like MACC frequently trade at a
discount from net asset value and MACC's shares have historically traded at a
discount from net asset value. At September 30, 2003, and June 30, 2004, MACC's
shares traded at a 42.8% and 35.9% discount to their net asset value,
respectively. This characteristic of shares of closed-end investment companies
is separate and distinct from the risk that MACC's per share net asset value
will decline. In addition, MACC differs from similar venture capital closed-end
funds in several respects.
• First, many closed-end funds generally are structured to produce annual
dividends to shareholders. MACC, however, does not presently pay dividends
but, rather, retains all income after taxes and expenses to fund additional
investments and thus create capital appreciation. The return to holders of
the Shares is thus anticipated to be long-term and capital in nature.
MACC's Board will, however, consider payment of dividends in the future and
reserves the right to do so without shareholder approval.
• Second, most similar closed-end funds have elected pass-through tax
treatment so that no taxes are incurred at the corporate level. As noted in
"RISK FACTORS - Loss of Pass-Through Tax Treatment," it may be a
considerable period of time before MACC converts to this mode of tax
operation. It is likely that a change to pass-through tax treatment would
be made in conjunction with a decision to pay dividends to shareholders.
• Third, due to several factors, including the small size of MACC relative to
fixed expenses, and the fact that much of the income of MACC arises through
capital gains rather than ordinary income, on a consolidated basis, MACC
has had operating expenses in excess of investment income for four of the
last five years. Many similar funds are structured to earn sufficient
current income to achieve operating income (investment income in excess of
operating expenses) each year. MACC's goals are to increase the size of its
asset base relative to fixed expenses, among other things though this
Offering, and to continue to increase the number and size of investments
yielding current income.
Portfolio Valuation
Pursuant to the requirements of the 1940 Act, substantially all of MACC's
portfolio investments are recorded at fair value as determined in good faith by
our Board of Directors on a quarterly basis, and, as a result, there is
uncertainty regarding the value of MACC's portfolio investments. At June 30,
2004, approximately 79% of MACC's total assets represented investments recorded
at fair value. Since there is typically no readily ascertainable market value
for the investments in MACC's portfolio, our Board of Directors determines in
good faith the fair value of these investments pursuant to a valuation policy
and a consistently applied valuation process.
24
There is no single standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment while employing a
consistently applied valuation process for the types of investments MACC makes.
Unlike banks, MACC is not permitted to provide a general reserve for anticipated
loan losses; MACC is instead required by the 1940 Act to specifically value each
individual investment and record unrealized depreciation for an investment that
MACC believes has become impaired, including where collection of a debt security
or realization of an equity security is doubtful. Conversely, MACC records
unrealized appreciation if MACC has an indication that the underlying portfolio
company has appreciated in value and, therefore, our security has also
appreciated in value, where appropriate. Without a readily ascertainable market
value and because of the inherent uncertainty of valuation, fair value of our
investments determined in good faith by the Board of Directors may differ
significantly from the values that would have been used had a ready market
existed for the investments, and the differences could be material.
We adjust quarterly the valuation of our portfolio to reflect the Board of
Directors' determination of the fair value of each investment in our portfolio.
Any changes in fair value are recorded in our statement of operations as "Net
unrealized gains (losses)."
Competition
A large number of entities and individuals compete for the kinds of
investments made by MACC. Many of these entities and individuals have greater
financial resources than the combined resources of MACC. As a result of this
competition, MACC may, from time to time, be precluded from entering into
attractive transactions on terms considered by the Investment Adviser to be
prudent in light of the risks to be assumed.
Loss of Pass-Through Tax Treatment
Currently, MACC is a taxable entity (a "C corporation") in order to utilize
net operating loss carryforwards generated from a predecessor company as well as
MACC operating losses. In the future MACC may elect to qualify for pass-through
tax treatment contained in Subchapter M of the Code. Subchapter M treatment
essentially means that certain income is taxed at the shareholder level only
with no tax at the corporate level, although MACC may be subject to a corporate
level tax on certain built-in gains in existence at the time MACC would first
become subject to Subchapter M. It is possible that, for a number of reasons,
MACC may be unable to meet Subchapter M requirements, or that it may also cease
to qualify for pass-through treatment, or be subject to a four percent excise
tax, if it fails to make certain distributions. Under the 1940 Act, MACC is not
permitted to make distributions to shareholders unless it meets certain asset
coverage requirements with respect to money borrowed and senior securities
issued. See "DESCRIPTION OF MACC," and "INVESTMENT OBJECTIVES AND POLICIES."
Non-availability of pass-through tax treatment may potentially have a materially
adverse effect on the total return, if any, obtainable from an investment in
MACC's shares, once net operating loss carryforwards are no longer available and
the Subchapter M election has become advantageous.
Dependence on Management
MACC is wholly dependent for the selection, structuring, closing and
monitoring of its investments on the diligence and skill of its officers and of
the Investment Adviser and the Subadviser, subject to supervision by the Board
of Directors. However, the advisory agreements with the Investment Adviser are
short-term in nature and are subject to cancellation on 60 days' notice. The
management of the Investment Adviser and Subadviser believe that performance is
attributable largely to the abilities and experiences of certain key
individuals. The loss to the Investment Adviser or the Subadviser of these
individuals could have a material adverse effect on MACC's performance. See
"MANAGEMENT."
Leverage
MACC may borrow funds from and issue senior debt securities to banks,
insurance companies or other lenders up to the limit permitted by the 1940 Act.
Currently, MACC has an outstanding line of credit from a related party. See
"DESCRIPTION OF COMMON STOCK--Convertible Debt." In addition, through MorAmerica
Capital, MACC has borrowed and may continue to borrow funds through the SBIC
programs established by the
25
SBA. See "DESCRIPTION OF MACC." Such borrowings cause MACC to be leveraged. When
such borrowings are incurred, the lenders of these funds will have fixed dollar
claims on MACC's assets superior to the claims of MACC's shareholders. Decreases
in the value of the investments below their value at the time of acquisition
would cause MACC's net asset value to decline more sharply than it would if the
funds had not been borrowed. Any decrease in the rate of income would cause net
income to decline more sharply than it would had the funds not been borrowed and
invested. Leverage is thus generally considered a speculative investment
technique. Conversely, however, the ability of MACC to achieve its investment
objectives may depend in part on its ability to acquire leverage on favorable
terms by borrowing through the SBA, banks or insurance companies and there can
be no assurance that such leverage can in fact be acquired. Changes in
legislation applicable to or Congressional funding for the SBA, or changes in
the SBA regulations, may have an adverse impact on the future ability of either
MACC or MorAmerica Capital to acquire such leverage.
MACC, on a consolidated basis through its wholly-owned subsidiary
MorAmerica Capital, had outstanding $27,940,000 in subordinated debentures
issued to various parties and guaranteed by the SBA on September 30, 2003. The
following describes the maturities and interest rates of these debentures:
----------------------- ------------------------ ---------------------------
Due Year Ending Principal Amount Fixed Interest Rate
September 30
----------------------- ------------------------ ---------------------------
2005 $2,150,000 3.13%
----------------------- ------------------------ ---------------------------
2007 $1,000,000 7.55%
----------------------- ------------------------ ---------------------------
2009 $2,500,000 7.83%
----------------------- ------------------------ ---------------------------
2010 $9,000,000 8.48%
----------------------- ------------------------ ---------------------------
2011 $5,835,000 6.89%
----------------------- ------------------------ ---------------------------
2012 $7,455,000 7.03%
----------------------- ------------------------ ---------------------------
----------------------- ------------------------ ---------------------------
Total $27,940,000
----------------------------------------------------------------------------
The annual return that must be generated on MACC's portfolio in order to
cover annual interest payments is 5.22 percent. The following table is provided
to assist shareholders in understanding the effects of leverage. The
calculations are based upon the actual interest expense incurred on MorAmerica
Capital's subordinated debentures set out above and MACC's pro forma net assets
as of September 30, 2003 as described elsewhere in this Prospectus. The figures
provided are hypothetical and actual returns may be greater or less than those
appearing in the table.
--------------------- ----------- ------------ ------------ --------- ----------
Assumed
Return on Portfolio
(Net of Expenses) -10% -5% 0% 5% 10%
--------------------- ----------- ------------ ------------ --------- ----------
--------------------- ----------- ------------ ------------ --------- ----------
Corresponding
Return to Common
Stockholder (43.51%) (28.93%) (14.34%) 0.24% 14.82%
--------------------- ----------- ------------ ------------ --------- ----------
Management Fee
Since Atlas's management fee is based on a percentage of MACC's net assets,
increasing MACC's net assets through the Offering will increase the dollar
amount of the management fees paid to Atlas.
Possible Need for Follow-On Investments in Portfolio Companies
Following its initial investment, MACC may make additional debt and equity
investments in portfolio companies ("follow-on investments") in order to
increase its investment in a successful portfolio company, to exercise
securities that were acquired in the original financing, to preserve MACC's
proportionate ownership when a subsequent financing is planned or to protect
MACC's initial investment when such portfolio company's performance does not
meet expectations. The failure or inability to make such follow-on investments
may, in certain circumstances, jeopardize the continued viability of a portfolio
company and MACC's initial investment in that company.
26
Lack of Diversification
MACC is classified as a "non-diversified" investment company under the 1940
Act, which means MACC is not limited by the 1940 Act in the proportion of its
assets that may be invested in the securities of a single issuer. To the extent
MACC takes large positions in the securities of a small number of issuers,
MACC's net asset value and the market price of its Shares may fluctuate as a
result of changes in the financial condition of such issuers to a greater extent
than that of a diversified investment company.
THE OFFERING
Purpose of the Offering
The Board of Directors of MACC has determined that it is in the best
interests of MACC and its shareholders to increase the number of outstanding
Shares in order to provide working capital for holding company expenses and to
increase the assets of MACC available for investment (primarily through its
subsidiary, MorAmerica Capital). In reaching its decision, the Board noted that
more investment opportunities for MACC may exist in the future. The Board
concluded that an increase in the assets of MACC would permit MACC to take
advantage of these additional investment opportunities, consistent with MACC's
investment objectives, while retaining investments believed to be attractive in
MACC's portfolio. The Board believes that the Offering would permit MACC to
accomplish these objectives, while allowing existing shareholders an opportunity
to purchase additional Shares at a price below market value without paying a
brokerage commission. The Board also believes that a larger number of
outstanding Shares and a larger number of shareholders could increase the level
of market interest in MACC and the liquidity of Shares.
The Board considered that the Offering would have a dilutive effect on
nonparticipating shareholders and on shareholders who do not fully participate
in the Offering. The Board also considered the effect that the issuance of the
Shares would have on the net asset value of MACC. Nonetheless, the Board
believes that the dilutive effect will be mitigated because the Rights are
transferable, which will afford shareholders who do not exercise all of their
Rights the potential of receiving a cash payment upon sale of such Rights.
Additionally, nonparticipating shareholders would derive a benefit from the
Offering if it enables MACC to invest additional amounts that earn a return that
exceeds the dilution. Additionally, the Board concluded that increasing MACC's
total assets would reduce expenses per share due to the spreading of fixed
expenses over a larger asset base.
MACC's directors have voted unanimously to authorize the Offering. Three of
MACC's directors who voted to authorize the Offering are affiliated with the
Adviser and, therefore, could benefit indirectly from the Offering. The other
six directors are not "interested persons" of MACC within the meaning of the
1940 Act.
MACC may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of Shares and on terms which may
or may not be similar to this Offering. Any such future rights offering will be
made in accordance with the 1940 Act.
Terms of the Offering
MACC is issuing Rights to its Record Date Shareholders entitling the
holders thereof to subscribe for an aggregate of 768,654 Shares. Record Date
Shareholders, where the context requires, shall include beneficial owners whose
Shares are held of record by Cede & Co. ("Cede"), nominee for The Depository
Trust Company ("DTC"), or by any other depository or nominee. In the case of
Shares held of record by Cede or any other depository or nominee, beneficial
owners for whom Cede or any other depository or nominee is the holder of record
will be deemed to be the holders of the Rights that are issued to Cede or such
other depository or nominee on their behalf. Each Record Date Shareholder will
receive one Right for each three Shares beneficially owned on the Record Date,
and the Rights entitle Record Date Shareholders and holders of Rights acquired
during the period from the commencement date of the Offering to the Expiration
Date (the "Subscription Period") to acquire one Share for each Right held. No
fractional Shares will be issued. In addition, the Rights entitle each holder
thereof to subscribe, pursuant to the Over-Subscription Privilege, for any
Shares not acquired by exercise of Rights in the Primary Subscription. Rights
holders will have no right to rescind a purchase after the Subscription Agent
has
27
received the Subscription Certificate or Notice of Guaranteed Delivery. All
Rights may be exercised until the Expiration Date. (Record Date Shareholders and
Rights holders purchasing Shares are hereinafter referred to as "Exercising
Rights Holders" ). No fractional Rights will be issued.
Shares not subscribed for in the Primary Subscription will be offered, by
means of the Over-Subscription Privilege, to those Record Date Shareholders and
Rights holders who have exercised all Rights held by them and who wish to
acquire more than the number of Shares they are entitled to purchase pursuant to
the exercise of their Rights. Shares acquired pursuant to the Over-Subscription
Privilege are subject to allotment, as more fully discussed below under
"Over-Subscription Privilege." For purposes of determining the maximum number of
Shares a shareholder may acquire pursuant to the Offering, beneficial owners of
Shares whose Shares are held of record by Cede, as nominee for DTC, or by any
other depository or nominee will be deemed to be the holders of the Rights that
are issued to Cede or such other depository or nominee on their behalf.
There is no minimum number of Rights which must be exercised in order for
the Offering to close.
The number of Rights issued to a shareholder on the Record Date will be
rounded up to the nearest number of Rights. In the case of shares of common
stock held of record by a Nominee (e.g., Cede, as nominee for DTC, or any other
depository or nominee), the number of Rights issued to the Nominee will be
adjusted to permit rounding up (to the nearest number of Rights) of the Rights
to be received by beneficial owners for whom the Nominee is the holder of record
only if the Nominee provides to MACC on or before the close of business on
_____________, 2004 a written representation of the number of Rights required
for such rounding.
Over-Subscription Privilege
Shares not subscribed for in the Primary Subscription (the "Excess Shares")
will be offered, by means of the Over-Subscription Privilege, to those
Exercising Rights Holders who have exercised all exercisable Rights held by them
and who wish to acquire more than the number of Shares for which the Rights held
by them are exercisable. Exercising Rights Holders should indicate on the
Subscription Certificate, which they submit with respect to the exercise of the
Rights held by them, how many Excess Shares they are willing to acquire pursuant
to the Over-Subscription Privilege. If sufficient Excess Shares remain, all
over-subscription requests by Exercising Rights Holders will be honored in full.
If requests for Shares pursuant to the Over-Subscription Privilege exceed the
Excess Shares available, the available Excess Shares will be allocated pro rata
among Exercising Rights Holders who oversubscribe based on the number of Rights
held by such Exercising Rights Holders.
MACC WILL NOT OFFER OR SELL IN CONNECTION WITH THE OFFERING ANY SHARES THAT ARE
NOT SUBSCRIBED FOR PURSUANT TO THE PRIMARY SUBSCRIPTION OR THE OVER-SUBSCRIPTION
PRIVILEGE.
Subscription Price
The Subscription Price for each Share to be issued pursuant to the Offering
will be 95% of the volume-weighted average of the last reported bid price per
Share on the Nasdaq SmallCap Market on the Expiration Date and the four
preceding business days.
Exercising Rights Holders will not know the actual Subscription Price at
the time of exercise and will be required initially to pay for the Shares at the
Estimated Subscription Price of $______ per Share based on the last reported bid
price of MACC's Common Stock on __________________. The actual Subscription
Price may be more than the Estimated Subscription Price.
The net asset value per share at September 30, 2001, September 30, 2002 and
September 30, 2003 were $8.60, $6.72 and $5.47, respectively, and the last
reported bid price of a share on the Nasdaq SmallCap Market on ____________,
2004 was $______.
28
Expiration of the Offering
The Offering and the Rights will expire on the Expiration Date, unless
extended by MACC. MACC may make one or more extensions of the Offering, as
discussed below. Any extension of the Offering will be followed as promptly as
practicable by announcement thereof. Such announcement will be issued no later
than 9:00 a.m., Eastern time, on the next business day following the previously
scheduled Expiration Date. Without limiting the manner in which MACC may choose
to make such announcement, MACC will not, unless otherwise required by law, have
any obligation to publish, advertise or otherwise communicate any such
announcement other than by making a release to the Dow Jones News Service or
such other means of announcement as MACC deems appropriate.
Subscription Agent
The Subscription Agent will receive for its administrative, processing,
invoicing and other services as Subscription Agent fees and expenses estimated
to be approximately $_______. Questions regarding the Subscription Forms should
be directed to the Information Agent at ____________, (toll free); shareholders
may also consult their brokers or nominees. Completed Subscription Forms must be
sent, together with proper payment of the Estimated Subscription Price for all
Shares subscribed for in the Primary Subscription and the Over-Subscription
Privilege, to the Subscription Agent by one of the methods described below.
Alternatively, Notices of Guaranteed Delivery may be sent by brokerage firms and
custodian banks and trust companies exercising Rights on behalf of Exercising
Rights Holders whose Shares are held by such institutions by facsimile to
_________________ to be received by the Subscription Agent prior to 5:00 p.m.,
Eastern time, on the Expiration Date. Facsimiles should be confirmed by
telephone at ______________. MACC will accept only properly completed and
executed Subscription Certificates actually received at any of the addresses
listed below, prior to 5:00 p.m., Eastern time, on the Expiration Date or by the
close of business on the third business day after the Expiration Date following
timely receipt of a Notice of Guaranteed Delivery.
(1) BY FIRST CLASS MAIL:
MACC Private Equities Inc.
(2) BY OVERNIGHT COURIER:
MACC Private Equities Inc.
(3) BY HAND:
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL
NOT CONSTITUTE VALID DELIVERY.
Method for Exercising Rights
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Shareholders," will be mailed promptly following the Record
Date to Record Date Shareholders or, if a shareholder's Shares are held by
_______ or any other depository or nominee on their behalf, to _________ or such
depository or nominee. Rights may be exercised by completing and signing the
Subscription Certificate that accompanies this Prospectus and mailing it in the
envelope provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment in full for the
Shares to be purchased at the Estimated Subscription Price by the Expiration
Date. Rights may also be exercised by contacting your broker, bank or trust
company which can arrange, on your behalf, to guarantee delivery of payment and
delivery of a properly completed and executed Subscription Certificate pursuant
to a Notice of Guaranteed Delivery by the close of business on the third
business day after the Expiration Date. A fee may be charged by the broker,
29
bank or trust company for this service. Completed Subscription Certificates must
be received by the Subscription Agent prior to 5:00 p.m., Eastern time, on the
Expiration Date at one of the addresses set forth above (unless the guaranteed
delivery procedures are complied with as described below under "Payment for
Shares"). Exercising Rights Holders will have no right to rescind their
subscriptions after receipt of their payment for Shares by the Subscription
Agent.
Shareholders Who Are Record Owners
Shareholders who are record owners can choose between two options to
exercise their Rights as described below under "Payment for Shares." If time is
of the essence, option (2) under "Payment for Shares" below will permit delivery
of the Subscription Certificate and payment after the Expiration Date, provided
that a Notice of Guaranteed Delivery from a financial institution meeting
certain requirements has been received by the Subscription Agent prior to 5:00
p.m., Eastern time, on the Expiration Date, as described below.
Shareholders Whose Shares Are Held by a Nominee
Shareholders whose Shares are held by a nominee, such as a bank, broker or
trustee, must contact that nominee to exercise their Rights. In such case, the
nominee will complete the Subscription Certificate on behalf of the shareholder
and arrange for proper payment by one of the methods described below under
"Payment for Shares."
Nominees
Nominees who hold Shares for the account of others should notify the
beneficial owners of such Shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the nominee should complete the
Subscription Certificate and submit it to the Subscription Agent with the proper
payment as described below under "Payment for Shares."
Payment for Shares
Shareholders who wish to acquire Shares pursuant to the Offering may choose
between the following methods of payment:
1. An Exercising Rights Holder may send the Subscription Certificate
together with payment (based on Estimated Subscription Price) for the
Shares subscribed for in the Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege to
the Subscription Agent. A subscription will be accepted when payment,
together with a properly completed and executed Subscription
Certificate, is received by the Subscription Agent's office at one of
the addresses set forth above no later than 5:00 p.m., Eastern time,
on the Expiration Date. The Subscription Agent will deposit all checks
and money orders received by it for the purchase of Shares into a
segregated interest-bearing account (the interest from which will
accrue to the benefit of MACC) pending proration and distribution of
Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY
MONEY ORDER OR CHECK DRAWN ON A BANK OR BRANCH LOCATED IN THE UNITED
STATES, MUST BE PAYABLE TO MACC PRIVATE EQUITIES INC. AND MUST
ACCOMPANY A PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE
FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS
METHOD IS SUBJECT TO ACTUAL COLLECTION OF CHECKS BY 5:00 P.M., EASTERN
TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY
TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, SHAREHOLDERS ARE STRONGLY
URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR
CASHIER'S CHECK OR MONEY ORDER.
2. Alternatively, an Exercising Rights Holder may acquire Shares, and a
subscription will be accepted by the Subscription Agent if, prior to
5:00 p.m., Eastern time, on the Expiration Date, the Subscription
Agent has received a Notice of Guaranteed Delivery by facsimile
(telecopy) or
30
otherwise FROM A FINANCIAL INSTITUTION THAT IS A MEMBER OF THE
SECURITIES TRANSFER AGENTS MEDALLION PROGRAM, THE STOCK EXCHANGE
MEDALLION PROGRAM OR THE NEW YORK STOCK EXCHANGE MEDALLION SIGNATURE
PROGRAM guaranteeing delivery of (i) payment of the Estimated
Subscription Price for the Shares subscribed for in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege, (ii) payment in full of any additional
amount required to be paid if the actual Subscription Price is in
excess of the Estimated Subscription Price, and (iii) a properly
completed and executed Subscription Certificate. The Subscription
Agent will not honor a Notice of Guaranteed Delivery unless a properly
completed and executed Subscription Certificate and full payment for
the Shares based on the Estimated Subscription Price is received by
the Subscription Agent by the close of business on the third business
day after the Expiration Date.
On a date within eight business days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising Rights
Holder (or, if Shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee) a confirmation showing (i) the number
of Shares purchased pursuant to the Primary Subscription, (ii) the number of
Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii) any
excess to be refunded by MACC to such Exercising Rights Holder as a result of
payment for Shares pursuant to the Over-Subscription Privilege which the
Exercising Rights Holder is not acquiring, and (iv) any additional amount
payable by such Exercising Rights Holder to MACC or any excess to be refunded by
MACC to such Exercising Rights Holder, in each case, based on the actual
Subscription Price as determined on the Expiration Date. Any additional payment
required from Exercising Rights Holders must be received by the Subscription
Agent within seven business days after the Confirmation Date. Any excess payment
to be refunded by MACC to an Exercising Rights Holder will be mailed by the
Subscription Agent as promptly as practicable. All payments by an Exercising
Rights Holder must be in U.S. dollars by money order or check drawn on a bank or
branch located in the United States and payable to MACC PRIVATE EQUITIES, INC.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A
HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION
OR OVER-SUBSCRIPTION PRIVILEGE DOES NOT MAKE PAYMENT OF ANY AMOUNTS DUE BY THE
TENTH BUSINESS DAY AFTER THE CONFIRMATION DATE, THE SUBSCRIPTION AGENT RESERVES
THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING ACTIONS: (i) FIND OTHER EXERCISING
RIGHTS HOLDERS TO PURCHASE SUCH SUBSCRIBED AND UNPAID SHARES; (ii) APPLY ANY
PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE GREATEST WHOLE NUMBER
OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE PRIMARY
SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE; AND/OR (iii) EXERCISE ANY AND
ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED INCLUDING, WITHOUT
LIMITATION, THE RIGHT TO SET OFF AGAINST PAYMENTS ACTUALLY RECEIVED BY IT WITH
RESPECT TO SUCH SUBSCRIBED SHARES.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO MACC WILL BE AT THE ELECTION AND RISK OF THE EXERCISING
RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND
PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., EASTERN
TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT
LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by MACC, whose determinations will be
final and binding. MACC in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Subscription
Agent determines in its sole discretion.
31
The Subscription Agent will not be under any duty to give notification of
any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION
AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
Sale of Rights
The Rights are transferable until the Expiration Date. The Rights will be
listed for trading on the Nasdaq SmallCap Market under the symbol ["MACCR."]
MACC will use its best efforts to ensure that an adequate trading market for the
Rights will exist, although no assurance can be given that a market for the
Rights will develop. It is anticipated that the Rights will trade on the Nasdaq
SmallCap Market on a when-issued basis commencing on or about ________, ____
until approximately _______, ____ and on a regular way basis thereafter until
and including _________, ____, the last business day prior to the Expiration
Date.
Sales Through Subscription Agent
Record Date Shareholders who do not wish to exercise any or all of their
Rights may instruct the Subscription Agent to sell any unexercised Rights.
Subscription Certificates representing the Rights to be sold must be received by
the Subscription Agent on or before ___________, 2004 (or if the Offering is
extended, by two business days prior to the Expiration Date). Upon the timely
receipt by the Subscription Agent of appropriate instructions to sell Rights,
the Subscription Agent will use its best efforts to complete the sale and will
remit the proceeds of sale, net of commissions, to the selling Record Date
Shareholder. Any commissions on sales of Rights will be paid by the selling
Record Date Shareholder. If the Rights can be sold, sales of such Rights will be
deemed to have been effected at the volume-weighted average price received by
the Subscription Agent on the day such Rights are sold. The Subscription Agent
will also attempt to sell all Rights which remain unclaimed as a result of
Subscription Certificates being returned by the postal authorities to the
Subscription Agent as undeliverable as of the fourth business day prior to the
Expiration Date. Such sales will be made, net of commissions, on behalf of the
nonclaiming Record Date Shareholders. The Subscription Agent will hold the
proceeds from those sales for the benefit of such nonclaiming Record Date
Shareholders, until such proceeds are either claimed or escheated. There can be
no assurance that the Subscription Agent will be able to complete the sale of
any such Rights, and neither MACC nor the Subscription Agent has guaranteed any
minimum sales price for the Rights.
Other Transfers
The Rights will be evidenced by a Subscription Certificate and may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights.
In such event, a new Subscription Certificate evidencing the balance of the
Rights, if any, will be issued to the holder thereof or, if the holder thereof
so instructs, to an additional transferee. The signature on the Subscription
Certificate must correspond with the name as written upon the face of the
Subscription Certificate in every particular, without alteration or enlargement,
or any change whatsoever. A signature guarantee must be provided by an eligible
financial institution as defined in Rule 17Ad-15 of the Securities Exchange Act
of 1934, as amended (the "1934 Act"), subject to the standards and procedures
adopted by MACC.
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five business days for (i) the transfer
instructions to be received and processed by the Subscription Agent; (ii) a new
Subscription Certificate to be issued and transmitted to the transferee or
transferees with respect to transferred Rights, and to the transferor with
respect to retained Rights, if any; and (iii) the Rights evidenced by such new
Subscription Certificate to be exercised or sold by the recipients thereof.
Neither MACC nor the Subscription Agent shall have any liability to a transferee
or transferor of Rights if Subscription Certificates are not received in time
for exercise or sale prior to the Expiration Date.
32
Except for the fees charged by the Subscription Agent (which will be paid
by MACC), all commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred or charged in connection with the
purchase, sale or exercise of Rights will be for the account of the transferor
of the Rights, and none of such commissions, fees or expenses will be paid by
MACC or the Subscription Agent.
MACC anticipates that the Rights will be eligible for transfer or exercise
through the DTC PSOP function and that the exercise of the Primary Subscription
and the Over-Subscription Privilege may be effected through the same facility
(Rights exercised through DTC are referred to as "DTC Exercised Rights").
Holders of DTC Exercised Rights may exercise the Over-Subscription Privilege in
respect of such DTC Exercised Rights by delivering their instructions to the
Subscription Agent via the PSOP function, at or prior to 5:00 p.m., Eastern
time, on the Expiration Date, with payment of the Estimated Subscription Price
for the number of Shares for which the Over-Subscription Privilege is to be
exercised.
Delivery of Share Certificates
Except as described herein, certificates representing Shares acquired in
the Primary Subscription and representing Shares acquired pursuant to the
Over-Subscription Privilege will be mailed promptly after the Expiration Date
once full payment for such Shares has been received and cleared. Shareholders
whose Shares are held of record by Cede or by any other depository or nominee on
their behalf or their broker-dealer's behalf will have any Shares acquired in
the Primary Subscription credited to the account of Cede or such other
depository or nominee. Shares acquired pursuant to the Over-Subscription
Privilege will be certificated and certificates representing such Shares will be
sent directly to Cede or such other depository or nominee. Stock certificates
will not be issued for Shares credited to the Plan accounts.
Foreign Shareholders
SUBSCRIPTION CERTIFICATES WILL NOT BE MAILED TO RECORD DATE SHAREHOLDERS
WHOSE RECORD ADDRESSES ARE OUTSIDE THE UNITED STATES (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders"). Each
Foreign Record Date Shareholder will be sent written notice of the Offering,
provided that such provision of notice is consistent with the laws of the
jurisdiction to which such notice is to be sent. The Rights to which such
Subscription Certificates relate will be held by the Subscription Agent for such
Foreign Record Date Shareholders' accounts until instructions are received to
exercise or sell the Rights. If no instructions have been received by 5:00 p.m.,
Eastern time, on _________, 2004, which is three business days prior to the
Expiration Date, the Rights of those Foreign Record Date Shareholders will be
transferred by the Subscription Agent, who will either purchase the Rights or
use its best efforts to sell the Rights. The net proceeds, if any, from the sale
of those Rights by the Subscription Agent will be remitted to Foreign Record
Date Shareholders.
Federal Income Tax Consequences of the Offering
The U.S. federal income tax consequences to holders of Shares with respect
to the Offering will be as follows:
• The distribution of Rights to Record Date Shareholders will not result
in taxable income to them, nor will they realize taxable income as a
result of the exercise of the Rights. No loss will be realized if
Rights expire without being exercised.
• The basis of a Right to a Record Date Shareholder who exercises or
sells the Right is expected to be zero, since the Right's fair market
value on the distribution date is expected to be less than 15% of the
fair market value on that date of the Shares with regard to which it
is issued (unless the holder elects with respect to all Rights
received, by filing a statement with his or her timely filed federal
income tax return for the year in which the Rights are received, to
allocate the basis of the Share between the Right and the Share based
on their respective fair market values on that date). The basis of a
Right to a Record Date Shareholder who allows the Right to expire will
be zero, and the basis to anyone who purchases a Right in the market
will be its purchase price.
33
• An Exercising Rights Holder's basis for determining gain or loss on
the sale of a Share acquired on the exercise of Rights will be equal
to the sum of the Record Date Shareholder's basis in the Rights, if
any, plus the Subscription Price per Share. An Exercising Rights
Holder's gain or loss recognized on the sale or exchange of such a
Share will be capital gain or loss if the Share was then held as a
capital asset and will be long-term capital gain or loss if the Share
was held for more than one year.
MACC is required to withhold and remit to the U.S. Treasury 28% of
reportable payments paid on an account if its holder provides MACC with either
an incorrect taxpayer identification number or no number at all or fails to
certify that he or she is not subject to such withholding.
The foregoing is only a general summary of the material U.S. federal income
tax consequences of the Offering under the Code, and Treasury regulations
presently in effect that are generally applicable to (1) Record Date
Shareholders that are "United States persons" within the meaning of the Code and
(2) any other Record Date Shareholder that would be subject to U.S. federal
income tax on the sale or exchange of the Shares acquired on exercise of the
Rights, and does not cover foreign, state or local taxes. The Code and those
regulations are subject to change by legislative or administrative action, which
may be retroactive. Record Date Shareholders and Exercising Rights Holders
should consult their tax advisers regarding specific questions as to federal,
state, local or foreign taxes. See "Federal Income Tax Considerations."
Notice of Net Asset Value Decline
MACC has, as required by the Commission's registration form, undertaken to
suspend the Offering until it amends this Prospectus if, subsequent to the
effective date of this Registration Statement, MACC's net asset value declines
more than 10% from its net asset value as of that date. In such event, the
Expiration Date would be extended, and MACC would notify Exercising Rights
Holders of any such decline and thereby permit them to cancel their exercise of
Rights.
Employee Plan Considerations
Shareholders that are on tax-deferral arrangements, such as plans qualified
under Code section 401(a) (including corporate savings plans, 401(k) plans, and
Keogh plans of self-employed individuals), individual retirement accounts under
Code section 408(a) ("IRAs"), Roth IRAs under Code section 408A, and custodial
accounts under Code section 403(b) (collectively, "Retirement Plans"), should be
aware that additional contributions of cash to a Retirement Plan (other than
permitted rollover contributions or trustee-to-trustee transfers from another
Retirement Plan) in order to exercise Rights, when taken together with
contributions previously made, may result in, among other things, excise taxes
for excess or nondeductible contributions or the Retirement Plan's loss of its
tax-favored status. Furthermore, the sale or transfer of Rights may be treated
as a distribution or result in other adverse tax consequences. In the case of
Retirement Plans qualified under Code section 401(a) and certain other
Retirement Plans, additional cash contributions could cause the maximum
contribution limitations of Code section 415 or other qualification rules to be
violated.
Retirement Plans and other tax-exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Code section 511. If any portion of an IRA or a
Roth IRA is used as security for a loan, the portion so used is also treated as
distributed to the IRA or Roth IRA owner, which may result in current income
taxation and penalty taxes.
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
contains fiduciary responsibility requirements, and ERISA and the Code contain
prohibited transaction rules that may apply to the exercise of Rights by
Retirement Plans. Retirement Plans that are not subject to ERISA (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or transfer Rights. Due to the complexity of these
rules and the penalties for noncompliance, shareholders that are on Retirement
Plans should consult with their counsel and other advisers regarding the
consequences of their exercise of Rights under ERISA, the Code, and, where
applicable, state law.
34
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the Estimated Subscription
Price of $____ per Share, the net proceeds of the Offering are estimated to be
$_______ after payment of the estimated Offering expenses. These expenses will
be borne by MACC and will reduce the net asset value of MACC's shares. MACC
anticipates that an estimated $200,000 of the proceeds of the Offering will be
retained by MACC to be used for and as a reserve for operating expenses of MACC.
The balance of the proceeds, estimated at $_______________ will be contributed
as a capital contribution to MorAmerica Capital and, in accordance with MACC's
investment objective, used to make new investments primarily in private
companies. It is anticipated that these proceeds will be invested within one
year of the closing of this Offering. MACC intends that, pending investment, the
proceeds of the Offering will be invested in cash and cash equivalents.
DESCRIPTION OF MACC
General
MACC, MACC Private Equities Inc., was formed as a Delaware corporation on
March 3, 1994. It is qualified as a BDC under the 1940 Act and is classified as
a closed-end management investment company.
MACC has one subsidiary, MorAmerica Capital. MorAmerica Capital is an Iowa
corporation incorporated in 1959, which has been licensed as a small business
investment corporation since that year. It is also a BDC under the 1940 Act and
is classified as a closed-end management investment company.
Regulation Under the Investment Company Act of 1940
The 1940 Act was enacted to regulate investment companies. In 1980, the
1940 Act was amended by the adoption of the Small Business Investment Incentive
Act. The purpose of the amendment was to remove regulatory burdens on
professionally managed investment companies engaged in providing capital to
smaller companies. The Small Business Investment Incentive Act established a new
type of investment company specifically identified as a "business development
company" as a way to encourage financial institutions and other major investors
to provide a new source of capital for small developing businesses.
Business Development Company
A business development company ("BDC") is a closed-end management company
that generally makes 70% or more of its investments in "eligible portfolio
companies" and "cash items" pending other investment. Under the regulations
established by the Securities and Exchange Commission (the "SEC") under the 1940
Act, only certain companies may qualify as "eligible portfolio companies." To be
an "eligible portfolio company," a portfolio company must satisfy the following:
• it must be organized under the laws of, and has its principal place of
business in, any state or states;
• is neither an investment company as defined in Section 3 (other than a
small business investment company which is licensed by the Small
Business Administration to operate under the Small Business Investment
Act of 1958 and which is a wholly-owned subsidiary of the BDC) nor a
company which would be an investment company except for the exclusion
from the definition of investment company in Section 3(c); and
• satisfies one of the following:
a. it does not have any class of securities with respect to
which a member of a national securities exchange, broker, or
dealer may extend or maintain credit to or for a customer
pursuant to rules or regulations adopted by the Board of
Governors of the Federal Reserve System under Section 7 of
the Securities Exchange Act of 1934;
35
b. it is controlled by a BDC, either alone or as part of a
group acting together, and such BDC in fact exercises a
controlling influence over the management or policies of
such eligible portfolio company and, as a result of such
control, has an affiliated person who is a director of such
eligible portfolio company;
c. it has total assets of not more than $4,000,000, and capital
and surplus (shareholders' equity less retained earnings) of
not less than $2,000,000, except that the Commission may
adjust such amounts by rule, regulation, or order to reflect
changes in one or more generally accepted indices or other
indicators for small businesses; or
d. it meets such other criteria as the Commission may, by rule,
establish as consistent with the public interest, the
protection of investors, and the purposes fairly intended by
the policy and provisions of this title.
While the 1940 Act allows a BDC to "control" a portfolio company, it is not
the general policy of MACC to acquire a controlling position in its portfolio
companies. MACC only provides managerial assistance, and in certain
circumstances seeks to limit its "control" position by contracting for the right
to have a designee of MACC be elected to the board of directors of the portfolio
company, or be selected an advisory director. While these are MACC's general
policies, the application of these policies, of necessity, vary with each
investment situation.
1940 Act Requirements
The BDC election exempts MACC from some provisions of the 1940 Act.
However, except for those specific provisions, MACC will continue to be subject
to all provisions of the 1940 Act not exempted, including the following:
• restrictions on MACC from changing the nature of business so as to
cease to be, or to withdraw its election as, a BDC without the
majority vote of the shares outstanding;
• restrictions against certain transactions between MACC and affiliated
persons;
• restrictions on issuance of senior securities, such not being
prohibited by the 1940 Act but being restricted as a percentage of
capital;
• compliance with accounting rules and conditions as established by the
SEC, including annual audits by independent accountants;
• compliance with fiduciary obligations imposed under the 1940 Act; and
• requirement that the shareholders ratify the selection of MACC's
independent public accountants and the approval of the investment
advisory agreement or similar contracts and amendments thereto.
Investment Advisers Act of 1940 and the Investment Advisory Agreements
Atlas Management Partners, LLC is the investment advisor to MACC pursuant
to the Investment Advisory Agreement, as amended (the "MACC Investment Advisory
Agreement"). The Investment Adviser is registered as an investment advisor under
the Advisers Act and is subject to the reporting and other requirements thereof.
The Advisers Act also provides restrictions on the activities of registered
advisors to protect its clients from manipulative or deceptive practices and
restricts performance compensation. Atlas address is 15 West South Temple
Street, Suite 520, Salt Lake City, Utah 84101.
The MACC Investment Advisory Agreement provides that the Investment Adviser
is entitled to receive a management fee equal to a annual rate of 2.5% of MACC's
Net Assets, payable monthly in arrears. In addition to the annual management fee
of 2.5% of MACC's net assets, Atlas is entitled to receive an incentive fee (the
36
"Incentive fee") in an amount equal to 20% of MACC's realized capital gains in
excess of realized capital losses of MACC after allowance for any unrealized
capital losses in excess of unrealized capital gains on the portfolio
investments of MACC. The Incentive fee is calculated, accrued, and paid on a
quarterly basis, subject to adjustment at the end of each fiscal year.
MorAmerica Capital has a separate investment advisory agreement with the
Investment Adviser (the "MorAmerica Capital Investment Advisory Agreement").
Under the MorAmerica Capital Investment Advisory Agreement, the Investment
Adviser is entitled to a management fee equal to 2.5% of the Capital Under
Management (as defined in the MorAmerica Capital Investment Advisory Agreement)
on an annual basis, but in no event more than 2.5% per annum of the Assets Under
Management, or 7.5% of Regulatory Capital (as defined in the MorAmerica Capital
Investment Advisory Agreement). In addition, MorAmerica Capital contracted to
pay the Investment Adviser 20% of the net capital gains, before taxes, on
investments in the form of an incentive fee. Net capital gains, as defined in
the agreement, are calculated as gross realized gains, minus the sum of capital
losses, less any unrealized depreciation, including reversals of previously
recorded unrealized depreciation, recorded during the year, and net investment
losses, if any. Capital losses and realized capital gains are not cumulative
under the incentive fee computation. Payments for incentive fees resulting from
noncash gains are deferred until the assets are sold.
MACC, MorAmerica Capital and Atlas are also parties to an Investment
Advisory Support Services Agreement (the "Subadvisory Agreement") with
InvestAmerica Investment Advisors, Inc ("InvestAmerica" or the "Subadviser").
Prior to March 1, 2004, InvestAmerica was the investment advisor to MACC and
MorAmerica Capital. Pursuant to the Subadvisory Agreement, InvestAmerica has
been retained to monitor and manage portfolio company investments in existence
as of the date of the Subadvisory Agreement, including exits, preparation of
valuations, follow-on investment analysis and recommendations and other
portfolio management matters. InvestAmerica also currently provides certain
accounting and financial services for MACC. Under the Subadvisory Agreement,
Atlas pays InvestAmerica certain fixed management fees and incentive fees based
on a portion of the incentive fees paid to Atlas by the MACC and MorAmerica
Capital under the MACC Investment Advisory Agreement and the MorAmerica Capital
Investment Advisory Agreement, respectively. The Subadvisory Agreement does not
result in any additional expense to either MACC or MorAmerica Capital. The
address of the Subadviser is 101 Second Street S.E., Suite 800, Cedar Rapids IA
52401.
The following table reflects the amount of management fees and incentive
fees payable to InvestAmerica by Atlas under the Subadvisory Agreement:
% Portion of
Period Management Fee Incentive Fees
Effective Date through February 28, 2005 $325,000 70%
March 1, 2005 through February 28, 2006 $250,000 70%
March 1, 2006 through February 28, 2007 $125,000 70%
March 1, 2007 through February 28, 2008 $ 60,000 70%
March 1, 2008 through February 28, 2009 $ 60,000 50%
The Subadvisory Agreement has a term of two years, unless sooner terminated
as described below. After the initial two-year term, the Subadvisory Agreement
will continue in effect so long as such continuance is specifically approved at
least annually by Atlas and the Boards of Directors of MACC and MorAmerica
Capital, including a majority of their respective directors who are not
interested persons of InvestAmerica, or by vote of the holders of a majority, as
defined in the 1940 Act, of the outstanding voting securities MACC and
MorAmerica Capital. The Subadvisory Agreement may be terminated by Atlas, MACC
or MorAmerica Capital at any time, without payment of any penalty, on 60 days
written notice to InvestAmerica if the decision to terminate has been made by
Atlas or by the Boards of Directors of MACC and MorAmerica Capital or by vote of
the holders of a majority, as defined in the 1940 Act, of the outstanding voting
securities MACC or MorAmerica Capital. The Subadvisory Agreement also may be
terminated by InvestAmerica at any time, without payment of any penalty, on 60
days' written notice to Atlas, MACC and MorAmerica Capital.
37
Investment advisory agreements are further subject to the 1940 Act, which
requires that the agreement, in addition to having to be initially ratified by a
majority of the outstanding shares, shall precisely describe all compensation to
be paid, shall be approved annually by a majority vote of the Board of
Directors, may be terminated without penalty on not more than 60 days notice by
a vote of a majority of the outstanding shares, and shall terminate
automatically in the event of assignment. The Board of Directors has determined
that the Investment Advisory Agreement shall constitute MACC's advisory
agreement and at all times be construed so as to comply with the Advisers Act
and the 1940 Act.
Pending SBA Approval of Atlas
As noted, MorAmerica Capital is a small business investment company
regulated by the U.S. Small Business Administration. In anticipation of the
changes to the Board of Directors of MACC and MorAmerica and the change in
investment advisors, Atlas periodically notified the SBA of the proposed changes
and, as required by SBA regulations, submitted the MorAmerica Capital Investment
Advisory Agreement to the SBA for approval on January 29, 2004. Section 107.400
of the SBA regulations requires prior approval by the SBA of an event that
results in a change of control by any persons not previously approved as SBIC
management by the SBA. Because Mr. Madsen and a majority of Atlas members are
approved SBIC managers, Atlas did not view the change of investment advisors as
a change of control requiring SBA approval. The SBA has taken the position that
both the MorAmerica Capital Investment Advisory Agreement and the change of
control require SBA approval and the review process on both issues is
proceeding. However, the SBA has indicated that due to a backlog of work by the
relevant SBA internal committee, this process may take some time. Nonetheless,
the SBA has notified MorAmerica Capital in writing that (i) Mr. Efstratis, Mr.
Stevens, Mr. Bridgewater and Mr. Madsen have SBA's approval as management of
MorAmerica Capital; and (ii) MorAmerica Capital's SBA Account Executive has
recommended approval of the MorAmerica Capital Investment Advisory Agreement and
prospects are positive for final official approval. The SBA has made several
comments on the MorAmerica Capital Investment Advisory Agreement that are
technical in nature. When finally agreed with the SBA, these changes will be
submitted to a meeting of MACC shareholders for approval.
Other Investment Funds
Atlas and InvestAmerica currently serve as the investment advisor to no
other funds. However, affiliates of both Atlas and InvestAmerica do serve as the
investment advisors to other private venture capital funds. Atlas is affiliated
with Wasatch Management Partners, LLC which manages Wasatch Venture Corporation,
Wasatch Venture Fund II, LLC, Wasatch Venture Fund III, LLC and Zions SBIC, LLC.
Affiliates of InvestAmerica manage NDSBIC, L.P. and Lewis & Clark Private
Equities, L.P.
Atlas and InvestAmerica, may, from time to time, provide investment
advisory services, management consulting services and investment banking
services to other clients. The determination regarding the existence of conflict
of interest between these affiliated investment funds and the Registrant, and
the resolution of any such conflict, vests in the discretion of the Board of
Directors, subject to the requirements and resolution of the 1940 Act.
Co-Investments with Adviser Affiliated Funds
Certain investments made by MACC will be made in participation with its
wholly-owned subsidiary, MorAmerica Capital, and in some cases with other funds
managed by affiliates of the Investment Adviser or Subadviser. Under an existing
exemptive order from the Commission, MACC is presently permitted to make
investments in InvestAmerica-affiliated Managed Funds, subject to the conditions
set forth in the order. MACC intends to obtain a new exemptive order from the
Commission that would permit co-investments with Atlas-affiliated Managed Funds
on the same terms and conditions as the current exemptive order.
The Commission's current exemptive order permitting such co-investments
with InvestAmerica and its affiliates provides that MACC must be offered the
opportunity to invest in any investment (other than in interim investments or
marketable securities) that would be suitable for MACC that is being presented
to the Managed Funds to the extent of an amount proportionate to their
respective consolidated assets or paid-in-capital if SBICs are involved. All
co-investments with Managed Funds must receive specific advance approval by a
majority of the non-
38
interested directors of MACC. Securities purchased in a joint transaction by
both MACC and Managed Funds will consist of the same class of securities,
including the same registration rights, if any, and other rights related
thereto, and will be purchased for the same unit consideration, all as governed
by SBA regulations, if applicable, and the approval of such transaction,
including the determination by non-interested directors, will take place during
the same time period. Notwithstanding the foregoing, MACC will not make any
investment in the securities of any issuer in which the Managed Funds, but not
MACC, have previously invested.
Atlas is affiliated with Wasatch Management Partners, LLC which manages
Wasatch Venture Corporation, Wasatch Venture Fund II, LLC, Wasatch Venture Fund
III, LLC and Zions SBIC, LLC. Each of these four funds is headquartered in Salt
Lake City, Utah and is invested primarily in early stage high technology
companies. Wasatch Venture Corporation was founded in 1994 with approximately
$11.5 million of committed capital and has approximately 35 portfolio companies;
Wasatch Venture Fund II, LLC was founded in 1999 with approximately $37 million
of committed capital and has approximately 30 portfolio companies, Wasatch
Venture Fund III, LLC was founded in 2001 with approximately $58 million of
committed capital and currently has invested in approximately 13 portfolio
companies and Zions SBIC, LLC was founded in 2001 with approximately $26 million
of committed capital and has invested in approximately 7 portfolio companies.
Affiliates of InvestAmerica manage NDSBIC, L.P., Lewis & Clark Private
Equities, L.P. and Invest Northwest, LP. Each of these to funds is headquartered
in Cedar Rapids, Iowa. Both NDSBIC, L.P. and Lewis & Clark Private Equities,
L.P. are SBICs and invest primarily in later stage companies. NDSBIC, L.P. was
organized in 1995, had $5,000,000 of committed capital and currently owns
approximately 20 portfolio companies. Except for follow on investments, this
fund is fully invested. Lewis & Clark Private Equities, L.P. was founded in
2002, has committed capital of $11,989,899 and to date has approximately 6
portfolio company investments. Invest Northwest is a private venture capital
limited partnership and was organized in 2004 with $10,000,000 of committed
capital.
Note that not all investments that might be made by Managed Funds may be
suitable for investment by MACC, or vice versa.
MACC will be given the opportunity to dispose of any securities in which
both Managed Funds and MACC have invested in proportion to their holdings of
such securities. MACC will take advantage of such opportunity except to the
extent that a majority of the members of its Board of Directors, including a
majority of its independent directors, determines otherwise. In connection with
any such disposition, MACC will be required to bear no more than its
proportionate share of the transaction costs.
MACC will be given notice of any intention by a Managed Fund to exercise
any conversion privilege or other right to acquire equity securities of an
issuer in the securities of which both a Managed Fund and MACC have invested.
Personnel
MACC has no direct employees, but instead has contracted with Atlas
pursuant to the Investment Advisory Agreement to provide all management and
operating activities. Atlas currently has seven employees who are engaged in
performing the duties and functions required by MACC. At the present time, a
substantial portion of Atlas's staff time is devoted to activities of MACC.
These employees are not engaged solely in activities of MACC.
In addition, under the Subadvisory Agreement, InvestAmerica employees
provide management and operational support to MACC. InvestAmerica currently has
seven employees who provide services on behalf of MACC. These employees are not
engaged solely in activities of MACC.
39
Properties
MACC's business activities are conducted from the offices of the Investment
Adviser and Subadviser. The use of office facilities, including office
furniture, phone services, computer equipment and files, are provided by the
Investment Adviser and Subadviser at their expense pursuant to the Investment
Advisory Agreement and the Subadvisory Agreement.
Legal Proceedings
MorAmerica Capital is party to arbitration proceedings instituted by
TransCore Holdings, Inc., a company (Buyer) seeking indemnification under the
Stock Purchase Agreement (the Stock Purchase Agreement), pursuant to which
MorAmerica Capital and certain other individuals and institutional investors
(collectively, the Sellers) sold their interest in a former portfolio company
investment (Portfolio Company). The arbitration proceedings are being
administered by JAMS. Under the Stock Purchase Agreement, the Sellers agreed to
indemnify Buyer for breaches of representations and warranties as to Portfolio
Company made by the Sellers. Buyer claims that accounting irregularities at
Portfolio Company resulted in a breach of the Sellers' representations and
warranties. The Sellers have retained counsel and forensic accountants to defend
the Sellers against Buyer's claim for indemnification. Following discovery,
depositions and other preliminary proceedings, in June, 2003, the formal
arbitration proceedings commenced and are being intensively contested by all
parties. Based on the current schedule for the arbitration, a decision will not
be rendered until at least September, 2004. Based on its evaluation of the
Buyer's claim and discussions with external legal counsel, MACC believes that it
is reasonably possible that a loss may have been incurred as a result of the
indemnification claim, against which no accrual for loss has been made as of
June 30, 2004, because the amount of the possible loss, and therefore its
materiality to the financial statements, cannot be estimated. MorAmerica Capital
intends to continue vigorously defending this arbitration. MorAmerica Capital
received approximately $939,000 of proceeds from the sale of the Portfolio
Company. MorAmerica Capital owned debt securities of Buyer with a face value of
$508,761 and warrants with a cost of $24,000 received as part of the sale. Buyer
has defaulted on interest payments due on these debt securities. On March 31,
2003, MorAmerica Capital reduced the valuation of these debt securities by
$254,380 in light of the interest default and information regarding the related
dispute as of that date. On June 30, 2003, MorAmerica Capital further reduced
the valuation of these debt securities by $254,380 to $1 and reduced the
valuation of the warrants to zero based upon the continuing interest default and
additional information regarding the related dispute as of that date. Subsequent
to December 31, 2003, Buyer refinanced certain of its obligations, including the
debt securities held by MorAmerica Capital, and the principal amount of these
debt securities and accrued interest has been deposited in an escrow account
pending conclusion of the arbitration proceedings.
BFS Diversified Products, LLC ("BFS") was a supplier to Water Creations,
Inc. ("Water Creations"), a former portfolio company of MorAmerica Capital.
Water Creations went out of business in December, 2002, at which time BFS was
owed approximately $900,000 for products sold to Water Creations. On March 26,
2004, BFS filed suit in the Iowa District Court of Polk County, Iowa against
board members of and investors in Water Creations, including MorAmerica Capital,
David Schroder (Chief Financial Officer of MACC), and InvestAmerica Venture
Group, Inc., an affiliate of the Subadviser. BFS has sued the defendants for
fraud, fraudulent transfer, breach of fiduciary duty, civil conspiracy, breach
of contract, conversion, and alter ego/piercing corporate veil. The central
allegation of the case is that the defendants knew that Water Creations was
insolvent and owed a duty to BFS to protect it from selling to Water Creations
under these circumstances. The defendants have hired counsel and intend to
vigorously defend this litigation.
INVESTMENT OBJECTIVES
General
In addition to the 1940 Act requirements discussed above, MACC and
MorAmerica Capital have adopted the following additional policies. These
policies may be changed from time to time by the Board of Directors, except that
the election of MACC and MorAmerica Capital to be regulated as business
development companies may not be revoked without the approval of the holders of
a majority of the Shares.
40
Short Term Investment Policies
MACC's short term investments are placed in the following investment
instruments that mature in one year or less from the date of investment:
• Short Term Treasury Bills.
• Insured Certificates of Deposit in principal amounts not to exceed
$100,000.
• Securities issued by U.S. Government, consisting of agency issues
backed by the full faith and credit of the federal government with
maturities not to exceed one year.
• Commercial paper rated Al or P1.
• High quality repurchase contracts relating to government backed
securities.
• Money market funds investing primarily in short-term U.S. Government
securities.
MorAmerica Capital's short term investments are placed in securities
approved by SBA for SBIC's which include:
• Short Term Treasury Bills.
• Insured Certificates of Deposit in amounts not to exceed $100,000 at
maturity.
• High quality repurchase contracts relating to government backed
securities.
Long Term Investment Policies
In making investments and managing its portfolio, MACC and MorAmerica
Capital presently intend to adhere to the following policies.
MACC will generally seek investments that will result in immediate cash
flow to MACC . These may include but not be limited to structuring the
investments as interest-bearing debt instruments (with or without equity
features), equity with current dividend requirements, and other structures
permitted for investment by BDCs and SBICs . Nevertheless, MACC may from time to
time invest in equity instruments which may not require current payments.
MACC will at all times conduct its business so as to retain its (and
MorAmerica Capital's) status as a BDC. In order to retain that status, MACC may
not at any time acquire any assets (other than non-investment assets necessary
and appropriate to its operations as a BDC) if, after giving effect to such
acquisition, the value of its "Qualifying Assets" amounts to less than 70
percent of the value of its total assets. Securities proposed to be acquired by
MACC in its growth financing, management buyout, financing, senior financing,
bridge financing and follow-on investment activities (provided that MACC,
through its officers, makes significant managerial assistance available to the
issuers of these securities), as well as interim investments, will generally be
Qualifying Assets, as will be its investment in MorAmerica Capital. Securities
of public companies, on the other hand, are generally not Qualifying Assets
unless they were acquired in a distribution on, in exchange for or upon the
exercise of a right relating to securities that were Qualifying Assets.
MACC will not make any investment in the securities of any company if,
after giving effect to that investment, the value of all the securities of that
company held by MACC will exceed five percent of the value of MACC's total
assets and the value of all investments worth more than five percent of MACC's
total assets aggregates more than 25 percent of MACC's total assets. For this
purpose, an acquisition by MACC of securities upon the exercise of a right
related to previously acquired securities and which are not then legally or
contractually or, in the opinion of its Board of Directors, advantageously
saleable, will not be considered an acquisition.
41
MACC will not concentrate its investments in any particular industry or
group of industries. Therefore, MACC will not acquire any securities (except
upon the exercise of a right related to previously acquired securities) if, as a
result, more than 25 percent of the value of its total assets consists of
securities of companies in the same industry.
MACC may borrow money and issue senior securities to the extent that the
1940 Act permits a BDC to do so, for the purpose of making investments, to fund
share repurchases or tender offers, or for temporary or emergency purposes. A
BDC may issue and sell senior securities if, immediately after such issuance or
sale, the securities will have asset coverage of at least 200 percent. MACC does
not, however, intend to incur indebtedness for borrowed money, other than
through MorAmerica Capital, so long as it holds cash, interim investments or
marketable securities in an amount sufficient to fund the amount of investments
(other than in interim investments or marketable securities) and operating
expenses projected to be made in the forthcoming twelve months. At the present
time, MACC has an outstanding line of credit from a related party to fund
operating expenses. See `CERTAIN RELATIONSHIPS AND TRANSACTIONS." For the risks
associated with the resulting leverage, see "RISK FACTORS."
MorAmerica Capital will issue and sell senior securities, in the form of
subordinated debentures within applicable SBIC limitations. An SBIC may borrow
money through subordinated debentures in an amount up to 300 percent of its
combined paid-in capital and paid-in surplus, but not in excess of $90 million
in the aggregate. MorAmerica Capital does not expect to borrow more than 200
percent of its combined capital and paid-in surplus through the SBIC program.
Subordinated debentures may be issued for a term not exceeding ten years and
bear interest at a rate determined by the United States Secretary of the
Treasury. Subordinated debentures guaranteed by the SBA may be issued by
MorAmerica Capital up to applicable SBA limits. The 1940 Act senior securities
asset coverage requirements noted above will not be applicable to MorAmerica
Capital's SBA borrowings. Congressional funding for the SBA, or changes in SBA
regulations may have an adverse impact on the future ability of either MACC or
MorAmerica Capital to issue such securities.
While MACC will not generally acquire any security of a company for the
purpose of acquiring, by itself or together with other SBIC participants in the
acquisition transaction, more than 50 percent of the voting securities of that
company, situations may arise in which MACC, by itself or together with other
SBIC participants, in fact acquires voting control of a company.
MACC may invest up to 100 percent of its assets in securities acquired
directly from issuers in privately negotiated transactions. With respect to such
securities, MACC may, for the purpose of public resale, be deemed an
"underwriter" as that term is defined in the 1933 Act.
MACC and MorAmerica Capital will not (1) act as an underwriter of
securities of other issuers (except to the extent that it may be deemed an
"underwriter" of securities purchased, by it that must be registered under the
1933 Act before they may be offered or sold to the public); (2) purchase or sell
real estate or interests in real estate or real estate investment trusts (except
that MACC may purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments, including real estate
assets acquired through the MorAmerica reorganization, and may own the
securities of companies or participate in a partnership or partnerships that are
in the business of buying, selling or developing real estate); (3) sell
securities short; (4) purchase securities on margin (except to the extent that
it may purchase securities with borrowed money); (5) write or buy put or call
options (except to the extent of warrants or conversion privileges in connection
with its growth financing and management buyout investments, and rights to
require the issuer of such investments or their affiliates to repurchase them
under certain circumstances); or (6) engage in the purchase or sale of
commodities or commodity contracts, including futures contracts; (7) acquire
more than three percent of the voting stock of, or invest more than five percent
of its total assets in any securities issued by, any other investment company,
except as they may be acquired as part of a merger, consolidation or acquisition
of assets. As with other investment policies, these policies may be changed
without shareholder approval (except that the BDC election of MACC and
MorAmerica Capital may not be changed without shareholder consent).
42
Other Policies
As an SBIC, MorAmerica Capital must conform various aspects of its
investing activities to SBIC regulations promulgated by the SBA. In general,
MorAmerica Capital has generally invested in U.S.-owned businesses with annual
sales volumes ranging from $1,000,000 to $20,000,000. MorAmerica Capital has
generally invested the majority of its funds in mature ventures (companies with
five to eight years of business history) with a minority made in early stage
ventures. MorAmerica Capital's investments have generally been concentrated in
manufacturing and service businesses with no focus on any one technology or
industry.
The majority of MorAmerica Capital's "first round" investments have been in
a range of from $500,000 to $2,000,000. MorAmerica Capital's total investment
size in any one company is limited by the SBA to twenty percent of MorAmerica
Capital's private capital. As the size of MorAmerica Capital's private capital
increases it is likely that the size of the "first round" investments will
increase to exceed the range of $500,000 to $2,000,000.
Consistent with practices in the venture capital and SBIC business,
generally MorAmerica Capital has made investments in conjunction with other
venture capital investors. Generally, two or three venture capital investors
will make co-investments in a small business, and one of the investors will take
the lead in monitoring the investment. MACC and MorAmerica Capital expect to
continue this practice and anticipate that the investment portfolio will
continue to be substantially co-invested with other venture capital investors.
Co-investments with any fund managed by Invest America are covered by a specific
policy designed to assure that the terms of the co-investments are not less
advantageous to MACC and MorAmerica Capital than to the other fund. See
"INVESTMENT OBJECTIVES AND POLICY--Co-Investments With Adviser-Affiliated
Funds."
The general purposes of MorAmerica Capital's investments in new portfolio
companies are to help businesses fund expected growth, to help finance changes
of ownership and in some cases to assist in funding turnaround situations. The
general purposes of MorAmerica Capital's follow-on investments in portfolio
companies are to fund growth or occasionally to fund unexpected losses until
profits and positive cash flow are achieved. The terms of MorAmerica Capital
financings are generally from five to seven years. In the case of bridge
financings or for some follow-on financings, MorAmerica Capital has made demand
loans with and without equity features and for periods of less than five to
seven years.
MorAmerica Capital has always provided advisory services to its portfolio
companies either directly or in conjunction with co-investors. Both MACC and
MorAmerica Capital will continue this policy of making significant managerial
assistance available to portfolio companies. These advisory services include but
are not limited to accepting or requiring board representation, providing
executive hiring and search advice, assisting to secure debt and equity
financing relationships, offering management advice and providing general
oversight of portfolio companies. The President and Vice Presidents of MACC and
MorAmerica Capital will be available for and will provide these services.
MorAmerica Capital's ownership of voting securities of any one issuer is
generally limited by SBIC regulations to not more than 50 percent, including
voting securities held by other SBICs and affiliates. SBIC regulations do
provide for ownership of more than 50 percent of voting securities under limited
circumstances.
MACC Portfolio Investments
The following is a listing of MACC's portfolio companies in which MACC
(through its wholly-owned subsidiary MorAmerica Capital) had an investment at
June 30, 2004. The portfolio companies are presented in three categories --
companies more than 25% owned which represent portfolio companies where MACC
directly or indirectly owns more than 25% of the outstanding voting securities
of such portfolio company and, therefore, is deemed controlled by MACC under the
1940 Act; companies owned 5% to 25% which represent portfolio companies where
MACC directly or indirectly owns 5% to 25% of the outstanding voting securities
of such portfolio company or where MACC holds one or more seats on the portfolio
company's board of directors and, therefore, is deemed to be an affiliated
person under the 1940 Act; and companies less than 5% owned which represent
portfolio companies where MACC directly or indirectly owns less than 5% of the
outstanding voting securities of such portfolio company and where MACC has no
other affiliations with such portfolio company.
43
MACC makes available significant managerial assistance to its portfolio
companies. MACC generally receives rights to observe the meetings of the
portfolio companies' board of directors, and may have one or more voting seats
on their boards. For additional information relating to the amount and nature of
our investments in portfolio companies, see our consolidated statement of
investments at September 30, 2003 in the "FINANCIAL STATEMENTS" section of this
Prospectus.
Name and Address Nature of its Title of Securities
of Portfolio Company Principal Business Held by the Company Value
Companies More Than 25% Owned
Humane Manufacturing, LLC Manufacturer of rubber mats for 12% debt security, due 1,329,257
Baraboo, Wisconsin anti-fatigue, agricultural, December 31, 2004
exercise and roofing markets Membership interest (c)
12% debt security, due
December 31, 2004
Morgan Ohare, Inc. Fastener plating and heat treating 0% debt security, due 1,822,501
Addison, Illinois January 1, 2007
10% debt security, due
January 1, 2007
57 common shares
10% debt security, due
January 1, 2007
10% debt security, due
January 1, 2007
10% debt security, due
January 1, 2007
10% debt security, due
January 1, 2007
Spectrum Products, LLC Manufacturer of equipment for the 13% debt security, due 1,463,001
Missoula, Montana swimming pool industry October 9, 2006
385,000 units Series A
preferred
Membership interest
44
Companies 5% to 25% Owned
Aviation Manufacturing Group, LLC Manufacturer of flight critical 14% debt security, due 770,039
Yankton, South Dakota parts for aircraft October 1, 2007
154,000 units preferred
Membership interest
Concentrix Corporation Provides marketing outsourcing 3,758,750 shares Series 1,844,611
Pittsford, New York solutions including telemarketing, A preferred
fulfillment and web communications 130,539 shares Series C
preferred
261,078 shares Series D
preferred
67,407 shares Series D
preferred
Direct Mail Holding, LLC Provider of turnkey services for 537.634 units of preferred 3,320,360
Mt. Pleasant, Iowa non-profit fund raising preferred
Membership interest
DTMP Acquisition Company Metal stamping 14% debt security, due 1,556,670
Lebanon, Missouri June 30, 2006
25,666.67 shares Series
A preferred
45.26 shares common
Warrant to purchase
8,555.55 common shares
Feed Management Systems, Inc. Batch feed software and systems 540,551 common shares 1,362,860
Fairmont, Minnesota and B2B internet services 47,709 shares Series A
Preferred
66,600 shares Series A
preferred
400,000 shares Series A
preferred
160,000 shares Series A
preferred
12% debt security, due
May 20, 2008
Warrant to purchase
92,500 Series A preferred
12% debt security, due
August 21, 2008
Warrant to purchase
74,000 Series A preferred
Handy Industries, LLC Manufacturer of lifts for 12.5% debt security, due 1,619,605
Marshalltown, Iowa motorcycles, trucks and industrial January 8, 2007
metal products 167,171 units Class B
preferred
Membership interest
Hicklin Engineering, L.C. Manufacturer of auto and truck 10% debt security, due 1,108,210
Des Moines, Iowa transmission and brake December 31, 2003
dynamometers Membership interest
45
KW Products, Inc. Manufacturer of automobile 11% debt security, due 577,763
Marion, Iowa aftermarket engine and brake repair June 15, 2005
machinery 11% debt security, due
June 15, 2005
29,340 common shares
Warrant to purchase
8,879 common shares
M.A. Gedney Company Pickle processor 188,750 shares preferred
Chaska, Minnesota 137,086 shares preferred 508,585
210,167 shares preferred
10% loan, due on
demand
Warrant to purchase
34,223 preferred shares
Magnum Systems, Inc. Manufacturer of industrial bagging 12% debt security, due 1,137,278
Parsons, Kansas equipment July 31, 2006
48,038 common shares
292,800 shares preferred
Warrant to purchase
56,529 common shares
Miles Media Group, Inc. Tourist magazine publisher 1,000 common shares 1,474,500
Sarasota, Florida 100 common options
12% debt security, due
September 24, 2007
150 shares Series A
preferred
Warrant to purchase 831
common shares
12% debt security, due
September 24, 2007
50 shares Series A
preferred
Warrant to purchase 92
common shares
12% debt security, due
June 30, 2008
Warrant to purchase 500
shares common
Penn Wheeling Acquisition Company, Metal closure manufacturer 13% debt security, due 1,841,887
LLC March 10, 2007
Glen Dale, West Virginia 62 units Class B
membership interest
24 units Class C
membership interest
8 units Class C
membership interest
3 units Class C
membership interest
46
Pratt-Read Corporation Manufacturer of screwdriver shafts 13,889 shares Series A 1,444,467
Bridgeport, Connecticut and handles and other hand tools Preferred
Warrants to purchase
common shares
7,718 shares Series A
preferred
Warrant to purchase
common shares
13% debt security, duly
July 26, 2006
Warrant to purchase
common shares
Warrant to purchase
common shares
SMWC Acquisition Co., Inc. Steel warehouse distribution and 10% debt security, due 608,605
Kansas City, Missouri processing on demand
13% debt security due
May 19, 2007
1,320 shares common
Warrant to purchase
1,100 common shares
Warrant to purchase
1,100 common shares
176,550 shares Series A
preferred
Companies Less Than 5% Owned
A-Plus Galvanizing, Inc. Specialty metal galvanizing 12% debt security, due 247,001
Salina, Kansas February 11, 2005
Warrant to purchase
16,940 common shares
Architectural Art Manufacturing, Inc. Manufacturer of industrial and 12% debt security, due 1,022,458
Wichita, Kansas commercial boilers and shower March 31, 2007
doors, frames and enclosures Warrant to purchase
11,143 common shares
10% debt security due
March 31, 2007
Warrant to purchase
121,457 common shares
Central Fiber Corporation Recyles and manufactures 12% debt security, due 654,456
Wellsville, Kansas cellulose fiber products December 31, 2005
12% debt security, due
December 31, 2005
Warrant to purchase
490.67 common shares
Divine, Inc. Database mining and analysis 8,904 common shares 89
Chicago, Illinois
47
FreightPro, Inc. Internet-based outsource 16% debt security, due 175,002
Overland Park, Kansas provider of freight logistics February 21, 2007
Warrant to purchase
243,810 common shares
16% debt security, due
February 15, 2007
Warrant to purchase
81,270 common shares
Warrant to purchase
41,097.80 common shares
JHT Holdings, Inc. Provider of truck drive-away, 1,238 shares Class A 780,020
Joplin, Missouri internet-based auction and common
related services to the
commercial truck industry
Lee Mathews Equipment, Inc. Distributor of industrial pump 12% debt security, due 560,636
Kansas City, Missouri systems March 10, 2005
Warrant to purchase
153,654 common shares
12% debt security, due
March 10, 2005
Linton Truss Corporation Manufacturer of residential 542.8 common shares 450,015
Delray Beach, Florida roof and floor truss systems 400 shares Series 1
preferred
Warrant to purchase
common shares
Warrant to purchase
common shares
Warrant to purchase
common shares
Monitronics International, Inc. Provides home security systems 73,214 common shares 501,500
Dallas, Texas monitoring services
48
Organized Living, Inc. Retail specialty stores for 400,000 shares Series A 1,324,202
Lenexa, Kansas storage and organizational preferred
products 145,204 shares Series A
preferred
130,435 shares Series B
preferred
43,478 shares Series B
preferred
41,680 shares Series B
preferred
94,241 shares Series C
preferred
71,428.5714 shares Series
C preferred
9,295 shares Series C
preferred
104,167 shares Series D
preferred
34,722 shares Series D
preferred
800,000 shares Series F
preferred
Phonex Broadband Corporation Power line communications 1,855,302 shares Series A 1,155,000
Midvale, Utah preferred
Portrait Displays, Inc. Designs and markets pivot 12% debt security, due 743,222
Pleasanton, California enabling software for LCD April 1, 2005
computer monitors 8% debt security, due
April 1, 2009
8% debt security, due
April 1, 2012
Warrant to purchase
common shares
Warrant to purchase
common shares
Simoniz USA, Inc. Producer of cleaning and wax 12% debt security, due 628,949
Bolton, Connecticut products under both the April 1, 2008
Simoniz brand and private
label brand names
SnapNames.com, Inc. Domain name management 10% debt security, due 852,500
Portland, Oregon March 15, 2007
Warrant to purchase
465,000 common shares
TransCore Holdings, Inc. Legal, audit, logistical and Escrow Agreement 1
Hummelstown, Pennsylvania internet e-business services
for the trucking industry
49
Warren Family Funeral Homes, Inc. Provider of value-priced 12% debt security, due 288,762
Topeka, Kansas funeral services June 29, 2006
Warrant to purchase 231
common shares
12% debt security, due
June 29, 2006
Warrant to purchase 115.5
common shares
50
MANAGEMENT
Board of Directors
The management of MACC, including general supervision of the duties
performed by the Investment Adviser, is the responsibility of the Board of
Directors. Pursuant to MACC's Articles of Incorporation and Bylaws, the Board of
Directors consists of nine directors. Each director serves for a one-year term.
Information Concerning Directors
NUMBER OF
PORTFOLIOS
IN FUND OTHER
DIRECTOR'S PRINCIPAL COMPLEX PUBLIC
NAME, POSITION(S) LENGTH OF OCCUPATION(S) OVERSEEN COMPANY
ADDRESS* HELD WITH TIME DURING PAST 5 BY DIRECTOR-
AND AGE FUND SERVED YEARS DIRECTOR** SHIPS
Independent
Directors
Paul M. Bass, Jr. Director Director since Vice Chairman of Keystone
Age 69 1994 First Southwest Consolidated
Company, a regional Industries;
investment banking
firm. Compx
International
Michael W. Dunn Director Director since President and None
Age 55 1994 Director of Farmers
& Merchants Savings
Bank of Manchester,
Iowa and Vice
President and
Director of
Security Savings
Bank of Eagle
Grove, Iowa. Mr.
Dunn also serves as
President and
C.E.O. of Dunn
Investment Co., a
bank holding
company for both
banks.
Jasja Kotterman Director Director since Vice President, None
Age 34 2004 Strategic Planning
and Business
Development for
Primedia Inc., a
51
diversified media
company
Shane Robison Director Director since Executive Vice None
Age 50 2004 President and Chief
Strategy and
Technology Officer,
Hewlett-Packard
Company
Gordon J. Roth Director Director since Chief Financial None
Age 50 2000 Officer and
Executive Vice
President of Roth
Capital Partners,
LLC (formerly known
as Cruttenden
Roth), an
independent
investment banking
firm
Martin Walton Director Director since President of TD None
Age 41 2004 Options LLC and
Global Head of
Equity Derivatives
for TD Securities
(the investment
bank arm of the
Toronto-Dominion
Bank)
Interested
Directors
Benjamin Director Director since President of None
Jiaravanon*** 2004 Strategic Planning
age 33 Group of Charoen
Pokphand Indonesia,
an agribusiness
conglomerate
Kent I. Madsen*** President, Director since Managing Director
Age 38 Chief 2003 of Wasatch Venture
Executive Fund; Officer of
Officer, and Zion's Bank SBIC
Director Venture Fund;
Managing Director
of the Investment
Adviser
52
Geoffrey T. Director Director since Executive Chairman Polaris
Woolley*** 2003 of European Venture Ventures, Euclid
Age 45 Partners; Managing SR Partners, Von
Director of the Braun &
Investment Adviser Schrieber
Private Equity
____________________________________
*Unless otherwise provided, the address of the individuals in the foregoing
table is: 15 West South Temple Street, Suite 520, Salt Lake City, Utah 84101.
**No other funds in MACC complex.
***Mr. Jiaravanon, Mr. Madsen and Mr. Woolley are "interested persons" as
defined by the 1940 Act. See "MANAGEMENT."
DOLLAR RANGE* AGGREGATE DOLLAR RANGE**
OF EQUITY SECURITIES OF EQUITY SECURITIES IN ALL
NAME OF DIRECTOR IN MACC FUNDS IN MACC COMPLEX
Paul M. Bass, Jr. over $100,000
Michael W. Dunn $50,001 - $100,000
Kent I. Madsen over $100,000
Gordon J. Roth $10,001 - $50,000
Geoffrey T. Woolley*** $50,001 - $100,000
____________________________________
*As of March 30, 2004.
**No other funds in MACC complex
*** Mr. Woolley is a party to a line of credit agreement with MACC. Under this
agreement, amounts loaned by Mr. Woolley to MACC may be converted, at his
option, into Shares. The amount reported here does not include any Shares which
may be so acquired. See "DESCRIPTION OF COMMON STOCK -- Convertible Debt."
Committees and Meetings
During Fiscal Year 2003, fourteen meetings of the Board of Directors were
held. In addition, six meetings of the Audit Committee, one meeting of the
Nominating Committee and three meetings of the Investment Committee were held.
Each of the Directors attended at least 75% of the meetings of the Board of
Directors and at least 75% of the meetings held by the committees of the Board
of Directors on which that Director served. The Audit Committee consists of
Michael W. Dunn (Chair), Paul M. Bass, Jr. and Gordon J. Roth.
53
Audit Committee
The Audit Committee makes recommendations to the Board of Directors
regarding the engagement of the independent auditors for audit and non-audit
services; evaluates the independence of the auditors and reviews with the
independent auditors the fee, scope and timing of audit and non-audit services.
The Audit Committee also is charged with monitoring the Corporation's Policy
Against Insider Trading and Prohibited Transactions and its Code of Conduct. The
Audit Committee has adopted a written charter.
The Audit Committee presently consists of Michael W. Dunn (Chair), Paul M.
Bass, Jr. and Gordon J. Roth. Each member of the Audit Committee is independent
under Nasdaq listing standards.
Nominating/Governance Committee
In last 2003, the Nominating Committee adopted a written charter,
subsequently approved by the Board of Directors, which reconstituted the
Nominating Committee as the Nominating/Governance Committee. Among other things,
the Nominating/Governance Committee recommends to the Board of Directors
nominations for Director of the Corporation.
The Nominating/Governance Committee may seek input from other Directors or
senior management in identifying candidates. Under the Corporation's Bylaws,
shareholders desiring to nominate persons for election as directors or to
propose other business for consideration at an annual meeting must generally
notify the Secretary of MACC in writing not less than 60 days, nor more than 90
days, prior to the date on which MACC first mailed its proxy materials for the
prior year's annual meeting. Accordingly, shareholders desiring to submit a
proposal for consideration at the 2005 Annual Meeting of shareholders must give
written notice of the proposal to the Secretary not earlier than November 10,
2004, and not later than December 10, 2004.
The Nominating/Governance Committee also oversees the formulation of, and
recommends for adoption to the Board, a set of corporate governance guidelines.
The Nominating/Governance Committee also periodically reviews and reassess the
corporate governance guidelines of the Company and recommens appropriate changes
to the Board for approval. The Nominating/Governance Committee also reviews and
approves annually MACC's compensation program for service on the Board of
Directors or any of its committees.
The Nominating/Governance Committee presently consists of Paul M. Bass, Jr.
(Chair), Jasja Kotterman and Shane Robison. All members of the
Nominating/Governance Committee are independent under Nasdaq listing standards.
Investment Committee
The Investment Committee assists the full Board of Directors with oversight
of the Corporation's investment portfolio and evaluates any proposed revisions
to the Corporation's investment policy. The Investment Committee also assures
compliance with the Corporation's policies regarding investments made in
participation with other funds managed by InvestAmerica, with entities
controlling, controlled by or under common control with Atlas, and with other
affiliates. The voting members of the Investment Committee presently include
Paul M. Bass, Jr., Michael W. Dunn, Jasja Kotterman, Shane Robison, Gordon J.
Roth, and Martin Walton. All voting members are independent under Nasdaq listing
standards. The nonvoting ex officio members are Benjamin Jiaravanon, Kent I.
Madsen and Geoffrey T. Woolley.
Valuation Committee
Since the end of Fiscal Year 2003, the Board of Directors has appointed a
Valuation Committee to assist the Board of Directors with its quarterly
portfolio valuation. The Valuation Committee meets with the portfolio managers
to review the portfolio managers' proposed valuations of all investments. The
Valuation Committee then recommends proposed valuations to the full Board, and
selects investments for review by the full Board which have had material
developments or are otherwise determined appropriate for individual review. The
full Board then reviews the report of the Valuation Committee as well as all
portfolio investments recommend for review at the
54
meeting. The full Board also receives the complete valuation report and
recommendations on all investments and may ask questions or for detailed review
of any investment. The Board then approves the valuation of all portfolio
investments, with any changes approved at the meeting. Current members of the
Valuation Committee are Jasja Kotterman, Kent I. Madsen and Martin Walton.
Director Compensation
The following table sets forth certain details of compensation paid to
Directors during Fiscal Year 2003, which includes compensation for serving on
the Boards of Directors of MACC and MorAmerica Capital (the only wholly owned
subsidiary of MACC). For purposes of the following table, MACC Complex (as that
term is defined in Item 22(a)(1)(v) of Reg. ss.240.14a-101) consists solely of
MACC and MorAmerica Capital. MACC presently maintains no pension or retirement
plans for its Directors.
Aggregate Compensation
Name and Position From Corporation and Fund Complex(1)
Paul M. Bass, Jr. $30,350
Chairman of the Board
David R. Schroder, -0-
Director, President and Secretary
Robert A. Comey, -0-
Director, Executive Vice President
and Treasurer
Henry T. Madden, Director(4) 15,800
John D. Wolfe, Director(4) 15,350
Michael W. Dunn, Director 16,550
Gordon J. Roth, Director 16,400
Todd J. Stevens(2) 15,050
Jeri J. Harman(3) 3,000
____________________________________
(1) Consists only of directors' fees and does not include reimbursed expenses.
MACC presently maintains no pension or retirement plans for its Directors.
(2) Mr. Stevens resigned from the Board of Directors on October 7, 2003.
(3) Ms. Harman resigned from the Board of Directors on October 9, 2002.
(4) The terms of Mr. Madden and Mr. Wolfe expired in February, 2004.
Executive Compensation and Options
Officers of MACC receive no compensation from MACC. MACC has never issued
options or warrants to officers or directors of MACC.
55
Auditor
The Audit Committee has selected KPMG LLP ("KPMG"), 666 Grand Avenue, 2500
Ruan Center, Des Moines, Iowa 50309 audit MACC for the fiscal year ending
September 30, 2004. KPMG has performed audit services for MACC since 1994. The
aggregate fees billed by KPMG for audit services for the audit of MACC's
financial statements included in MACC's Form 10-K and the review of MACC's
financial statements included in MACC's Forms 10-Q for 2002 and 2003 were
$78,840 and $110,150, respectively.
INFORMATION ABOUT OFFICERS AND PRINCIPALS
OF MACC AND THE INVESTMENT ADVISORS
MACC Officers
Geoffrey T. Woolley
Mr. Woolley, age 45, has been a Director of MACC since 2003 and Chairman of
the Board since April 30, 2004. Mr. Woolley is also a Managing Director of
Atlas. He is currently Chairman of European Venture Partners, a company he
founded in 1997 to introduce "venture leasing," an asset-backed debt instrument
with equity participation to the European and Israeli markets. Mr. Woolley is
also the Founding Partner of Dominion Ventures, Inc., a company he formed in
1985. Mr. Woolley also serves as an advisor and/or investor to Polaris Ventures,
Euclid SR Partners and Von Braun & Schrieber Private Equity. He holds an M.B.A.
from the University of Utah and a B.S. in Business Management with a Minor in
Economics from Brigham Young University.
Kent I. Madsen
Mr. Madsen, age 38, has been a Director of MACC since 2003 and Chief
Executive Officer since March, 2004. Mr. Madsen is also a Managing Director of
Atlas and a Managing Director of Wasatch Venture Fund, where he has been
employed since 1998. Mr. Madsen also has served as an officer of Zion's Bank
SBIC Venture Fund since 2001. From 1994 to 1996, Mr. Madsen worked for Ford
Motor Company, initially in the Advanced Technology Group and later in Ford's
China Operations. Mr. Madsen received a B.S. in Mechanical Engineering and
Applied Mechanics with a Minor in Mathematics from the University of
Pennsylvania. He also received a M.S.E. from the University of Michigan, an M.A.
in International Studies from the Lauder Institute at the University of
Pennsylvania and an M.B.A. from the Wharton School at the University of
Pennsylvania.
David R. Schroder
Mr. Schroder, age 61, has been Chief Financial Officer and Treasurer of
MACC since March, 2004. Mr. Schroder is also President, Secretary and a Director
of the Subadviser. Prior to his current position, Mr. Schroder served as
President, Secretary and a Director of MACC since 1994. Since 1985, Mr. Schroder
has been a principal of InvestAmerica Venture Group, Inc. and is presently
President, Secretary and a Director. From 1985 to 1994, InvestAmerica Venture
Group, Inc. provided management and investment services to MorAmerica Capital.
Venture Group presently provides management and investment services to a private
investment partnership, the Iowa Venture Capital Fund, L.P. Mr. Schroder is also
President, Secretary and a Director of InvestAmerica N.D. Management, Inc.,
which provides management and investment services to NDSBIC, L.P. Mr. Schroder
is also President, Secretary and a Director of InvestAmerica ND, L.L.C., the
general partner of NDSBIC, L.P. Since 2002 Mr. Schroder is also President and
Secretary of InvestAmerica L&C Management, Inc. and InvestAmerica L&C, LLC,
respectively the Manager and General Partner of Lewis and Clark Private
Equities, LP, an SBIC. Since August, 2004, Mr. Schroder is also President and
Secretary of InvestAmerica NW Management, Inc. and InvestAmerica NW, LLC,
respectively the Manager and General Partner of Invest Northwest, LP, a private
venture capital limited partnership. As a representative of the Subadviser and
affiliates, Mr. Schroder also serves on the boards of directors of several of
MACC's portfolio companies and the portfolio companies of other managed funds.
Mr. Schroder received a B.S.F.S. from Georgetown University and an M.B.A. from
the University of Wisconsin.
56
Robert A. Comey
Mr. Comey, age 58, has been Chief Financial Officer and Treasurer of
MorAmerica Capital since March, 2004. Mr. Comey is also Executive Vice
President, Treasurer and a Director of the Subadviser. Prior to his current
position, Mr. Comey served as Vice President, Treasurer and a Director of the
Corporation since 1994. Mr. Comey was named Executive Vice President of MACC in
1995. Since 1986, Mr. Comey has been a principal of InvestAmerica Venture Group,
Inc. and is presently Executive Vice President, Treasurer and a Director. From
1985 to 1994, Venture Group provided management and investment services to
MorAmerica Capital. Venture Group presently provides management and investment
services to a private investment partnership, the Iowa Venture Capital Fund,
L.P. Since 1996, Mr. Comey has also been Executive Vice President, Treasurer and
a Director of InvestAmerica N.D. Management, Inc., which provides management and
investment services to North Dakota Small Business Investment Company
("NDSBIC"), a private investment partnership based in North Dakota. Mr. Comey is
also Executive Vice President, Treasurer, and a Director of InvestAmerica ND,
L.L.C., the general partner of NDSBIC. Since 2002 Mr. Comey is also Executive
Vice President of InvestAmerica L&C Management, Inc. and InvestAmerica L&C, LLC,
respectively the Manager and General Partner of Lewis and Clark Private
Equities, LP, an SBIC. Since August, 2004, Mr. Comey is also Executive Vice
President of InvestAmerica NW Management, Inc. and InvestAmerica NW, LLC,
respectively the Manager and General Partner of Invest Northwest, LP, a private
venture capital limited partnership. As a representative of the Subadviser and
affiliates, Mr. Comey also serves on the boards of directors of several of
MACC's portfolio companies and the portfolio companies of other managed funds.
Mr. Comey received an A.B. in Economics from Brown University and an M.B.A. from
Fordham University.
Timothy A. Bridgewater
Mr. Bridgewater, age 43, has been Vice President and Assistant Secretary of
MACC since February 24, 2004. Mr Bridgewater is also a Managing Director of
Atlas. He is currently the President of Interlink Management Corporation, a
management consulting firm he founded in 1994. Since 1998, Mr. Bridgewater has
also served as the Vice President of the American-Thai Foundation for Education,
a non-profit scholarship and rural Thai support organization. Mr. Bridgewater
also currently serves on the advisory board of Gunderboom, Inc., an
environmental services company. From 2000 until 2003, Mr. Bridgewater served on
the board of directors of China Motion Telecom International, Ltd., and from
2001 until 2003 he served on the advisory board of LiveTutor, Inc. Mr.
Bridgewater received a B.S. in Business Finance from Brigham Young University in
1985.
Investment Adviser Principals
In addition to Mr. Woolley, Mr. Madsen and Mr. Bridgewater, the following
are principals of Atlas, the Investment Adviser. Together with Mr. Madsen, each
of these principals has responsibility for day-to-day management of all or a
portion of MACC's investment portfolio.
Nick Efstratis
Mr. Efstratis joined Atlas shortly after its formation. He is also employed
by Wasatch Management Partners, LLC, which manages the Wasatch Venture Funds. He
joined Wasatch immediately after completing his MBA at the Marriott School at
BYU in 1999. While pursuing his MBA, Mr. Efstratis was retained as a consultant
for Wasatch to research, analyze, and make recommendations on strategic
investments. In addition, he worked for Excite Corporation as an Associate in
Business Development. While at Excite, Mr. Efstratis worked with Excite's Senior
Management and production teams to identify the key content and technology
elements needed to further advance Excite's services, distribution and branding.
Prior to pursuing his MBA, Mr. Efstratis was a founding member of the management
team of NetDocuments. He received a B.S. in Entrepreneurship with a minor in
Accounting/Economics from Brigham Young University in 1997.
57
Michael Hennessy
Mr. Hennessy currently serves as an associate with Atlas, joining shortly
after its creation. He has responsibility for deal sourcing, due diligence and
financial modeling. Mr. Hennessy began his career as an investment banker at
Credit Suisse First Boston from 1997 to 1999 where he worked on international
mergers, acquisitions, divestitures, restructurings and equity and debt
offerings in a variety of industries and countries. He then joined the
management team of a financial services software start-up with responsibilities
in fundraising, business development and strategy where he worked from 1999 to
2002. The company raised $30 million in venture capital and was acquired by
Mellon Financial. Mr. Hennessy subsequently worked as a technology research
analyst for Great Companies, LLC, a large cap growth mutual fund from May to
August, 2003. Mr. Hennessy received his B.A. in English Literature from Williams
College in 1994 and his M.B.A. from Brigham Young University where he was
awarded the Hawes and Dean's Scholarships in 2004.
Todd J. Stevens
Mr. Stevens has been Managing Director with Atlas since March, 2004.
Between 1997 and 2003, Mr. Stevens was a Director of MACC and MorAmerica. Since
1993, Mr. Stevens has been the Managing Director of the Wasatch Venture Funds, a
$50,000,000 early stage venture capital fund complex and majority-owned
subsidiary of Zions First National Bank (the "Bank"). Mr. Stevens is also a
Manager of the Bank's Venture Capital Department. From 1991 through 1993, Mr.
Stevens was a Managing Director of Stevens Wood, Inc., a financial and
managerial consulting firm which assisted in raising equity and debt private
placements. Mr. Stevens was also Development Manager, Assistant Treasurer, and
Treasurer for Bonneville Pacific Corporation from 1987-1991, in which his
functions included negotiating, closing and administering corporate and project
finance credit facilities. From 1985 through 1987, Mr. Stevens performed
financial analysis for development, acquisition and sale of retail, commercial
and hotel properties for Homart Development Company. Mr. Stevens received his
B.S. in Accounting and Management from University of Utah in 1983, and his
M.B.A. in 1985 from Harvard Graduate School of Business Administration.
Subadviser Principals
The following are principals of InvestAmerica, the Subadviser. Together
with Mr. Schroder and Mr. Comey, each of these principals has responsibility for
day-to-day management of all or a portion of MACC's investment portfolio.
Kevin F. Mullane
Mr. Mullane, age 48, has been a Senior Vice President of MACC since 1994.
Mr. Mullane is also Senior Vice President, Treasurer and a Director of the
Subadviser. Since 1985, Mr. Mullane has been a principal of InvestAmerica
Venture Group, Inc. and is presently Senior Vice President and a Director. From
1985 to 1994, Venture Group provided management and investment services to
MorAmerica Capital. Venture Group presently provides management and investment
services to a private investment partnership, the Iowa Venture Capital Fund,
L.P. Since 1996, Mr. Mullane has also been Senior Vice President and a Director
of InvestAmerica ND Management, Inc., which provides management and investment
services to North Dakota Small Business Investment Company ("NDSBIC"), a private
investment partnership based in North Dakota. Mr. Mullane is also Senior Vice
President and a Director of InvestAmerica N.D., L.L.C., the general partner of
NDSBIC. Since 2002 Mr. Mullane is also Senior Vice President of InvestAmerica
L&C Management, Inc. and InvestAmerica L&C, LLC, respectively the Manager and
General Partner of Lewis and Clark Private Equities, LP, an SBIC. Since August,
2004, Mr. Mullane is also Senior Vice President of InvestAmerica NW Management,
Inc. and InvestAmerica NW, LLC, respectively the Manager and General Partner of
Invest Northwest, LP, a private venture capital limited partnership. As a
representative of the Subadviser and affiliates, Mr. Mullane also serves on the
boards of directors of several of MACC's portfolio companies and the portfolio
companies of other managed funds. Mr. Mullane received an M.B.A. and an M.S. in
Business Administration, Emphasis in Accounting, from Rockhurst Jesuit
University.
58
Michael H. Reynoldson
Mr. Reynoldson, age 39, has been a Vice President of MACC since 2000. Since
2002, Mr. Reynoldson is also Vice President of InvestAmerica L&C, LLC, the
General Partner of Lewis and Clark Private Equities, LP, an SBIC. Since August,
2004, Mr. Reynoldson is also Vice President of InvestAmerica NW, LLC, the
General Partner of Invest Northwest, LP, a private venture capital limited
partnership. As a representative of the Subadviser and affiliates, Mr.
Reynoldson also serves on the boards of directors of several of MACC's portfolio
companies and the portfolio companies of other managed funds. From 1999 to 2000,
Mr. Reynoldson was a Managing Director of AAVIN, LLC, a venture capital and
private equity fund. Mr. Reynoldson received an M.B.A. from the University of
Iowa and an B.A. in Business Administration from Washington State University.
Securities Trading Policy
MACC has adopted a policy pursuant to Rule 17j-1 under the 1940 Act that
permits investment personnel to invest in securities, including securities that
may be purchased or held by MACC, for their own accounts. The securities trading
policy is on public file with, and is available from, the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling the
Commission at (202)-942-8090, and this policy is available on the EDGAR database
as an exhibit to MACC's registration statement on Form N-2 for this offering,
which is found on the Commission internet site at http://www.sec.gov. A copy of
this policy may be obtained, after paying a duplicating fee, by electronic
request at the following e-mail address: publicinfo@sec.gov, or by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
Proxy Voting Policies and Procedures
SEC registered investment advisors that have the authority to vote proxies
for their clients are required to adopt policies and procedures reasonably
designed to ensure that the advisor votes proxies in the best interests of its
clients. Registered advisors also must maintain certain records on proxy voting.
MACC has adopted Proxy Voting Polices and Procedures, which have also been
adopted by Atlas and InvestAmerica. In some cases, MACC invests in securities
that do not generally entitle MACC to voting rights in our portfolio companies.
When MACC does have voting rights, they are delegated to Atlas and InvestAmerica
under our investment advisory agreements.
In determining how to vote, our advisors will take into account the
interests of MACC and its shareholders well as any potential conflicts of
interest. The compliance officer of each of our advisors will implement
procedures to identify and deal with any conflicts of interest. The advisors
will report regularly to the Board of Directors regarding any conflicts of
interest and resolution of those conflicts as well as any other issues arising
under the proxy policy and any recommended changes to the proxy policy. The
advisors will also keep detailed records of proxy voting and the administration
of the proxy policy, which are available to MACC upon request.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to MACC with
respect to beneficial ownership of MACC's Common Stock as of June 30, 2004 (i)
for all persons who are beneficial owners of 5% or more of the outstanding
shares of MACC's Common Stock (ii) each director of MACC, and (iii) all officers
and directors of MACC as a group:
59
NUMBER OF SHARES
BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER DIRECTLY OR INDIRECTLY PERCENT OF CLASS
Atlas Management Partners, LLC(1) 910,146 Shares 39.10%
15 West South Temple Street, Suite 520
Salt Lake City, Utah 84101
Bridgewater International Group, LLC(1) 804,689 Shares 34.55%
10500 South 1300 West
South Jordan, Utah 84095
Paul M. Bass, Jr. 37,000 Shares 1.59%
15 West South Temple Street, Suite 520
Salt Lake City, Utah 84101
Michael W. Dunn 23,827 Shares 1.02%
15 West South Temple Street, Suite 520
Salt Lake City, Utah 84101
Benjamin Jiaravanon(2) -- --
10500 South 1300 West
South Jordan, Utah 84095
Jasja Kotterman 1,000 Shares 0.04%
15 West South Temple Street, Suite 520
Salt Lake City, Utah 84101
Kent I. Madsen(3) 913,146 Shares 39.18%
15 West South Temple Street, Suite 520
Salt Lake City, Utah 84101
Gordon J. Roth 3,951 Shares 0.17%
15 West South Temple Street, Suite 520
Salt Lake City, Utah 84101
Geoffrey T. Woolley(4) 926,094 Shares 39.76%
15 West South Temple Street, Suite 520
Salt Lake City, Utah 84101
All Officers and Directors as a Group 1,148,571 Shares 49.31%
____________________________________
(1) Information with respect to Atlas Management Partners, LLC ("Atlas")
and Bridgewater International Group, LLC ("Bridgewater") is based upon
Amendment No. 2 to Schedule 13D, dated February 13, 2004, filed by Atlas
with the Commission in which Atlas disclosed that its has sole power to
vote or to direct the vote and shared power to dispose or to direct the
disposition of approximately 804,689 shares of MACC's Common Stock
previously acquired by Bridgewater under a Shareholder and Voting Agreement
entered into between Atlas and Bridgewater. In addition, Atlas has sole
power to vote or to direct the vote and shared power to dispose or to
direct the disposition of approximately 105,457 shares of MACC's Common
Stock previously acquired by Robert T. Madsen under a Shareholder and
Voting Agreement entered into between Atlas and Robert T. Madsen. Both
Shareholder and Voting Agreements referenced above grant Atlas the right to
vote the respective shares of Bridgewater and Robert T. Madsen for an
initial period ending six years after the date upon which Atlas enters into
an investment advisory agreement with MACC and MorAmerica Capital. Mr.
Robert Madsen is the father of Mr. Kent Madsen.
60
The Voting Managing Members of Atlas are Mr. Madsen, Mr. Woolley, Timothy
A. Bridgewater, Todd J. Stevens and Nick Efstratis.
(2) To the extent that Bridgewater International Group, LLC
("Bridgewater") may be deemed to be in control of MACC as a result of
beneficial ownership of MACC' Shares, Mr. Jiaravanon, as the sole manager
of Bridgewater, may be an "interested person" of MACC, as that term is
defined in Section 2(a)(19) of the 1940 Act. The sole member of Bridgewater
is Aleksin,. a corporation formed under the laws of the British Virgin
Islands. The sole shareholder of Aleksin is Maze Industrial Ltd. ("Maze").
Maze is a corporation formed under the laws of the British Virgin Islands.
The sole shareholder of Maze is Sumet Jiaravanon. Mr. Sumet Jiaravanon is
the father of Mr. Benjamin Jiaravanon.
(3) Information with respect to Mr. Kent Madsen is based upon Amendment
No. 2 to Schedule 13D, dated February 13, 2004, filed by Atlas with the
SEC. Mr. Kent Madsen has sole voting and sole dispositive power over 3,000
shares of MACC's Common Stock and, as a voting managing director of Atlas,
has shared control over the voting power of Atlas on an additional 910,146
shares of MACC's Common Stock. To the extent that Atlas may be deemed to be
in control of MACC as a result of beneficial ownership and voting control
of MACC's Common Stock, and as Atlas is the investment advisor for MACC and
MorAmerica Capital, Mr. Kent Madsen, who is currently a member and a voting
managing director of Atlas, may be an "interested person" of MACC, as that
term is defined in Section 2(a)(19) of the Investment Company Act.
(4) Information with respect to Mr. Woolley is based upon Amendment No. 2
to Schedule 13D, dated February 13, 2004, filed by Atlas with the SEC. To
the extent that Atlas may be deemed to be in control of MACC as a result of
beneficial ownership and voting control of MACC Shares, and as Atlas is the
investment advisor for MACC and MorAmerica Capital, Mr. Woolley, who is a
member and voting managing director of Atlas, may be an "interested person"
of MACC, as that term is defined in Section 2(a)(19) of the Investment
Company Act. In addition, Mr. Woolley is a party to a line of credit
agreement with MACC. Under this agreement, amounts loaned by Mr. Woolley to
MACC may be converted, at his option, into Shares. See "DESCRIPTION OF
COMMON STOCK -- Convertible Debt."
The ability of Atlas, MACC's Investment Adviser, to vote approximately 39%
of MACC's shares may be considered to provide Atlas with control of MACC (for
purposes of the 1940 Act, a person is presumed to control a company if that
person has the power to vote more than 25% of the voting securities of a
company). Atlas' ability to control MACC is, however, limited by a number of
provisions of the 1940 Act, other federal securities laws and related
regulations, for example, those requiring that certain capital transactions be
approved by a majority of disinterested shareholders and the requirement for a
majority of independent directors and Board committees composed of independent
directors.
FEDERAL INCOME TAX CONSIDERATIONS
Federal Income Tax Consequences of the Offering
The U.S. federal income tax consequences to holders of Common Stock with
respect to the Offering will generally be as follows:
• The distribution of Rights to Record Date Shareholders will not result
in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights.
• The basis of a Right will be (a) to a holder of Common Stock to whom
it is issued and who exercises or sells the Right is expected to be
zero, since the fair market value of the Right immediately after
issuance is expected to be less than 15% of the fair market value of
the Common Stock with regard to which it is issued (unless the holder
elects, by filing a statement with his timely filed income tax return
for the year in which the Rights are received, to allocate the basis
of the Common Stock between the Right and the Common Stock based on
their respective fair market values immediately after the Right
61
is issued); (b) to a holder of Common Stock to whom it is issued and
who allows the Right to expire, zero; and (c) to anyone who purchases
a Right in the market, the purchase price for a Right.
• The holding period of a Right received by a Record Date Shareholder
includes the holding period of the Common Stock with regard to which
the Right is issued.
• Any gain or loss on the sale of a Right will be treated as a capital
gain or loss if the Right is a capital asset in the hands of the
seller. Such a capital gain or loss will be long-term or short-term,
depending on whether the Right has been held for more than one year,
after giving effect to the rule set forth in the preceding bullet
point. A Right issued with regard to Common Stock will be a capital
asset in the hands of the person to whom it is issued if the Common
Stock was a capital asset in the hands of that person. If a Right is
allowed to expire, there will be no loss realized unless the Right had
been acquired by purchase, in which case there will be a loss equal to
the basis in the Right.
• If the Right is exercised by the Record Date Shareholder, the basis of
the Common Stock received will include the basis, if any, allocated to
the Right and the amount paid upon exercise of the Right.
• If the Right is exercised, the holding period of the Common Stock
acquired begins on the date the Right is exercised.
The foregoing is only a summary of applicable federal income tax laws and
does not include any state or local tax consequences of the Offering. Holders of
Rights should consult their own tax advisors concerning the tax consequences of
the Offering.
Taxation of MACC
Prior to MACC's inception, MACC's predecessor and its affiliates
accumulated substantial net operating loss carryforwards for federal income tax
purposes. Management estimates that as of September 30, 2003, MACC's net
operating loss carryforwards are approximately $19.9 million, of which $15.9
million are available for the fiscal year ended September 30, 2004 and the
remaining $4 million becoming available $1 million each year.
MACC anticipates utilizing these net operating loss carryforwards for a
number of years. After MACC has utilized such net operating loss carryforwards,
MACC is contemplating making a Subchapter M election. Subchapter M treatment
essentially means that certain income is taxed at the shareholder level only
with no tax at the corporate level, although certain built-in gains at the time
of the election may be subject to a corporate level tax at MACC.
Taxation of Shareholders
OVERVIEW: Distributions paid to shareholders by MACC from its ordinary
income or its net capital gains ("Regular Dividends") will be taxable to
shareholders as ordinary income to the extent of MACC's current or accumulated
earnings and profits. Distributions in excess of MACC's earnings and profits
will first reduce the adjusted tax basis of a shareholder's Shares and, after
such adjusted tax basis is reduced to zero, will constitute either short-term or
long-term capital gains (depending on a shareholder's holding period for his
Shares), assuming the Shares are held as capital assets.
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA"),
special rules apply to Regular Dividends paid to individual shareholders. Such
Regular Dividends, with respect to taxable years beginning on or after January
1, 2003 and ending on or before December 31, 2008, may be subject to tax at the
rates generally applicable to long-term capital gains for individuals (which
under the JGTRRA have been reduced to a maximum rate of 15% with respect
long-term capital gains recognized in taxable years ending on or after May 6,
2003 and before taxable years beginning after December 31, 2008), provided that
the individual shareholder meets certain holding period requirements. The
maximum long-term capital gains rate of 15% will generally apply to such portion
of the Regular Dividends paid by MACC to an individual shareholder in a
particular taxable year.
62
Corporate shareholders which are otherwise eligible to claim the dividends
received deduction under section 243 of the Code can deduct 70% of such portion
of a dividend as is received with respect to their Shares as represent their
proportionate share of the eligible dividend income distributed by MACC. Capital
gains dividends do not qualify for the dividends received deduction under
section 243 of the Code.
SALE OF SHARES: On a sale of Shares, a shareholder will realize taxable
gain or loss depending upon the amount realized on the sale and the
shareholder's basis for the Shares. That gain or loss will be treated as capital
gain or loss if the shareholder held the Shares as capital assets and will be
long-term capital gain or loss if the Shares were held for more than one year.
Any such loss will be disallowed to the extent the Shares that were disposed of
are replaced (such as pursuant to the Dividend Reinvestment Plan) within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition. In such a case, the basis of the acquired Shares will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on the sale
of Shares held for six months or less will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received by the shareholder on those Shares or any undistributed capital gains.
Backup Withholding
MACC is required to withhold federal income tax at the rate of 28% on all
dividends, capital gain distributions and repurchase proceeds payable to any
individuals and certain other noncorporate shareholders who fail to provide MACC
with certain information, including their correct taxpayer identification
number, or who otherwise (with respect to dividends and capital gain
distributions) are subject to backup withholding under section 3406 of the Code.
Any amount withheld under the backup withholding provisions may be credited
against a shareholder's U.S. federal income tax liability.
Foreign Withholding Taxes Imposed on MACC
Income received by MACC from sources within foreign countries, and gains
realized on foreign securities, may be subject to withholding and other taxes
imposed by such countries, which would reduce MACC's yield and/or total return.
Tax conventions between certain countries and the United States may reduce or
eliminate such taxes, and many foreign countries do not impose taxes on capital
gains from investments by foreign investors. It is impossible to determine the
rate of foreign tax in advance, because the amount of MACC's assets to be
invested in various countries is not known.
Foreign Shareholders of MACC
Regular Dividends distributed by MACC to non-U.S. shareholders (which
generally would include non-resident alien individuals, foreign trusts and
estates, foreign corporations, and foreign partnerships, in each case as defined
in section 7701 of the Code) will be subject to U.S. withholding taxes imposed
at a flat rate of 30%, unless either (i) such non-U.S. shareholder is entitled
to an exemption from, or reduced rate of, withholding under an applicable income
tax treaty, or (ii) such Regular Dividends constitute income "effectively
connected" with the conduct of a trade or business within the United States (or,
if required under an applicable income tax treaty, are attributable to the
conduct of a trade or business carried on within the United States through a
"permanent establishment") in respect of which the non-U.S. shareholder will be
subject to U.S. federal income taxes on its net income at applicable graduated
rates. In order to claim an exemption from, or reduced rate of, withholding
under an applicable income tax treaty with respect to Regular Dividends not
subject to U.S. income tax on a net income basis, a non-U.S. shareholder will be
required to furnish generally a U.S. Internal Revenue Service ("IRS") Form W-8
BEN, and such other information and documentation as is required under the
instructions to the Form W-8 BEN and applicable regulations prescribed by the
IRS, at the times and in the manner set forth therein. In the case of Regular
Dividends that are "effectively connected" with conduct of a trade or business
within the U.S. (or, if required under an applicable income tax treaty, are
attributable to a trade or business carried on within the U.S. through a
"permanent establishment"), a non-U.S. shareholder in order to demonstrate its
exemption from withholding taxes will be required to provide an IRS Form W-8
ECI, and such other information and documentation as is required under the
instructions to the Form W-8 ECI and applicable regulations prescribed by the
IRS, at the times and in the manner set forth therein. In addition, by providing
an applicable Form W-8, a non-U.S. shareholder identifies himself as being a
foreign rather than a U.S. person and, therefore, exempt from backup withholding
discussed above.
63
Non-U.S. shareholders will not be subject either to U.S. federal income
taxes or withholding taxes in respect of Capital Gains Dividends, or gains on
the sale or exchange of their Shares, unless either (i) such gain is
"effectively connected" with the conduct of a U.S. trade or business, or (ii) in
the case of an individual, such non-U.S. shareholder is present in the U.S. for
183 days or more during the taxable year.
Other Tax Considerations
The foregoing is only a summary of some of the important federal tax
considerations affecting MACC and its shareholders. Distributions may also be
subject to state, local and foreign taxes, depending on each shareholder's
particular situation. Prospective shareholders thus are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in MACC.
DESCRIPTION OF COMMON STOCK
General
--------------------------------------------------------------------------------
(4)
AMOUNT
(3) OUTSTANDING
(2) AMOUNT HELD BY EXCLUSIVE OF
(1) AMOUNT REGISTRANT OR AMOUNT SHOWN
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT UNDER (3)
Common Stock, 2,329,255 as of
$.01 Par Value 10,000,000 -0- June 30, 2004
--------------------------------------------------------------------------------
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters submitted for action by the shareholders. There is no provision for
cumulative voting rights with respect to the election of directors. Accordingly,
the holders of more than 50% of the shares of Common Stock can, if they choose
to do so, elect all of the directors. In such event, the holders of the
remaining shares will not be able to elect any directors. The holders of shares
of Common Stock are entitled to receive dividends, when, as and if declared by
the Board of Directors, out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of MACC, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby, when issued against the consideration set forth
in this Prospectus, will be, fully-paid and non-assessable.
Section 203 of Delaware Corporation Law
MACC is subject to the "business combination" statute of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder," unless (1) the transaction is
approved by the Board of Directors prior to the date the interested stockholder
obtained such status, (2) upon the consummation of the transaction which
resulted in the stockholder becoming an "interested stockholder," the
"interested stockholder" owned at least 85 percent of the voting stock of MACC
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding, those shares owned by (a) persons
who are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the Plan will be tendered in a tender or exchange offer,
or (3) on or subsequent to such date the "business combination" is approved by
the Board of Directors and authorized at an annual or special
64
meeting of the stockholders by the affirmative vote of 66 2/3 percent of the
outstanding voting stock that is not owned by the "interested stockholder." A
"business combination" includes mergers, asset sales and other transactions
resulting in financial benefit to a stockholder. An "interested stockholder" is
a person who, together with affiliates and associates, owns (or within three
years, did own) 15 percent of more of a corporation's voting stock. The statute
could prohibit or delay mergers or other takeover or change in control attempts
with respect to MACC and, accordingly, may discourage attempts to acquire MACC.
Annual Meetings
MACC holds annual meetings of shareholders for the election of directors
and other matters.
Convertible Debt
MACC is a party to an agreement providing for a line of credit to be used
for MACC's operating expenses, if cash is not available from MorAmerica Capital
for these purposes.
The following are the principal terms of the line of credit:
• The lender is Mr. Geoffrey T. Woolley, a Director of the Corporation
and a voting managing director of Atlas, the Investment Adviser.
• MACC may borrow up to up to $400,000, which may be drawn over a twelve
month period. Advances under this line of credit bear interest at the
rate of 9% per year. MACC is required to make interest payments
quarterly during the first year, and all accrued interest and unpaid
principal will be fully amortized in the second year.
• The loan agreement extends for two years, subject to extension at any
time by mutual agreement.
• Any outstanding principal and interest may be converted at the option
of Mr. Woolley to Shares of the Corporation's Common Stock at the
lesser of (i) $3.50 per share or (ii) the same price per share as any
rights offering to shareholders within 12 months of the loan date.
• The loan is secured by:
» A first lien on cash assets of the Corporation;
» Letter of support from MorAmerica Capital in which
MorAmerica Capital agrees to make legally available
distributions to pay any outstanding loan amounts; and
» A guarantee by Atlas.
If the entire amount of the loan were drawn and all principal and accrued
interest were converted into Common Stock, Mr. Woolley would be issued
approximately 139,645 Shares, assuming a conversion price of $3.38 (representing
a 5% discount to the market price of the Common Stock of $3.56 as of _________,
2004) and $72,000 of accrued interest. At this date, the sum of $270,000 has
been drawn under the loan agreement and $5,723 in accrued interest is due. Mr.
Woolley has indicated that he intends to convert all outstanding principal and
interest on the loan agreement into Shares following the conclusion of this
Offering.
CUSTODIAN AND TRANSFER AGENT
MACC's investment securities and cash are held by Zions First National
Bank, as custodian, 10 East South Temple, Suite 300, Salt Lake City, Utah 84111
and US Bank, Post Office Box 3013, Cedar Rapids, Iowa 52406.
Mellon Investor Services, LLC serves as the transfer agent and registrar
for the Rights and the Shares.
65
EXPERTS
The consolidated financial statements of MACC at and as of September 30,
2003, appearing in this Prospectus and Registration Statement have been audited
by KPMG, LLP, an independent registered public accounting firm, as set forth in
their report thereon appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Rights and the Shares has been passed on for MACC by
Blackwell Sanders Peper Martin LLP, 1620 Dodge Street, Suite 2100, Omaha,
Nebraska 68102.
REPORTS TO SHAREHOLDERS
MACC sends audited annual reports to its shareholders, including a list of
its portfolio investments.
FURTHER INFORMATION
MACC has filed with the Commission, Washington, D.C., 20549, a Registration
Statement under the Securities Act with respect to the Shares offered hereby.
Further information concerning these securities and MACC may be found in the
Registration Statement, of which this Prospectus constitutes a part, on file
with the Commission. The Registration Statement may be inspected without charge
at the Commission's office in Washington, D.C., and copies of all or any part
thereof may be obtained from such office after payment of the fees prescribed by
the Commission.
MACC is subject to the informational requirements of the 1934 Act and the
1940 Act and, in accordance therewith, files reports and other information with
the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the Public Reference Room maintained
by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Information
on the Commission's public reference facilities may be obtained by calling
1-800-SEC-0330. The Commission maintains a Web site (http://www.sec.gov) that
contains material incorporated by reference into this Prospectus, and reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. In addition, reports, proxy and
information statements and other information concerning MACC can be inspected at
the offices of the Nasdaq SmallCap Market, Investor Relations, 4 Times Square,
New York, NY 10036.
66
INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Financial Statements Page
Condensed Consolidated Balance
Sheets (Unaudited) at June 30, 2004
and September 30, 2003 F-1
Condensed Consolidated Statements of
Operations (Unaudited) for the three months
ended June 30, 2004 and June 30, 2003
and the nine months ended
June 30, 2004 and June 30, 2003 F-2
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the nine months ended
June 30, 2004 and June 30, 2003 F-3
Notes to Unaudited Condensed Consolidated
Financial Statements F-4
Report of Independent Registered Public
Accounting Firm F-6
Consolidated Balance Sheet -
September 30, 2003 F-7
Consolidated Statements of Operations -
Year ended September 30, 2003 F-8
Consolidated Statements of Changes in Net Assets -
Years ended September 30, 2003 and 2002 F-9
Consolidated Statements of Cash Flows -
Year ended September 30, 2003 F-10
Notes to Consolidated Financial Statements F-11
Consolidated Schedule of Investments -
September 30, 2003 F-17
Notes to Consolidated Schedule of Investments F-25
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, September 30,
2004 2003
------------ -------------
Assets
Loans and investments in portfolio securities, at market
or fair value:
Unaffiliated companies (cost of $11,613,758 and $14,546,361) $ 9,383,813 13,610,760
Affiliated companies (cost of $17,786,705 and $19,842,874) 19,175,441 20,068,666
Controlled companies (cost of $4,536,308 and $4,490,502) 4,614,758 4,921,751
Cash and money market accounts 7,884,630 722,691
Other assets, net 1,006,255 1,909,250
--------- ---------
Total assets $ 42,064,897 41,233,118
========== ==========
Liabilities and net assets
Liabilities:
Debentures payable, net of discount $ 27,940,000 27,940,000
Deferred incentive fees 18,353 27,528
Accrued interest 657,214 185,664
Accounts payable and other liabilities 528,722 334,014
----------- ----------
Total liabilities 29,144,289 28,487,206
----------- ----------
Net assets:
Common stock, $.01 par value per share;
authorized 10,000,000 shares and 4,000,000 shares
in 2004 and 2003, respectively;
issued and outstanding 2,329,255 shares 23,293 23,293
Additional paid-in-capital 13,660,074 13,001,179
Unrealized depreciation on investments (762,759) (278,560)
----------- ----------
Total net assets 12,920,608 12,745,912
----------- ----------
Total liabilities and net assets $ 42,064,897 41,233,118
========== ==========
Net assets per share $ 5.55 5.47
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
F-1
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
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,
2004 2003 2004 2003
---- ---- ---- ----
Investment income:
Interest
Unaffiliated companies $ 154,724 171,562 531,052 416,418
Affiliated companies 184,070 245,839 538,066 759,716
Controlled companies 68,247 60,626 206,016 195,126
Other 12,690 6,998 37,057 22,907
Dividends
Unaffiliated companies -- 74,141 78,204 238,892
Affiliated companies 250,335 131,756 592,602 189,161
Controlled companies -- 7,700 -- 23,442
Processing fees -- 5,556 -- 22,741
Other 2,507 11,556 10,166 97,582
----- ------ ------ ------
Total investment income 672,573 715,734 1,993,163 1,965,985
------- ------- --------- ---------
Operating expenses:
Interest expenses 531,714 550,420 1,595,142 1,651,261
Management fees 262,810 270,782 782,608 825,867
Professional fees 93,155 467,257 547,001 797,524
Other 87,462 245,389 1,002,948 473,226
------ ------- --------- -------
Total operating expenses before
management fees waived 975,141 1,533,848 3,927,699 3,747,878
Management fees waived -- (61,420) (87,092) (132,075)
------- ------- ------- --------
Net operating expenses 975,141 1,472,428 3,840,607 3,615,803
Investment expense,
net before tax expense (302,568) (756,694) (1,847,444) (1,649,818)
-------- -------- ---------- ----------
Income tax expense -- -- -- (15,000)
-------- -------- ---------- -------
Investment expense, net (302,568) (756,694) (1,847,444) (1,664,818)
-------- -------- ---------- ----------
Realized and unrealized (loss) gain
on investments:
Net realized (loss) gain on investments (net
incentive fees of $514,837 in 2004
and $0 in 2003):
Unaffiliated companies 26,495 748,734 1,974,658 (46)
Affiliated companies 3,380 150,500 64,690 (1,893,002)
Controlled companies -- -- 466,991 --
Net change in unrealized appreciation/
depreciation on investments (80,659) (2,955,958) (484,199) (502,937)
------- ---------- -------- --------
Net (loss) gain on investments (50,784) (2,056,724) 2,022,140 (2,395,985)
------- ---------- --------- ----------
Net change in net assets
from operations $ (353,352) (2,813,418) 174,696 (4,060,803)
========== ========== ======= ==========
See accompanying notes to unaudited condensed consolidated financial statements.
F-2
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,
2004 2003
---- ----
Cash flows from operating activities:
Increase (decrease) in net assets from operations $ 174,696 (4,060,803)
----------- ----------
Adjustments to reconcile increase (decrease)
in net assets from operations to net cash
provided by operating activities:
Net realized and unrealized gain on investments (2,022,140) 2,395,985
Proceeds from disposition of and payments on
loans and investments in portfolio securities 8,023,128 2,218,500
Payments of incentive fees to investment advisor (497,517) ---
Purchases of loans and investments in
portfolio securities (481,934) (977,027)
Change in other assets 724,823 238,309
Change in accrued interest, accounts payable,
and other liabilities 657,083 777,288
Other 583,800 (169,305)
------- --------
Total adjustments 6,987,243 4,483,750
--------- ---------
Net cash provided by operating activities 7,161,939 422,947
--------- -------
Cash flows from financing activities:
Payment of commitment fees --- (65,000)
--------- -------
Net cash used in financing activities --- (65,000)
--------- -------
Net increase in cash and cash equivalents 7,161,939 357,947
Cash and cash equivalents at beginning of period 722,691 1,802,603
------- ---------
Cash and cash equivalents at end of period $ 7,884,630 2,160,550
=========== =========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 1,048,948 1,071,804
=========== =========
Supplemental disclosure of noncash investing and financing
information -
Assets received in exchange of securities $ 196,687 448,125
In-kind interest income received in the form of securities 323,820 251,303
=========== =========
See accompanying notes to unaudited condensed consolidated financial statements.
F-3
MACC PRIVATE EQUITIES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of MACC Private Equities Inc. (MACC) and its wholly owned
subsidiary MorAmerica Capital Corporation (MorAmerica Capital) 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, 2003. 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, 2003 has been derived
from the audited balance sheet as of that date.
(2) Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the average of the bid
price on the three final trading days of the valuation period which is not
materially different from the bid price on the final day of the period.
Restricted and other securities for which quotations are not readily available
are valued at fair value as determined by the Board of Directors. Among the
factors considered in determining the fair value of investments are the cost of
the investment; developments, including recent financing transactions, since the
acquisition of the investment; 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.
In the valuation process, MorAmerica Capital uses financial information
received monthly, quarterly, and annually from its portfolio companies which
includes both audited and unaudited financial statements. This information is
used to determine financial condition, performance, and valuation of the
portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
(3) Loss Contingency
MorAmerica Capital is party to arbitration proceedings instituted by
TransCore Holdings, Inc., a company (Buyer) seeking indemnification under the
Stock Purchase Agreement (the Stock Purchase Agreement), pursuant to which
MorAmerica Capital and certain other individuals and institutional investors
(collectively, the Sellers) sold their interest in a former portfolio company
investment (Portfolio Company). The arbitration proceedings are being
administered by JAMS. Under the Stock Purchase Agreement, the Sellers agreed to
indemnify Buyer for breaches of representations and warranties as to Portfolio
Company made by the Sellers. Buyer claims that accounting irregularities at
Portfolio Company resulted in a breach of the Sellers' representations and
warranties. The Sellers have retained counsel and forensic accountants to defend
the Sellers against Buyer's claim for indemnification. Following discovery,
depositions and other preliminary proceedings, in June, 2003, the formal
arbitration proceedings commenced and are being intensively contested by all
parties. Based on the current schedule for the arbitration, a decision will not
be rendered until at least September, 2004. Based on its evaluation of the
Buyer's
F-4
claim and discussions with external legal counsel, MACC believes that it is
reasonably possible that a loss may have been incurred as a result of the
indemnification claim, against which no accrual for loss has been made as of
June 30, 2004, because the amount of the possible loss, and therefore its
materiality to the financial statements, cannot be estimated. MorAmerica Capital
intends to continue vigorously defending this arbitration. MorAmerica Capital
received approximately $939,000 of proceeds from the sale of the Portfolio
Company. MorAmerica Capital owned debt securities of Buyer with a face value of
$508,761 and warrants with a cost of $24,000 received as part of the sale. Buyer
has defaulted on interest payments due on these debt securities. On March 31,
2003, MorAmerica Capital reduced the valuation of the debt securities by
$254,380 in light of the interest default and information regarding the related
dispute as of that date. On June 30, 2003, MorAmerica Capital further reduced
the valuation of these debt securities by $254,380 to $1 and reduced the
valuation of the warrants to zero based upon the continuing interest default and
additional information regarding the related dispute as of that date. Subsequent
to December 31, 2003, Buyer refinanced certain of its obligations, including the
debt securities held by MorAmerica Capital, and the principal amount of these
debt securities and accrued interest has been deposited in an escrow account
pending conclusion of the arbitration proceedings.
In a related development, MorAmerica Capital and another small business
investment company, NDSBIC, L.P., which co-invested in Portfolio Company, filed
suit on December 24, 2003 in the United States District Court for the Northern
District of Texas against Patton Boggs LLP and Charles P. Miller, Esq., of
Patton Boggs alleging legal malpractice and breach of fiduciary duty. Patton
Boggs and Mr. Miller represented MorAmerica Capital and NDSBIC in connection
with their investment in the Portfolio Company and the subsequent sale of the
Portfolio Company to Buyer. Effective June 30, 2004, Patton Boggs executed a
tolling agreement with MorAmerica Capital and NDSBIC, L.P. waiving any statue of
limitations defense until the agreement is cancelled by either party with 30
days notice. This litigation was then dismissed without prejudice. MorAmerica
Capital intends to monitor the outcome of the TransCore arbitration and then
determine whether to re-institute this litigation.
F-5
MACC PRIVATE EQUITIES INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS AND SHAREHOLDERS
MACC PRIVATE EQUITIES INC.:
We have audited the accompanying consolidated balance sheet of MACC Private
Equities Inc. and subsidiary (the Companies), including the consolidated
schedule of investments, as of September 30, 2003, and the related consolidated
statements of operations and cash flows for the year ended September 30, 2003
and the consolidated statements of changes in net assets for the years ended
September 30, 2003 and 2002, and the financial highlights for each of the five
years in the period then ended. These consolidated financial statements and
financial highlights are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial highlights based on our audit.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights 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, 2003. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements and
financial highlights present fairly, in all material respects, the financial
position of MACC Private Equities Inc. and subsidiary as of September 30, 2003,
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, 2003 and 2002, and
the financial highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Des Moines, Iowa
November 7, 2003
F-6
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
Assets
Loans and investments in portfolio securities, at market or fair value (note 2):
Unaffiliated companies (cost of $13,439,514) $ 12,803,914
Affiliated companies (cost of $20,949,721) 20,875,512
Controlled companies (cost of $4,490,502) 4,921,751
Cash and money market accounts 722,691
Other assets, net (note 1) 1,909,250
------------
Total assets $ 41,233,118
============
Liabilities and Stockholders' Equity
Liabilities:
Debentures payable (note 3) $ 27,940,000
Incentive fees payable (note 5) 27,528
Accrued interest 185,664
Accounts payable and other liabilities 334,014
----------
Total liabilities 28,487,206
----------
Net assets (note 3)
Common stock, $.01 par value per share;
authorized 4,000,000 shares;
issued and outstanding 2,329,255 shares 23,293
Additional paid-in-capital 13,001,179
Unrealized depreciation on investments (note 2) (278,560)
----------
Total net assets 12,745,912
----------
Commitments and contingency (note 5)
Total liabilities and net assets $ 41,233,118
============
Net assets per share $ 5.47
============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2003
Investment income:
Interest
Unaffiliated companies $ 455,137
Affiliated companies 1,040,270
Controlled companies 256,142
Other 27,807
Dividends
Unaffiliated companies 315,066
Affiliated companies 275,169
Controlled companies 23,442
Processing fees 22,741
Other 128,951
-------
Total income 2,544,725
---------
Operating expenses:
Interest expenses (note 3) 2,195,886
Management fees (note 5) 1,083,575
Professional fees 1,068,511
Net unrealized loss on other assets 288,743
Other 279,565
-------
Total operating expenses before management fees waived 4,916,280
Management fees waived (notes 5 and 6) (180,421)
--------
Net operating expenses 4,735,859
---------
Investment expense, net before tax expense (2,191,134)
Income tax expense (note 4) (15,000)
-------
Investment expense, net (2,206,134)
----------
Realized and unrealized (loss) gain on investments (note 2):
Net realized loss on investments:
Unaffiliated companies (464,441)
Affiliated companies (3,136,308)
Net change in unrealized depreciation/appreciation on investments 2,896,291
---------
Net loss on investments (704,458)
--------
Net change in net assets from operations $(2,910,592)
===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
------------------------------------------------------------------------------------------
Operations:
Investment expense, net $ (2,206,134) (926,634)
Net realized loss on investments (3,600,749) (4,592,480)
Net change in unrealized appreciation/depreciation
on investments 2,896,291 1,132,647
Net change in net assets from operations (2,910,592) (4,386,467)
Net assets:
Beginning of period 15,656,504 20,042,971
---------- ----------
End of period $ 12,745,912 15,656,504
============ ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-9
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2003
Cash flows from operating activities:
Decrease in net assets from operations $(2,910,592)
-----------
Adjustments to reconcile decrease in net assets from operations to
net cash used in operating activities:
Net realized and unrealized loss on investments 704,458
Net unrealized loss on other assets 288,743
Change in incentive fees payable, accrued interest,
accounts payable and other liabilities 152,222
Other (265,677)
--------
Total adjustments 879,746
-------
Net cash used in operating activities (2,030,846)
----------
Cash flows from investing activities:
Proceeds from disposition of and payments on loans and
investments in portfolio securities 2,316,961
Purchases of loans and investments in portfolio securities (1,301,027)
----------
Net cash provided by investing activities 1,015,934
---------
Cash flows from financing activities:
Debt commitment fee (65,000)
-------
Net cash used in financing activities (65,000)
-------
Net decrease in cash and cash equivalents (1,079,912)
Cash and cash equivalents at beginning of period 1,802,603
---------
Cash and cash equivalents at end of period $ 722,691
===========
Supplemental disclosure of cash flow information -
Cash paid during the year for interest $ 2,088,201
===========
Supplemental disclosure of noncash investing and financing information -
Assets received in exchange of securities $ 739,868
===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICES AND RELATED MATTERS
(a) Basis of Presentation
The consolidated financial statements include the accounts of MACC Private
Equities Inc. (Equities) and its wholly owned subsidiary, MorAmerica
Capital Corporation (MACC). Equities and MACC (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
accounting principles generally accepted in the United States of America
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.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
(c) 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 accounts to be cash equivalents.
At September 30, 2003, cash equivalents consisted of $688,246 of money
market funds.
(d) 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 which is
not materially different from the bid price on the final day of the period.
Restricted and other securities for which quotations are not readily
available are valued at fair value as determined by the Board of Directors.
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.
(e) Other Assets
Other assets include accrued interest receivable on portfolio loans of
$1,730,327 at September 30, 2003, which is presented net of a reserve of
$1,333,746.
(f) Revenue Recognition
Dividend income is recognized on the ex-dividend date and interest income
is accrued on a daily basis.
F-11
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
SEPTEMBER 30, 2003
In conjunction with the investment process, the Company negotiates
non-refundable processing fees with many companies it evaluates for
investment. These fees are compensation for time and efforts of the
investment advisory personnel and for reimbursement of expenses related to
the due diligence, and are recognized as income when received.
(g) Income Taxes
Equities and MACC 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.
(h) 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, incentive fee payable, accrued interest,
accounts payable and other liabilities.
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 $38,601,177 and $38,879,737,
respectively, at September 30, 2003.
The estimated fair value of long-term debt is $30,545,000, with a cost of
$27,940,000, at September 30, 2003. This fair value 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.
(2) LOANS AND INVESTMENTS IN PORTFOLIO SECURITIES
Loans and investments in portfolio securities include debt and equity
securities in small business concerns located throughout the continental
United States, with a concentration in the Midwest. The Company determined
that the fair value of its portfolio securities was $38,601,177 at
September 30, 2003. 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 a portion of the securities held of
Devine, Inc. (formerly Delano Technology Corporation, acquired on October
16, 2000), are considered to be restricted in their disposition and
illiquid at September 30, 2003.
F-12
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
SEPTEMBER 30, 2003
(3) DEBENTURES PAYABLE
Debentures of MACC guaranteed by the Small Business Administration (SBA) of
$27,940,000 at September 30, 2003 are unsecured. In accordance with SOP
90-7, the debentures then outstanding were revalued to fair value on
February 15, 1995. Maturities of the debentures are as follows:
Fixed
Year ending September 30: Debentures Interest Rate
------------------ ------------------
2005 $ 2,150,000 3.13 %
2007 1,000,000 7.55
2009 2,500,000 7.83
2010 9,000,000 8.48
2011 5,835,000 6.89
2012 7,455,000 7.03
==================
------------------
$ 27,940,000
==================
On October 20, 2003, the Company received notification from the SBA that it
will not exercise its right to demand payment on $2,150,000 of debentures
which matured on September 1, 2003 before November 1, 2004.
The debentures contain restrictions on the acquisition or repurchase of
MACC's capital stock, distributions to MACC's shareholder other than out of
undistributed net realized earnings, officers' salaries, and certain other
matters. At September 30, 2003, MACC does not have accumulated
undistributed net realized earnings (computed under SBA guidelines)
available for distribution to Equities.
MACC has a commitment letter for $10,000,000 with the SBA to issue
debentures, which expire on September 30, 2005. At September 30, 2003,
$3,500,000 of this commitment remained unused. On October 1, 2002, MAAC
received a commitment letter for $6,500,000 with the SBA to issue
debentures, which expire on September 30, 2007. At September 30, 2003,
$6,500,000 of this commitment remained unused.
(4) INCOME TAXES
Income tax expense differed from the amounts computed by applying the
United States federal income tax rate of 34% to pretax loss due to the
following:
Computed "expected" tax benefit $ (985,000)
Increase (reduction) in income taxes resulting from:
State income tax expense 15,000
Nontaxable dividend income (39,000)
Change in the beginning of the period valuation allowance for 1,087,000
deferred tax assets
Other (63,000)
-----------
Income tax expense $ 15,000
===========
F-13
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
SEPTEMBER 30, 2003
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at September 30, 2003 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 7,994,000
Unrealized depreciation on investments 524,000
Other 574,000
-----------
Total gross deferred tax assets 9,092,000
Less valuation allowance (7,973,000)
-----------
Net deferred tax assets 1,119,000
Deferred tax liabilities:
Equity investments (795,000)
Other assets received in lieu of cash (324,000)
-----------
Net deferred tax assets $ --
===========
The net change in the total valuation allowance for the year ended
September 30, 2003 was an increase of $1,087,000. 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 $19.9 million prior to the expiration of the net operating
loss carryforwards in 2008-2023. The Company had a taxable loss of
approximately $5.9 million for the year ended September 30, 2003. Based
upon the level of historical taxable income of MACC 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, 2003.
At September 30, 2003, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $19.9 million, which are
available to offset future federal taxable income, if any, through 2023.
Approximately $15.9 million of the carryforwards are available for the year
ending September 30, 2004, with approximately $1 million additionally
available annually thereafter.
(5) COMMITMENTS AND CONTINGENCY
(a) Management Agreements
Equities has an investment advisory agreement (the Agreement) with
InvestAmerica Investment Advisors, Inc. (IAIA). Three of Equities' 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 MACC. In addition, Equities 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 $12,448 for the year ended
September 30, 2003. There were no incentive fees accrued or paid under the
Agreement in 2003.
F-14
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
SEPTEMBER 30, 2003
MACC 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, or 7.5% of Regulatory Capital (as defined in
the Agreement). However, during fiscal 2003, MACC's investment advisor
agreed to a voluntary, temporary reduction in management fees from January
1, 2003 through February 29, 2004. This temporary agreement changed the
management fee to be $68,750 per month not to exceed the calculation
specified in the current advisory agreement. In addition, MACC contracted
to pay IAIA 13.4% of the net capital gains, before taxes, on investments in
the form of an incentive fee. Net capital gains, as defined in the
agreement, are calculated as gross realized gains, minus the sum of capital
losses, less any unrealized depreciation, including reversals of previously
recorded unrealized depreciation, recorded during the year, and net
investment losses, if any, as reported on page 4c, line 33 of the SBA Form
468.1. Capital losses and realized capital gains are not cumulative under
the incentive fee computation. Payments for incentive fees resulting from
noncash gains are deferred until the assets are sold.
Total management fees (net of management fees waived) under this agreement
amounted to $890,706 for the year ended September 30, 2003. Incentive fees
are an expense in determining net realized gain (loss) on investments in
the consolidated statement of operations. No incentive fees were earned or
paid for the year ended September 30, 2003. Approximately $27,000 of
incentive fees related to noncash gains from prior years is being deferred
as described above.
(b) Loss Contingency
MACC is party to arbitration proceedings instituted by TransCore Holding,
Inc., a company (Buyer) seeking indemnification under the Stock Purchase
Agreement (the Stock Purchase Agreement), pursuant to which MACC and
certain other individuals and institutional investors (collectively, the
Sellers) sold their interest in a former portfolio company investment
(Portfolio Company). The arbitration proceedings are being administered by
JAMS. Under the Stock Purchase Agreement, the Sellers agreed to indemnify
Buyer for breaches of representations and warranties as to Portfolio
Company made by the Sellers. Buyer claims that accounting irregularities at
Portfolio Company resulted in a breach of the Sellers' representations and
warranties. The Sellers have retained counsel and forensic accountants to
defend the Sellers against Buyer's claim for indemnification. Following
discovery, depositions and other preliminary proceedings, in June the
formal arbitration proceedings commenced and are being intensively
contested by all parties. Based on the current schedule for the
arbitration, a decision will not be rendered until at least February, 2004.
Based on its evaluation of the Buyer's claim and discussions with external
legal counsel, Equities believes that it is reasonably possible that a loss
may have been incurred as result of the indemnification claim, against
which no accrual for loss has been made as of September 30, 2003, because
the amount of the possible loss, and therefore its materiality to the
financial statements, cannot be estimated. MACC intends to continue
vigorously defending this arbitration. MACC received approximately $939,000
of proceeds from the sale of the Portfolio Company. MACC owns debt
securities of Buyer with a cost of $508,761 and warrants with a cost of
$24,000 received as part of the sale. Buyer has defaulted on interest
payments due on these debt securities. On March 31, 2003, MACC reduced the
valuation of the debt securities by $254,380 in light of the interest
default and information regarding the related dispute as of that date. On
June 30, 2003, MACC further reduced the valuation of these debt securities
by $254,380 to $1 and reduced the valuation of the warrants to zero based
upon the continuing interest default and additional information regarding
the related dispute as of that date.
F-15
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
SEPTEMBER 30, 2003
(6) FINANCIAL HIGHLIGHTS
The Company has presented the following disclosures pertaining to common stockholders, as required by
the AICPA Audit and Accounting Guide for Investment Companies, for the years ended September 30:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Per Share Operating Performance
(For a share of capital stock outstanding
throughout the period (1)):
Net asset value, beginning of period $ 6.72 8.60 11.01 10.04 8.38
-------- ---- ----- ----- ----
Income from investment operations:
Net investment (expense) income (0.95) (0.40) (0.12) 0.02 --
Net realized and unrealized (loss)
gain on investment transactions (0.30) (1.48) (2.57) 0.95 1.15
Allocation of income tax benefit to
additional paid-in capital -- -- 0.28 -- 0.51
-------- ---- ----- ----- ----
Total from investment
operations (1.25) (1.88) (2.41) 0.97 1.66
-------- ---- ----- ----- ----
Net asset value, end of period $ 5.47 6.72 8.60 11.01 10.04
======== ==== ==== ===== =====
Closing market price $ 2.52 3.40 6.06 7.66 8.51
======== ==== ==== ===== =====
Total return
Net asset value basis (18.59) % (21.89) (21.81) 9.67 19.85
Market price basis (25.88) % (43.89) (20.89) (9.99) 48.26
Net asset value, end of period
(in thousands) $ 12,746 15,657 20,043 25,646 23,394
Ratio to average net assets:
Investment (expense) income, net (1) (15.60) % (4.85) (1.21) 0.21 (0.04)
Operating and income tax expense (1) (2) (33.60) % (20.52) (14.14) (11.41) (11.10)
(1) Per share data reflects a 30% stock split effected in the form of a
stock dividend on March 31, 1999, a 20% stock split effected in the form of a
stock dividend on March 31, 2000 and a 20% stock split effected in the form of a
stock dividend on March 31, 2001.
(2) As discussed in note 5, MACC's investment advisor agreed to a
voluntary, temporary reduction in management fees from January 1, 2003 through
February 29, 2004. Due to the agreement, the investment advisor voluntarily
waived $180,421 of management fees. Excluding the effect of the waiver, the
operating and income tax expense ratio for the year ended September 30, 2003 was
(35.10)%.
The ratios of investment (expense) income, net to average net assets, of
operating and income tax expenses to average net assets and total return are
calculated for common stockholders as a class. Total return, which reflects the
annual change in net assets, was calculated using the change in net assets
between the beginning and end of the year. An individual common stockholders'
return may vary from these returns.
F-16
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
SCHEDULE 1 - SEPTEMBER 30, 2003
Manufacturing:
Percent of
Company Security Net assets Value Cost
.............................................................................................................................................
Architectural Art Manufacturing, Inc. 12% debt security, due June 15, 2005 (c) $ 680,000 780,000
Wichita, Kansas Warrant to purchase 11,143 common shares (c) 1 1
Manufacturer of industrial and commercial ---------- ---------
boilers and shower doors, frames and enclosures 680,001 780,001
---------- ----------
Aviation Manufacturing Group, LLC (a) 14% debt security, due October 1, 2007 616,000 616,000
Yankton, South Dakota 154,000 units preferred 154,000 154,000
Manufacturer of flight critical parts Membership interest 39 39
for aircraft ---------- ---------
770,039 770,039
---------- ----------
B & B Molders, LLC 11% debt security, due December 31, 2004 850,031 850,031
Mishawaka, Indiana ---------- ----------
Manufacturer of custom plastic injection
molded products for the RV and other industries
Central Fiber Corporation 12% debt security, due December 31, 2005 350,000 350,000
Wellsville, Kansas 12% debt security, due December 31, 2005 91,123 91,123
Recycles and manufactures Warrant to purchase 490.67 common shares (c) 213,333 --
cellulose fiber products ---------- ----------
654,456 441,123
---------- ----------
Deluxe Ice Cream Acquisition Corporation (a) 14,600 shares Series A preferred (c) 146,000 146,000
Salem, Oregon Warrant to purchase common shares (c) 380,024 24
Ice cream and novelty dessert manufacturer Warrant to purchase common shares (c) -- --
Warrant to purchase common shares (c) -- --
---------- ----------
526,024 146,024
---------- ----------
DTMP Acquisition Company (a) 14% debt security, due June 30, 2006 1,170,753 1,170,753
Lebanon, Missouri 25,666.67 shares Series A preferred (c) 252,389 252,389
Metal stamping 45.26 shares common (c) 4,277 4,277
Warrant to purchase 8,555.55 common shares (c) 17 17
---------- ----------
1,427,436 1,427,436
---------- ----------
Gregg Manufacturing, Inc. (a) 12% debt security, due July 1, 2004 943,500 943,500
Irvine, California 545,750 units of 8% preferred (c) 520,700 166,500
Manufacturer of Bible covers and Christian 136,438 units of common (c) 80,655 37,000
themed apparel and gifts Warrant to purchase 74,000 units of common (c) 21,865 --
---------- ----------
1,566,720 1,147,000
---------- ----------
F-17
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED
SCHEDULE 1 - SEPTEMBER 30, 2003
Manufacturing Continued:
Company Security Net assets Value Cost
.............................................................................................................................................
Handy Industries, LLC (a) 12.5% debt security, due January 8, 2007 $ 890,222 890,222
Marshalltown, Iowa 167,171 units Class B preferred (c) 167,171 167,171
Manufacturer of lifts for motorcycles, Membership interest 1,357 1,357
trucks and industrial metal products --------- ---------
1,058,750 1,058,750
--------- ---------
Hicklin Engineering, L.C. (a) 10% debt security, due December 31, 2003 740,000 740,000
Des Moines, Iowa Membership interest 254,386 127
Manufacturer of auto and truck transmission --------- ---------
and brake dynamometers 994,386 740,127
--------- ---------
Humane Manufacturing, LLC (b) 12% debt security, due April 3, 2004 784,300 784,300
Baraboo, Wisconsin Membership interest (c) 101,200 101,200
Manufacturer of rubber mats for anti-fatigue, --------- ---------
agricultural, exercise and roofing markets 885,500 885,500
--------- ---------
KW Products, Inc. (a) 11% debt security, due June 15, 2005 (c) 267,254 267,254
Marion, Iowa 11% debt security, due June 15, 2005 (c) 281,795 281,795
Manufacturer of automobile aftermarket 29,340 common shares (c) 92,910 92,910
engine and brake repair machinery Warrant to purchase 8,879 common shares (c) -- --
--------- ---------
641,959 641,959
--------- ---------
Linton Truss Corporation 542.8 common shares (c) -- --
Delray Beach, Florida 400 shares Series 1 preferred (c) 450,000 40,000
Manufacturer of residential roof Warrant to purchase common shares (c) 15 15
and floor truss systems Warrant to purchase common shares (c) -- --
Warrant to purchase common shares (c) -- --
--------- ---------
450,015 40,015
trucks and industrial metal products --------- ---------
M.A. Gedney Company (a) Warrant to purchase 2,006 common shares (c) -- --
Chaska, Minnesota 14% debt security, due July 22, 2007 (c) 76,261 286,971
Pickle processor 10% debt security, due July 3, 2009 (c) 258,198 1,050,868
Warrant to purchase 497,535 common shares (c) -- --
10% loan, due on demand 100,000 100,000
10% loan, due on demand 50,000 50,000
--------- ---------
484,459 1,487,839
--------- ---------
F-18
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED
SCHEDULE 1 - SEPTEMBER 30, 2003
Manufacturing Continued:
Company Security Net assets Value Cost
.............................................................................................................................................
Magnum Systems, Inc. (a) 12% debt security, due July 31, 2006 $ 574,163 574,163
Parsons, Kansas 48,038 common shares (c) 48,038 48,038
Manufacturer of industrial bagging 292,800 shares preferred (c) 304,512 304,512
equipment Warrant to purchase 56,529 common shares (c) 210,565 565
--------- ----------
1,137,278 927,278
--------- ----------
Penn Wheeling Acquisition Company, LLC (a) 13% debt security, due March 10, 2007 694,000 694,000
Glen Dale, West Virginia 62 units Class B membership interest (c) 928,880 62,000
Metal closure manufacturer 24 units Class C membership interest (c) 361,120 24,000
13% debt security, due March 10, 2007 203,300 203,000
8 units Class C membership interest (c) -- --
13% debt security, due March 10, 2007 136,500 136,500
3 units Class C membership interest (c) -- --
--------- ----------
2,323,500 1,119,500
--------- ----------
Pratt-Read Corporation (a) 13,889 shares Series A Preferred 750,000 750,000
Bridgeport, Connecticut Warrants to purchase common shares (c) -- --
Manufacturer of screwdriver shafts and 7,718 shares Series A preferred 416,667 416,667
handles and other hand tools Warrant to purchase common shares (c) -- --
13% debt security, due July 26, 2006 277,800 277,800
Warrant to purchase common shares (c) -- --
Warrant to purchase common shares (c) -- --
--------- ----------
1,444,467 1,444,467
--------- ----------
Simoniz USA, Inc. 12% debt security, due April 1, 2008 809,592 809,592
Bolton, Connecticut --------- ----------
Producer of cleaning and wax
products under both the Simoniz
brand and private label brand names
Spectrum Products, LLC (b) 13% debt security, due October 9, 2006 1,077,650 1,077,650
Missoula, Montana 385,000 units Series A preferred 385,000 385,000
Manufacturer of equipment for the Membership interest 351 351
swimming pool industry --------- ----------
1,463,001 1,463,001
--------- ----------
Total manufacturing 142.54% 18,167,614 16,179,682
======= ---------- ----------
F-19
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED
SCHEDULE 1 - SEPTEMBER 30, 2003
Service:
Percent of
Company Security Net assets Value Cost
.............................................................................................................................................
A-Plus Galvanizing, Inc. 12% debt security, due February 11, 2005(c) $ 297,000 847,000
Salina, Kansas Warrant to purchase 16,940 common shares (c) 1 1
Specialty metal galvanizing ---------- ----------
297,001 847,001
---------- ----------
Big J Enterprises, LLC (b) Membership interest 750,750 263,250
Albuquerque, New Mexico ---------- ----------
Electrical-mechanical contractor with an
in-plant construction and maintenance focus
Concentrix Corporation (a) 3,758,750 shares Series A preferred (c) 1,503,500 2,255,250
Pittsford, New York 130,539 shares Series C preferred (c) 78,323 104,431
Provides marketing outsourcing solutions 261,078 shares Series D preferred (c) 208,862 208,862
including telemarketing, fulfillment 67,407 shares Series D preferred (c) 53,926 53,926
and web communications ---------- ----------
1,844,611 2,622,469
---------- ----------
Direct Mail Holding, LLC (a) 537.634 units of preferred (c) 537,634 537,634
Mt. Pleasant, Iowa Membership interest 1,865,436 476,366
Provider of turnkey services for non-profit ---------- ----------
fund raising 2,403,070 1,014,000
---------- ----------
FreightPro, Inc. 14.5% debt security, due February 21, 2007 262,500 262,500
Overland Park, Kansas Warrant to purchase 243,810 common shares (c) 1 1
Internet based outsource provider of 14.5% debt security, due February 15, 2007 87,500 87,500
freight logistics Warrant to purchase 81,270 common shares (c) 1 1
Warrant to purchase 41,097.80 common shares (c) -- --
---------- ----------
350,002 350,002
---------- ----------
Inergy, LP Membership interest 3,568,570 1,596,000
Kansas City, Missouri ---------- ----------
Propane distributor
JHT Holdings, Inc. 1,238 shares Class A common (c) 780,020 975,026
Joplin, Missouri ---------- ----------
Provider of truck drive-away, internet
based auction and related services to the
commercial truck industry
F-20
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED
SCHEDULE 1 - SEPTEMBER 30, 2003
Service Continued:
Percent of
Company Security Net assets Value Cost
.............................................................................................................................................
Lee Mathews Equipment, Inc. 12% debt security, due March 10, 2005 $ 500,000 500,000
Kansas City, Missouri Warrant to purchase 153,654 common shares (c) 30 30
Distributor of industrial pump systems 12% debt security, due March 10, 2005 60,606 60,606
---------- ----------
560,636 560,636
---------- ----------
Monitronics International, Inc. 73,214 common shares (c) 183,035 54,702
Dallas, Texas ---------- ----------
Provides home security systems
monitoring services
Morgan Ohare, Inc. (b) 0% debt security, due January 1, 2007 (c) 1,068,750 1,125,000
Addison, Illinois 14% debt security, due January 1, 2007 (c) 375,000 375,000
Fastener plating and heat treating 57 common shares (c) 1 1
14% debt security, due January 1, 2007 (c) 75,000 75,000
14% debt security, due January 1, 2007 (c) 225,000 225,000
14% debt security, due January 1, 2007 (c) 56,250 56,250
14% debt security, due January 1, 2007 (c) 22,500 22,500
---------- ----------
1,822,501 1,878,751
---------- ----------
Organized Living, Inc. 400,000 shares Series A preferred (c) 250,000 400,000
Lenexa, Kansas 145,204 shares Series A preferred (c) 143,227 143,227
Retail specialty stores for storage and 130,435 shares Series B preferred (c) 150,000 150,000
organizational products 43,478 shares Series B preferred (c) 50,001 50,001
41,680 shares Series B preferred (c) 47,932 47,932
94,241 shares Series C preferred (c) 120,029 120,029
71,428.5714 shares Series C preferred (c) 100,000 100,000
9,295 shares Series C preferred 9 (c) 13,012 13,012
104,167 shares Series D preferred (c) 250,001 250,001
34,722 shares Series D preferred (c) -- --
Escrow agreement (c) 200,000 200,000
---------- ----------
1,324,202 1,474,202
---------- ----------
SMWC Acquisition Co., Inc. (a) 10% debt security, due on demand (c) 102,605 102,605
Kansas City, Missouri 13% debt security due May 19, 2007 (c) 110,000 110,000
Steel warehouse distribution and processing 1,320 shares common (c) 42,900 42,900
Warrant to purchase 1,100 common shares (c) -- --
Warrant to purchase 1,100 common shares (c) -- --
176,550 shares Series A preferred (c) 353,100 353,100
---------- ----------
608,605 608,605
---------- ----------
F-21
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED
SCHEDULE 1 - SEPTEMBER 30, 2003
Service Continued:
Percent of
Company Security Net assets Value Cost
.............................................................................................................................................
TransCore Holdings, Inc 7% debt security, due February 6, 2009 (c) $ 1 245,159
Hummelstown, Pennsylvania 13% debt security, due December 31, 2006 (c) -- 263,602
Legal, audit, logistical and internet Warrant to purchase 1,296.48 common shares (c) -- 24,000
e-business services for the trucking industry Warrant to purchase 107.82 common shares (c) -- --
---------- ---------
1 532,761
---------- ---------
Warren Family Funeral Homes, Inc. 12% debt security, due June 29, 2006 96,250 96,250
Topeka, Kansas Warrant to purchase 231 common shares (c) 8 8
Provider of value priced funeral services 12% debt security, due June 29, 2006 92,500 192,500
Warrant to purchase 115.5 common shares (c) 4 4
---------- ---------
288,762 288,762
---------- ---------
Total services 115.97% 14,781,766 13,066,167
======= ---------- ----------
Technology and Communications:
Divine, Inc. 8,904 common shares (c) 89 1,832,160
Chicago, Illinois ---------- ---------
Database mining and analysis
Feed Management Systems, Inc. (a) 540,551 common shares (c) 760,500 1,327,186
Fairmont, Minnesota 47,709 shares Series A Preferred (c) 27,306 47,709
Batch feed software and systems 66,600 shares Series A preferred (c) 38,118 66,600
and B2B internet services 400,000 shares Series A preferred (c) 228,936 400,000
160,000 shares Series A preferred (c) 160,000 160,000
12% debt security, due May 20, 2008 (c) 74,000 74,000
Warrant to purchase 92,500 Series A preferred (c) -- --
12% debt security, due August 21, 2008 (c) 74,000 74,000
Warrant to purchase 74,000 Series A preferred (c) -- --
---------- ---------
1,362,860 2,149,495
---------- ---------
F-22
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
SCHEDULE 1 - SEPTEMBER 30, 2003
Technology and Communications Continued:
Percent of
Company Security Net assets Value Cost
.............................................................................................................................................
Miles Media Group, Inc. (a) 1,000 common shares (c) $ 440,000 440,000
Sarasota, Florida 100 common options (c) -- --
Tourist magazine publisher 12% debt security, due September 24, 2007 158,925 374,925
150 shares Series A preferred (c) 375,000 375,000
Warrant to purchase 831 common shares (c) 75 75
12% debt security, due September 24, 2007 124,992 124,992
50 shares Series A preferred (c) 125,000 125,000
Warrant to purchase 92 common shares (c) 8 8
12% debt security, due June 30, 2008 250,000 250,000
Warrant to purchase 500 shares common (c) 500 500
--------- ----------
1,474,500 1,690,500
--------- ----------
NewPath Communications, LC (a) 10% debt security, due April 16, 2002 (c) 1 847,000
Des Moines, Iowa Membership interest (c) -- 385
Rural cable TV network provider --------- ----------
1 847,385
--------- ----------
Phonex Broadband Corporation 1,855,302 shares Series A preferred (c) 1,155,000 1,155,000
Midvale, Utah --------- ----------
Power line communications
Portrait Displays, Inc. (a) 12% debt security, due April 1, 2005 256,846 256,846
Pleasanton, California 8% debt security, due April 1, 2009 (c) 100,001 100,001
Designs and markets pivot enabling 8% debt security, due April 1, 2012 (c) 449,999 750,001
software for LCD computer monitors Warrant to purchase 12,240 common shares (c) -- --
Warrant to purchase 27,160 common shares (c) -- --
--------- ----------
806,846 1,106,848
--------- ----------
RSI Holdings, Inc. Warrant to purchase 1,188 common shares (c) 1 --
Fargo, North Dakota Warrant to purchase 562 common shares (c) -- --
Satellite simulcast communications and --------- ----------
services to the gaming industry 1 --
--------- ----------
SnapNames.com, Inc. 10% debt security, due March 15, 2007 852,500 852,500
Portland, Oregon Warrant to purchase 465,000 common shares (c) -- --
Domain name management --------- ----------
852,500 852,500
--------- ----------
Total technology and communications 44.34% 5,651,797 9,633,888
====== --------- ----------
$38,601,177 $38,879,737
=========== ===========
F-23
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS CONTINUED...
SCHEDULE 1 - SEPTEMBER 30, 2003
(a) Affiliated company. Represents ownership of greater than 5% to 25% of the
outstanding voting securities of the issuer, and is or was an affiliate of MACC
Private Equities Inc. as defined in the Investment Company Act of 1940 at or
during the period ended September 30, 2003. Transactions during the period in
which the issuers were affiliated companies are as follows:
Beginning Purchase Sales Ending Dividend Interest Net Realized
Description Cost Cost Cost Cost Income Income Gains/Losses
---------------------------------------- --------- -------- ----- ------ -------- -------- ------------
Aviation Manufacturing Group, LLC $ 770,039 -- -- 770,039 10,302 86,240 --
Concentrix Corporation 2,568,543 53,926 -- 2,622,469 -- 1,541 --
Deluxe Ice Cream Acquisition Corporation 733,517 -- 587,493 146,024 -- 83,391 --
Direct Mail Holding, LLC 585,000 429,000 -- 1,014,000 109,822 -- --
DTMP Acquisition Company 1,275,013 152,423 -- 1,427,436 -- 152,423 --
Eagle West, L.L.C 1,243,306 -- 1,243,306 -- -- -- (1,243,306)
Feed Management Systems, Inc. 2,001,495 148,000 -- 2,149,495 -- 4,169 --
Gregg Manufacturing, Inc. 1,147,000 -- -- 1,147,000 -- 113,283 --
Handy Industries, LLC 1,058,750 -- -- 1,058,750 40,401 112,823 --
Hicklin Engineering, L.C 740,127 -- -- 740,127 21,311 74,000 --
KW Products, Inc. 650,061 -- 8,102 641,959 -- 14,396 --
MA Gedney Company 1,325,270 162,569 -- 1,487,839 -- 13,767 --
Magnum Systems, Inc. 927,278 -- -- 927,278 -- 68,900 --
Miles Media Group, Inc. 1,440,000 250,500 -- 1,690,500 -- 67,657 500
NewPath Communications, LC 847,385 -- -- 847,385 -- -- --
Penn Wheeling Acquisition Company, LLC 1,119,500 -- -- 1,119,500 -- 172,818 --
Portrait Displays, Inc. 1,000,002 166,746 59,900 1,106,848 -- 33,966 150,000
Pratt-Read Corporation 1,361,127 83,340 -- 1,444,467 93,333 25,176 --
SMWC Acquisition Co., Inc. 506,000 102,605 -- 608,605 -- 15,720 --
Water Creations, Inc. 2,042,270 1,232 2,043,502 -- -- -- (2,043,502)
----------- --------- --------- ---------- ------- --------- ----------
Total $23,341,683 1,550,341 3,942,303 20,949,721 275,169 1,040,270 (3,136,308)
=========== ========= ========= ========== ======= ========= ==========
(b) Controlled company. Represents ownership of greater than 25% of the
outstanding voting securities of the issuer, and is or was a controlled
affiliate of MACC Private Equities Inc. as defined in the Investment Company Act
of 1940 at or during the period ended September 30, 2003. Transactions during
the period in which the issuers were controlled affiliates are as follows:
Beginning Purchase Sales Ending Dividend Interest Net Realized
Description Cost Cost Cost Cost Income Income Gains/Losses
------------------------- --------- -------- ------- --------- -------- -------- ------------
Big J Enterprises, LLC $ 825,750 -- 562,500 263,250 -- 13,246 --
Humane Manufacturing, LLC 885,500 -- -- 885,500 -- 94,116 --
Morgan Ohare, Inc. 1,878,751 -- -- 1,878,751 -- 6,740 --
Spectrum Products, LLC 1,463,001 -- -- 1,463,001 23,442 142,040 --
---------- -------- ------- --------- -------- -------- ------------
Total $5,053,002 -- 562,500 4,490,502 23,442 256,142 --
========== ======== ======== ========= ======== ======== ============
(c) Presently nonincome producing.
F-24
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2003
(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, 2003, all securities, except for a portion of the
securities held of Divine, Inc. (formerly Delano Technology 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) At September 30, 2003, the cost of securities for federal income tax
purposes was $38,423,084, and the aggregate unrealized
appreciation/depreciation (including other basis differences) based on that
cost was:
Unrealized appreciation $ 8,989,502
Unrealized depreciation (8,811,409)
----------
Net unrealized depreciation $ 178,093
==========
(D) The Company owns a portfolio which includes investments in restricted
securities of small businesses. Within this portfolio, thirty of these
restricted securities include registration rights and ten of these
restricted securities do not include registration rights. Within the thirty
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.
F-25
No dealer, salesperson or any other person has been
authorized to give any information or to make any
representations other than those contained in this
Prospectus in connection with the offer made by this
Prospectus and, if given or made, such information or
representations must not be relied upon as having been
authorized by MACC or the Investment Adviser. This
Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy any security other than
the shares of Common Stock offered by this Prospectus, nor
does it constitute an offer to sell or a solicitation of
any offer to buy the shares of Common Stock by anyone in 768,654 SHARES OF COMMON STOCK
any jurisdiction in which such offer or solicitation Issuable upon the Exercise of Transferable
is not authorized, or in which the person making such offer Rights to Subscribe for such Shares
of solicitation is not qualified to do so, or to any such
person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances,
create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
However, if any material change occurs while this
Prospectus is required by law to be delivered, the
Prospectus will be amended or supplemented accordingly.
Page
SUMMARY................................................3 ----------------------------------------------------------------------
FEE TABLE AND EXAMPLE..................................7
SELECTED FINANCIAL DATA................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..........................................11
MARKET RISK ..........................................20
TRADING AND NET ASSET VALUE INFORMATION...............21
DIVIDENDS AND DIVIDEND REINVESTMENT PLAN..............22
RISK FACTORS..........................................22
THE OFFERING..........................................27 [LOGO]
USE OF PROCEEDS.......................................35
DESCRIPTION OF MACC...................................35
INVESTMENT OBJECTIVES.................................40
MANAGEMENT............................................51
INFORMATION ABOUT OFFICERS AND PRINCIPALS
OF MACC AND THE INVESTMENT ADVISORS.................56 MACC PRIVATE EQUITIES INC.
PRINCIPAL SHAREHOLDERS................................59
FEDERAL INCOME TAX CONSIDERATIONS.....................61
DESCRIPTION OF COMMON STOCK...........................64
CUSTODIAN AND TRANSFER AGENT..........................65
EXPERTS...............................................66
LEGAL MATTERS.........................................66
REPORTS TO SHAREHOLDERS...............................66 __________________, 2004
FURTHER INFORMATION...................................66
INDEX TO FINANCIAL STATEMENTS........................F-1
FINANCIAL STATEMENTS.................................F-2
INDEX OF EXHIBITS....................................I-1 ----------------------------------------------------------------------
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
-----------------------------------------------------------
1 Financial Statements
See "Index to Financial Statements" in the Prospectus.
2. Exhibits:
a. Certificate of Incorporation, as amended(1)
b. Amended and Restated Bylaws(2)
d.1 Form of Subscription Certificate*
d.2 Form of Notice of Guaranteed Delivery for Shares of Common Stock*
g.1 Investment Advisory Agreement dated as of March 1, 2004, between
MACC Private Equities Inc. and Atlas Management Partners, LLC (3)
g.2 Investment Advisory Agreement dated as of March 1, 2004, between
MorAmerica Capital Corporation and Atlas Management Partners, LLC
(4)
g.3 Investment Advisory Support Services Agreement dated as of March
1, 2004, among MACC Private Equities Inc., MorAmerica Capital
Corporation, Atlas Management Partners, LLC and InvestAmerica
Investment Advisors, Inc. (5)
j.1 Custodial Agreement*
j.2 Information Agent Agreement*
j.3 Subscription Agent Agreement*
k.1 Agreement and Waiver of Rights under Section 203 of the Delaware
General Corporate Law among Zions First National Bank, Atlas
Management Partners, LLC, and MACC Private Equities Inc. (6)
k.2 Convertible Note and Security Agreement dated as of March 1,
2004, between MACC Private Equities Inc. and Geoffrey T. Woolley
(7)
k.3 Letter Agreement Regarding Subsidiary Support dated as of March
1, 2004, between MorAmerica Capital Corporation and MACC Private
Equities Inc. (8)
k.4 Guaranty dated as of March 1, 2004, by Atlas Management Partners,
LLC in favor of Geoffrey T. Woolley (9)
k.5 Employment Agreement between David R. Schroder and MACC Private
Equities Inc. dated March 1, 2004 (10)
k.6 Employment Agreement between Robert A. Comey and MorAmerica
Capital Corporation dated March 1, 2004 (11)
l. Opinion and Consent of Blackwell Sanders Peper Martin LLP*
C-1
n. Consent of KPMG LLP
r.1 Code of Business Conduct and Ethics (12)
r.2 Code of Ethics adopted under Rule 17j-1 under the 1940 Act*
-----------------
*To be filed by amendment.
(1) Incorporated by reference to Exhibit 3(i)(a) and Exhibit 3(i)(b) of the
Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1997, as filed with the SEC on May 14, 1997.
(2) Incorporated by reference to Exhibit 3.2 of the Corporation's Annual Report
on Form 10-K for the year ended September 30, 2002, as filed with the SEC on
December 27, 2002.
(3) Incorporated by reference to Exhibit 10.4 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(4) Incorporated by reference to Exhibit 10.5 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(5) Incorporated by reference to Exhibit 10.6 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(6) Incorporated by reference to Exhibit 10.3 of the Corporation's Annual
Report on Form 10-K for the year ended September 30, 2003, as filed with the SEC
on December 29, 2003.
(7) Incorporated by reference to Exhibit 10.7 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(8) Incorporated by reference to Exhibit 10.8 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(9) Incorporated by reference to Exhibit 10.9 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(10) Incorporated by reference to Exhibit 10.10 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(11) Incorporated by reference to Exhibit 10.11 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(12) Incorporated by reference to Exhibit 14 of the Corporation's Annual Report
on Form 10-K for the year ended September 30, 2003, as filed with the SEC on
December 29, 2003.
-----------------
ITEM 25. MARKETING ARRANGEMENTS
----------------------
None.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
C-2
The following table sets forth the expenses to be incurred in connection with the Offering described in
this Registration Statement:
SEC Registration Fee $ 750
Nasdaq SmallCap Market Listing Fees $ 30,187
Printing $ 6,000
Accounting fees and expenses $ 10,000
Legal fees and expenses $ 75,000
Subscription Agent fees and expenses $ 28,300
Information Agent fees and expenses $ 7,500
Miscellaneous $ 2,500
--------
Total $160,237
========
C-3
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
-----------------------------------------------------------------------
1 Under a Shareholder and Voting Agreement, Atlas Management Partners, LLC
holds the power to vote MACC shares owned by Bridgewater International
Group LLC; accordingly, Atlas' ownership percentage show above includes the
Bridgewater shares. For additional detail on the relationship of these
entities, please see notes 1 and 2 to the shareholder chart contained in
"PRINCIPAL SHAREHOLDERS."
2 The financial statements of MACC Private Equities Inc. and MorAmerica
Capital Corporation are reported on a consolidated basis.
3 See "INVESTMENT OBJECTIVES--MACC Portfolio Investments" for a list of
portfolio companies more than 25% owned by MACC and which may be deemed to
be controlled by MACC.
C-4
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
--------------------------------------------------------------------
| |
| (1) (2) |
| |
| Title of Class Number of Record Holders |
| |
| Common Stock 2,209 |
| |
--------------------------------------------------------------------
ITEM 29. INDEMNIFICATION.
----------------
Article Nine of the Articles of Incorporation provide that any
director, officer or employee of the Registrant shall be indemnified
by Registrant against reasonable expenses, including attorney's fees
and amounts paid in satisfaction of judgments or in settlement
resulting from civil or criminal action or proceeding, except in
relation to matters in which such person is liable for willful
misfeasance, bad faith, gross negligence or reckless disregarding the
performance of his duties.
Paragraph 9 of the Investment Advisory Agreement provides that the
Registrant shall indemnify, to the extent permitted by law, the
Adviser and any of its Affiliates, who was, is or is threatened to be
made a party to any threatened, pending or completed action of
proceeding whether civil, criminal, administrative or investigative by
reason of any actual or alleged acts or omissions arising out of the
activities of such person, if such activities were performed in good
faith either on behalf of MACC or in furtherance of the interest of
MACC, and in a manner reasonably believed by such person to be within
the scope of the authority conferred by this Agreement or by law
against losses, damages or expenses for which such person has not
otherwise been reimbursed (including, but not limited to, accountants'
and attorneys' fees, judgments, fines and amounts paid in settlement)
actually and reasonably incurred by such person in connection with
such action or proceeding, so long as such person was not guilty of
willful misfeasance, bad faith, gross negligence, or reckless
disregard in the performance of his obligations and duties under such
contract, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
----------------------------------------------------
Information about the business and other connections of the Investment
Adviser and Subadviser are contained in "DESCRIPTION OF MACC -
Investment Advisers Act of 1940 and the Investment Advisory
Agreements" and "INFORMATION ABOUT OFFICES AND PRINCIPALS OF MACC AND
THE INVESTMENT ADVISORS."
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
--------------------------------
The accounts and records of MACC are located at the offices of the
Investment Adviser, Atlas Management Partners, LLC at 15 West South
Temple Street, Suite 520, Salt Lake City UT 84101, and at the offices
of the Subadviser, InvestAmerica Investment Advisors, Inc. at 101
Second Street S.E., Suite 800, Cedar Rapids IA 52401.
C-5
ITEM 32. MANAGEMENT SERVICES.
-------------------
Not applicable.
ITEM 33. UNDERTAKINGS.
------------
(1) The Registration undertakes to suspend the offering of shares covered
hereby until it amends its prospectus contained herein if (i)
subsequent to the effective date of this Registration Statement, its
net asset value declines more than 10 percent (10%) from its net asset
value as of the effective date of this Registration Statement, or (ii)
its net asset value increases to an amount greater than its net
proceeds as stated in the prospectus contained herein.
(2) Not applicable.
(3) Not applicable.
(4) The Registrant undertakes:
a. to file, during any period in which offers or sales are being
made, a post-effective amendment to the registration statement:
(1) to include any prospectus required by Section 10(a)(3)
of the 1933 Act [15 U.S.C. 77j(1)(3)];
(2) to reflect in the prospectus any facts or events after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(3) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
b. that, for the purpose of determining any liability under the
1933 Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of those securities at that time shall be deemed to
be the initial bona fide offering thereof; and
c. to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the Offering.
(5) The Registrant undertakes that:
a. For the purpose of determining any liability under the 1933
Act, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule
497(h) under the 1933 Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the 1933
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Salt Lake and the State of
Utah, on the 8th day of September, 2004.
MACC PRIVATE EQUITIES INC.
By: /s/ Kent I. Madsen
---------------------------------
Title: Kent I. Madsen, President
Each of the undersigned directors of MACC PRIVATE EQUITIES INC., hereby
constitute and appoint each of Kent I. Madsen and David R. Schroder, his true
and lawful attorney-in-fact, with full power of substitution, to sign for him
and in his name, the Registration Statement on Form N-2, and any pre-effective
amendments and post-effective amendments to said Registration Statements, any
supplements or other instruments in connection therewith, and generally to do
all such things in his name and behalf in connection therewith as said
attorney-in-fact deems necessary or appropriate, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission. Each of them hereby ratifies and confirms all that said
attorney-in-fact or his or her substitutes may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form N-2 has been signed below by the following persons in their
capacities as directors or principal financial and accounting officer of the
Registrant.
SIGNATURES TITLE DATE
/s/ Paul M. Bass, Jr. September 9, 2004
-------------------------------- Director -------------------------
Paul M. Bass, Jr.
/s/ Michael W. Dunn September 7, 2004
-------------------------------- Director -------------------------
Michael W. Dunn
/s/ Benjamin Jiaravanon September 8, 2004
-------------------------------- Director -------------------------
Benjamin Jiaravanon
-------------------------------- Director -------------------------
Jasja Kotterman
/s/ Kent I. Madsen September 8, 2004
-------------------------------- Director -------------------------
Kent I. Madsen President
-------------------------------- Director -------------------------
Shane Robison
/s/ Gordon J. Roth September 8, 2004
-------------------------------- Director -------------------------
Gordon J. Roth
/s/ Martin Walton September 9, 2004
-------------------------------- Director -------------------------
Martin Walton
/s/ Geoffrey T. Woolley September 9, 2004
-------------------------------- Director -------------------------
Geoffrey T. Woolley
/s/ David R. Schroder September 9, 2004
-------------------------------- Principal Financial -------------------------
David R. Schroder and Accounting Officer
INDEX OF EXHIBITS
a. Certificate of Incorporation, as amended(1)
b. Amended and Restated Bylaws(2)
d.1 Form of Subscription Certificate*
d.2 Form of Notice of Guaranteed Delivery for Shares of Common Stock*
g.1 Investment Advisory Agreement dated as of March 1, 2004, between MACC
Private Equities Inc. and Atlas Management Partners, LLC (3)
g.2 Investment Advisory Agreement dated as of March 1, 2004, between
MorAmerica Capital Corporation and Atlas Management Partners, LLC (4)
g.3 Investment Advisory Support Services Agreement dated as of March 1,
2004, among MACC Private Equities Inc., MorAmerica Capital
Corporation, Atlas Management Partners, LLC and InvestAmerica
Investment Advisors, Inc. (5)
j.1 Custodial Agreement*
j.2 Information Agent Agreement*
j.3 Subscription Agent Agreement*
k.1 Agreement and Waiver of Rights under Section 203 of the Delaware
General Corporate Law among Zions First National Bank, Atlas
Management Partners, LLC, and MACC Private Equities Inc. (6)
k.2 Convertible Note and Security Agreement dated as of March 1, 2004,
between MACC Private Equities Inc. and Geoffrey T. Woolley (7)
k.3 Letter Agreement Regarding Subsidiary Support dated as of March 1,
2004, between MorAmerica Capital Corporation and MACC Private Equities
Inc. (8)
k.4 Guaranty dated as of March 1, 2004, by Atlas Management Partners, LLC
in favor of Geoffrey T. Woolley (9)
k.5 Employment Agreement between David R. Schroder and MACC Private
Equities Inc. dated March 1, 2004 (10)
k.6 Employment Agreement between Robert A. Comey and MorAmerica Capital
Corporation dated March 1, 2004 (11)
l. Opinion and Consent of Blackwell Sanders Peper Martin LLP*
n. Consent of KPMG LLP
r.1 Code of Business Conduct and Ethics (12)
r.2 Code of Ethics adopted under Rule 17j-1 under the 1940 Act*
-----------------
*To be filed by amendment.
(1) Incorporated by reference to Exhibit 3(i)(a) and Exhibit 3(i)(b) of the
Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1997, as filed with the SEC on May 14, 1997.
(2) Incorporated by reference to Exhibit 3.2 of the Corporation's Annual Report
on Form 10-K for the year ended September 30, 2002, as filed with the SEC on
December 27, 2002.
(3) Incorporated by reference to Exhibit 10.4 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(4) Incorporated by reference to Exhibit 10.5 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(5) Incorporated by reference to Exhibit 10.6 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(6) Incorporated by reference to Exhibit 10.3 of the Corporation's Annual
Report on Form 10-K for the year ended September 30, 2003, as filed with the SEC
on December 29, 2003.
(7) Incorporated by reference to Exhibit 10.7 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(8) Incorporated by reference to Exhibit 10.8 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(9) Incorporated by reference to Exhibit 10.9 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(10) Incorporated by reference to Exhibit 10.10 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(11) Incorporated by reference to Exhibit 10.11 of the Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, as filed with
the SEC on May 17, 2004.
(12) Incorporated by reference to Exhibit 14 of the Corporation's Annual Report
on Form 10-K for the year ended September 30, 2003, as filed with the SEC on
December 29, 2003.
