Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
------------ to ------------
Commission file number 0-24412
-------
MACC Private Equities Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-1421406
----------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 Second Street SE, Suite 800, Cedar Rapids, Iowa 52401
(Address of principal executive offices)
(Zip Code)
(319) 363-8249
----------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer__ Accelerated filer__ Non-accelerated filer|X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes__ No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At August 4, 2006, the registrant had issued and outstanding 2,464,621
shares of common stock.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets at June 30, 2006
(Unaudited) and September 30, 2005........................... 3
Condensed Consolidated Statements of Operations
(Unaudited) for the three months and the nine
months ended June 30, 2006 and June 30, 2005................. 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended June 30, 2006
and June 30, 2005............................................ 5
Notes to Unaudited Condensed Consolidated
Financial Statements......................................... 6
Consolidated Schedule of Investments (Unaudited)
at June 30, 2006............................................. 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............ 12
Item 3. Quantitative and Qualitative
Disclosure About Market Risk................................. 20
Item 4. Controls and Procedures...................................... 20
Part II. OTHER INFORMATION............................................ 22
Item 5. Other Information............................................ 22
Item 6. Exhibits..................................................... 23
Signatures................................................... 23
Certifications.......................... See Exhibits 31 and 32
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30,
2006 September 30,
(Unaudited) 2005
--------------- ------------------
Assets
Loans and investments in portfolio securities, at market or fair value:
Unaffiliated companies (cost of $3,042,021 and $5,288,757) $ 2,931,651 5,039,691
Affiliated companies (cost of $16,377,262 and $17,406,157) 12,894,421 17,722,809
Controlled companies (cost of $3,316,485 and $3,247,063) 3,023,202 3,083,048
U.S. treasury bills, at cost, which approximates fair value 2,966,764 ---
Cash and money market accounts 2,962,870 2,393,149
Interest receivable 331,180 172,270
Other assets 1,339,949 2,925,247
------------------ ------------------
Total assets $ 26,450,037 31,336,214
================== ==================
Liabilities and net assets
Liabilities:
Debentures payable $ 14,790,000 16,790,000
Incentive fees payable 566,426 99,893
Accrued interest 354,365 100,378
Accounts payable and other liabilities 197,883 214,435
------------------ ------------------
Total liabilities 15,442,141 17,671,239
------------------ ------------------
Net assets:
Common stock, $.01 par value per share;
authorized 10,000,000 shares;
issued and outstanding 2,464,621 shares 24,646 24,646
Additional paid-in-capital $ 14,869,745 13,736,758
Unrealized depreciation on investments (3,886,495) (96,429)
------------------ ------------------
Total net assets 11,007,896 13,664,975
------------------ ------------------
Total liabilities and net assets $ 26,450,037 31,336,214
================== ==================
Net assets per share $ 4.47 5.54
================== ==================
See accompanying notes to unaudited condensed consolidated financial statements.
3
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,
2006 2005 2006 2005
--------------- ---------------- -------------- ---------------
Investment income:
Interest:
Unaffiliated companies 32,295 75,524 162,267 $ 198,818
Affiliated companies 126,507 444,716 451,362 1,013,978
Controlled companies 14,299 85,942 48,175 380,338
Other 59,417 17,904 128,491 53,420
Dividends:
Unaffiliated companies --- --- 2,187 ---
Affiliated companies 5,843 217,246 144,635 483,711
Processing fees --- --- --- 7,700
Other --- 39,360 --- 42,155
--------------- ---------------- -------------- ---------------
Total investment income 238,361 880,692 937,117 $ 2,180,120
--------------- ---------------- -------------- ---------------
Operating expenses:
Interest expenses 275,549 523,927 921,456 $ 1,566,681
Management fees 97,872 173,433 328,480 657,827
Incentive fees (138,300) --- 5,011 ---
Professional fees 38,691 122,211 162,051 444,106
Other 78,630 80,674 241,886 241,556
--------------- ---------------- -------------- ---------------
Total operating expenses 352,442 900,245 1,658,884 $ 2,910,170
Management fees waived --- (51,642) --- (103,867)
--------------- ---------------- -------------- ---------------
Net operating expenses 352,442 848,603 1,658,884 $ 2,806,303
--------------- ---------------- -------------- ---------------
Investment expense, net before tax expense (114,081) (17,911) (721,767) (626,183)
Income tax expense $ 40,000 50,000 110,000 50,000
--------------- ---------------- -------------- ---------------
Investment expense, net $ (154,081) (17,911) (831,767) (676,183)
--------------- ---------------- -------------- ---------------
Realized and unrealized gain (loss) on investments and other assets:
Net realized gain (loss) on investments:
Unaffiliated companies $ (705,226) 16,557 (34,490) (2,412,526)
Affiliated companies --- 638,657 1,987,604 638,657
Controlled companies --- --- 31,000 ---
Net change in unrealized depreciation/appreciation
on investments 1,043,716 1,651,887 (3,790,066) 5,148,084
Net change in unrealized gain
on other assets 9,111 2,115 (19,360) 88,196
--------------- ---------------- -------------- ---------------
Net gain (loss) on investments $ 347,601 2,309,216 (1,825,312) 3,462,411
--------------- ---------------- -------------- ---------------
Net change in net assets
from operations $ 193,520 2,291,305 (2,657,079) 2,786,228
=============== ================ ============== ===============
See accompanying notes to unaudited condensed consolidated financial statements.
4
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, 2006 June 30, 2005
---------------- --------------
Cash flows from operating activities:
(Decrease) increase in net assets from operations $ (2,657,079) 2,786,228
---------------- --------------
Adjustments to reconcile (decrease) increase in net assets from operations
to net cash provided by (used in) operating activities:
Net realized and unrealized loss (gain) on investments 1,805,952 (3,374,215)
Net realized and unrealized loss (gain) on other assets 19,360 (88,196)
Loss on litigation settlement --- (1,713,174)
Proceeds from disposition of and payments on
loans and investments in portfolio securities 5,477,447 3,409,744
Purchases of loans and investments in portfolio securities (287,125) (533,883)
Change in interest receivable (158,910) (282,293)
Change in other assets 1,565,938 353,032
Change in accrued interest, deferred incentive fees payable,
accounts payable and other liabilities (229,098) 499,045
------------- --------------
Total adjustments $ 8,193,564 (1,729,940)
----------------- --------------
Net cash provided by operating activities $ 5,536,485 1,056,288
----------------- --------------
Cash flows from financing activities:
Proceeds from issuance of note payable-related party $ --- 35,000
Debt repayment (2,000,000) (1,000,000)
------------- --------------
Net cash used in financing activities $ (2,000,000) (965,000)
----------------- --------------
Net increase in cash and cash equivalents $ 3,536,485 91,288
Cash and cash equivalents at beginning of period $ 2,393,149 4,774,771
Cash and cash equivalents at end of period $ 5,929,634 4,866,059
================= ==============
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 605,612 1,010,076
================= ==============
Supplemental disclosure of noncash investing and financing
information -
Assets received in exchange of securities $ 390,998 150,886
================= ==============
See accompanying notes to unaudited condensed consolidated financial statements.
5
MACC PRIVATE EQUITIES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of MACC Private Equities Inc. (Equities) and its wholly
owned subsidiary MorAmerica Capital Corporation (MACC) which have been prepared
in accordance with accounting principles generally accepted in the United States
of America for investment companies. All material intercompany accounts and
transactions have been eliminated in consolidation.
The financial statements included herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and instructions to Form 10-Q and Article 6 of
Regulation S-X. The financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of MACC Private Equities
Inc. and its Subsidiary as of and for the year ended September 30, 2005. 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, 2005 has been derived
from the audited balance sheet as of that date.
(2) Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the bid price on the final
day of the period. Restricted and other securities for which quotations are not
readily available are valued at fair value as determined by the Board of
Directors. Among the factors considered in determining the fair value of
investments are the cost of the investment; developments, including recent
financing transactions, since the acquisition of the investment; financial
condition and operating results of the investee; the long-term potential of the
business of the investee; market interest rates for similar debt securities; and
other factors generally pertinent to the valuation of investments. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
In the valuation process, MACC uses financial information received monthly,
quarterly, and annually from its portfolio companies which includes both audited
and unaudited financial statements. This information is used to determine
financial condition, performance, and valuation of the portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
6
(3) Financial Highlights
For the nine For the nine
months ended months ended
June 30, June 30,
2006 2005
------------------ -------------------
Per Share Operating Performance
(For a share of capital stock outstanding throughout the period):
Net asset value, beginning of period $ 5.54 4.61
------------ ---------
Income (loss) from investment operations:
Investment expense, net (0.33) (0.29)
Net realized and unrealized (loss) gain on investments (0.74) 1.49
------------ ---------
Total from investment operations (1.07) 1.20
------------ ---------
Net asset value, end of period $ 4.47 5.81
============ =========
Closing market price $ 2.13 2.20
============ =========
For the nine For the nine
months ended months ended
June 30, June 30,
2006 2005
------------------ -------------------
Total return
Net asset value basis (19.44) % 25.95
Market price basis (17.12) % (36.24)
Net asset value, end of period
(in thousands) $ 11,008 13,524
Ratio to average net assets:
Investment (expense) income, net (5.77) % (5.81)
Operating expense 13.27 % 26.06
The ratios of investment (expense) income, net to average net assets, of
operating expenses to average net assets and total return are calculated for
common stockholders as a class. Total return, which reflects the annual change
in net assets, was calculated using the change in net assets between the
beginning of the current fiscal year and end of the current year period. An
individual common stockholders' return may vary from these returns.
7
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 2006
Manufacturing:
Percent of
Company Security Net assets Value Cost (d)
.......................................................................................................................................
AAMI, Inc. (a) 12% debt security, due March 31, 2007 (c) $ 304,577 780,000
Wichita, Kansas Warrant to purchase 11,143 common shares (c) 1 1
Manufacturer of industrial and 10% debt security, due March 31, 2007 (c)
commercial boilers and shower
doors, frames and enclosures 221,000 221,000
121,457 common shares (c) --- 121,457
12% debt security, due March 31, 2007 (c) 191,880 191,880
312,000 common shares (c) --- 3,120
------------- -----------
717,458 1,317,458
------------- -----------
Aviation Manufacturing Group, LLC (a) 14% debt security, due October 1, 2007 (c) 616,000 616,000
Yankton, South Dakota 154,000 units preferred 154,000 154,000
Manufacturer of flight critical Membership interest 39 39
parts for aircraft 14% note, due December 31, 2008 89,320 89,320
------------- -----------
859,359 859,359
------------- -----------
Central Fiber Corporation 12% debt security, due March 31, 2009 268,705 268,705
Wellsville, Kansas 12% debt security, due March 31, 2009 69,505 69,505
Recycles and manufactures cellulose ------------- -----------
fiber products 338,210 338,210
------------- -----------
Detroit Tool Metal Products Co. (a) 14% debt security, due February 29, 2008 1,128,793 1,128,793
Lebanon, Missouri 19,853.94 shares Series A preferred (c)
Metal stamping 195,231 195,231
------------- -----------
1,324,024 1,324,024
------------- -----------
Handy Industries, LLC (a) 12.5% debt security, due January 8, 2007 667,327 667,327
Marshalltown, Iowa 167,171 units Class B preferred (c) 167,171 167,171
Manufacturer of lifts for Membership interest
motorcycles, trucks and industrial 1,357 1,357
metal products ------------- -----------
835,855 835,855
------------- -----------
Hicklin Engineering, L.C. (a) 10% debt security, due June 30, 2007 740,000 740,000
Des Moines, Iowa Membership interest
127 127
Manufacturer of auto and truck ------------- -----------
transmission and brake dynamometers 740,127 740,127
------------- -----------
Industrial Tooling & Fabrication, LLC (a) 10% debt security, due November 18, 2009 157,715 157,715
Fort Madison, Iowa 12% debt security, due November 18, 2009 343,267 343,267
Metal stamping 12% debt security, due November 18, 2009 208,728 208,728
------------- -----------
709,710 709,710
------------- -----------
Kwik-Way Products, Inc. (a) 2% debt security, due January 31, 2008 (c) 186,529 267,254
Marion, Iowa 2% debt security, due January 31, 2008 (c) 197,776 281,795
Manufacturer of automobile 38,008 common shares (c) ---- 126,651
aftermarket engine and brake repair 29,340 common shares (c) ---- 92,651
machinery ------------- -----------
384,305 768,610
------------- -----------
8
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED) CONTINUED...
JUNE 30, 2006
Manufacturing Continued:
Percent of
Company Security Net assets Value Cost (d)
.......................................................................................................................................
Linton Truss Corporation 542.8 common shares (c) ---- ----
Delray Beach, Florida 400 shares Series 1 preferred (c) $ 840,000 40,000
Manufacturer of residential roof Warrants to purchase common shares (c) 15 15
and floor truss systems ------------- -----------
840,015 40,015
------------- -----------
M.A. Gedney Company (a) 648,783 shares preferred (c) 140,000 1,450,601
Chaska, Minnesota 12% debt security, due June 30, 2009 152,000 76,000
Pickle Processor Warrant to purchase 83,573 preferred shares (c) ---- ----
------------- -----------
292,000 1,526,601
------------- -----------
Magnum Systems, Inc. (a) 12% debt security, due 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
------------- -----------
Metal Tooling Holdings, Inc. (a) 7,887.17 common shares (c)
Lebanon, Missouri 126,741 126,741
-------------- ------------
Metal stamping
Pratt-Read Corporation (a) 13,889 shares Series A Preferred (c) 750,000 750,000
Bridgeport, Connecticut 7,718 shares Services A preferred (c) 300,000 416,667
Manufacturer of screwdriver shafts 13% debt security, due July 26, 2006 (c) 277,800 277,800
and handles and other hand tools Warrants to purchase common shares (c) ---- ----
------------- -----------
1,327,800 1,444,467
------------- -----------
Simoniz USA, Inc. 12% debt security, due April 1, 2008 275,378 275,378
------------- -----------
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 (c) 1,077,650 1,077,650
Missoula, Montana 385,000 units Series A preferred (c) 192,500 385,000
Manufacturer of equipment for the Membership interest (c) ---- 351
swimming pool industry Redeemable preferred (c) 23,676 47,355
------------- -----------
1,293,826 1,510,356
------------- -----------
Total manufacturing 101.76% 11,202,086 12,744,189
======= ------------- -----------
9
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED) CONTINUED...
JUNE 30, 2006
Service:
Percent of
Company Security Net assets Value Cost (d)
.......................................................................................................................................
Concentrix Corporation (a) 3,758,750 shares Series A preferred (c) $ 126,475 2,255,250
Pittsford, New York 130,539 shares Series C preferred (c) 104,431 104,431
Provides marketing outsourcing 328,485 shares Series D preferred (c) 262,788 262,788
solutions including telemarketing, 8% debt security, due July 28, 2006 30,800 30,800
fulfillment and web communications ------------- -----------
524,494 2,653,269
------------- -----------
FreightPro, Inc 18% debt security, due February 21, 2007 (c) 93,750 262,500
Overland Park, Kansas 18% debt security, due February 15, 2007 (c) 31,250 87,500
Internet based outsource provider Warrant to purchase 366,177.80 common shares (c) 2 2
of freight logistics ------------- -----------
125,002 350,002
------------- -----------
Monitronics International, Inc. 73,214 common shares (c) 439,285 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 10% debt security, due January 1, 2007 375,000 375,000
Fastener plating and heat treating 57 common shares (c) 1 1
10% debt security, due January 1, 2007 37,500 37,500
10% debt security, due January 1, 2007 112,500 112,500
10% debt security, due January 1, 2007 28,125 28,125
10% debt security, due January 1, 2007
2,500 2,500
------------- -----------
1,624,376 1,680,626
------------- -----------
SMWC Acquisition Co., Inc. (a) 13% debt security due May 19, 2007 110,000 110,000
Kansas City, Missouri 1,320 shares common (c) 387,140 42,900
Steel warehouse distribution and Warrant to purchase 2,200 common shares (c) ---- ----
processing 176,550 shares Series A preferred 353,100 353,100
------------- -----------
850,240 506,000
------------- -----------
Warren Family Funeral Homes, Inc. Warrant to purchase 346.5 common shares (c) 100,012 12
Topeka, Kansas ------------- -----------
Provider of value priced funeral
services
Total Service 33.28% 3,663,409 5,244,611
====== ------------- -----------
10
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS (UNAUDITED) CONTINUED...
JUNE 30, 2006
Technology and Communications:
Percent of
Company Security Net assets Value Cost (d)
.......................................................................................................................................
Feed Management Systems, Inc. (a) 540,551 common shares (c) $ 1,327,186 1,327,186
Brooklyn Center, Minnesota 674,309 shares Series A preferred (c) 674,309 674,309
Batch feed software and systems 12% debt security, due May 20, 2008 61,487 61,487
and B2B internet services 12% debt security, due August 21, 2008 60,236 60,236
Warrants to purchase 166,500 Series A ---- ----
preferred (c) ------------- ----------
2,123,218 2,123,218
------------- ----------
MainStream Data, Inc. (a) 322,763 shares Series A preferred (c) 180,044 200,049
------------- ----------
Salt Lake City, Utah
Content delivery solutions
provider
Miles Media Group, Inc. (a) 1,000 common shares (c) 866,767 440,000
Sarasota, Florida 100 common options (c) ---- ----
Tourist magazine publisher ------------- ----------
866,767 440,000
------------- ----------
Phonex Broadband Corporation 1,855,302 shares Series A preferred (c) 288,750 1,155,000
------------- ----------
Midvale, Utah
Power line communications
Portrait Displays, Inc. 8% debt security, due April 1, 2009 74,050, 74,050
Pleasanton, California 8% debt security, due April 1, 2012 (c) 325,950 750,001
Designs and markets pivot enabling Warrant to purchase 39,400 common shares (c) ---- ----
software for LCD computer monitors ------------- ----------
400,000 824,051
------------- ----------
SnapNames.com, Inc. 465,000 common shares (c) 125,000 4,650
Portland, Oregon 46,500 common shares (c) ---- ----
Domain name management ------------- ----------
125,000 4,650
------------- ----------
Total technology and communications 36.19% 3,983,779 4,746,968
====== ------------- ----------
$ 18,849,274 22,735,768
================ ==========
(a) Affiliated company
(b) Controlled company
(c) Non-income producing.
(d) For all debt securities presented, the cost is equal to the principal balance.
See accompanying notes to unaudited condensed consolidated financial statements.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Such
statements are made in good faith by MACC pursuant to the safe-harbor provisions
of the 1995 Act, and are identified as including terms such as "may," "will,"
"should," "expects," "anticipates," "estimates," "plans," or similar language.
In connection with these safe-harbor provisions, MACC has identified in its
Annual Report to Shareholders for the fiscal year ended September 30, 2005,
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of MACC,
including, without limitation, the high risk nature of MACC's portfolio
investments, the effects of general economic conditions on MACC's portfolio
companies, the effects of recent or future losses on the ability of MorAmerica
Capital to comply with applicable regulations of the Small Business
Administration and MorAmerica Capital's ability to obtain future funding,
changes in prevailing market interest rates, and contractions in the markets for
corporate acquisitions and initial public offerings. MACC further cautions that
such factors are not exhaustive or exclusive. MACC does not undertake to update
any forward-looking statement which may be made from time to time by or on
behalf of MACC.
Results of Operations
MACC's investment income includes income from interest, dividends and fees.
Investment expense, net represents total investment income minus net operating
expenses. The main objective of portfolio company investments is to achieve
capital appreciation and realized gains in the portfolio. These gains and losses
are not included in investment expense, net. However, another one of MACC's
on-going goals is to reduce net investment expense. MACC is currently seeking to
achieve this goal by reducing its operating expenses. MACC also earns interest
on short-term investments of cash.
Third Quarter Ended June 30, 2006 Compared to Third Quarter Ended June 30, 2005
For the three months ended June 30,
2006 2005 Change
------------- --- ---------------- ----- ----------------
Total investment income $ 238,361 880,692 (642,331)
Net operating expense (392,442) (898,603) (898,603)
Income taxes (40,000) (50,000) 10,000
------------- ---------------- ----------------
Investment expense, net (154,081) (17,911) (136,170)
------------- ---------------- ----------------
Net realized (loss) gain on investments (705,226) 655,214 (1,360,440)
Net change in unrealized depreciation/
appreciation on investments 1,043,716 1,651,887 (608,171)
Net change in unrealized gain on other assets 9,111 2,115 6,996
------------- ---------------- ----------------
Net gain on investments 347,601 2,309,216 (1,961,615)
------------- ---------------- ----------------
Net change in net assets from operations $ 193,520 2,291,305 (2,097,785)
================= ================ ================
Net asset value:
Beginning of period $ 5.12 4.82
================= ================
End of period $ 4.47 5.81
================= ================
12
Total Investment Income
During the current fiscal year third quarter, total investment income was
$238,361, a decrease of $642,331, or 73%, from total investment income of
$880,692 for the prior year third quarter. In the current year third quarter as
compared to the prior year third quarter, interest income decreased $391,568, or
63%, dividend income decreased $211,403, or 97%, and other income decreased
$39,360, or 100%. The decrease in interest income is the net result of
repayments of principal on debt portfolio securities issued by thirteen
portfolio companies, a decrease in interest income on four debt portfolio
securities which have been placed on non-accrual of interest status, and a
decrease in interest income on one debt portfolio security of which interest has
been forgiven since the end of the prior year fiscal year end. In the current
year third quarter, MACC received dividends on two existing portfolio
investments, one of which was a distribution from a limited liability company,
compared to dividend income received in the prior year third quarter from five
existing portfolio companies, one of which was a distribution from a limited
liability company. The decrease in other income is due to a distribution
received by MACC in the prior year third quarter with respect to the insurance
claim of a former MACC subsidiary against an insurance company in liquidation.
Net Operating Expenses
Net operating expenses for the third quarter of the current year were
$352,442, a decrease of $496,161, or 58%, as compared to net operating expenses
for the prior year third quarter of $848,603. Interest expense decreased
$248,378, or 47%, in the current year third quarter due to the repayment of
borrowings from the Small Business Administration ("SBA") of $9,000,000 in the
prior fiscal year and $2,000,000 in the current year second quarter. Management
fees decreased $75,561, or 44%, in the current year third quarter due to the
decrease in capital under management and a decrease in the management fee as a
percentage of capital under management from 2.50% to 1.50%, which became
effective April 30, 2005. Incentive fees decreased $138,300, or 100%, due to the
decrease in fair value of several portfolio company investments which impacted
the calculation of the incentive fees earned in the current year third quarter.
Incentive fees are calculated on an annual basis, but MACC accrues incentive
fees expense on a quarterly basis. Accordingly, MACC's financial results for the
last three months of the current fiscal year may impact the amount of incentive
fee expense accrued during the third quarter of the current year. Professional
fees decreased $83,520, or 68%, in the current year third quarter primarily due
to the legal expenses incurred in the prior year third quarter in connection
with the change of MACC's investment advisor. Other expenses decreased $2,044,
or 3%, in the current year third quarter as compared to the prior year third
quarter. The decrease in other expenses is mainly due to the timing of
administrative expenses in the prior year third quarter due to the postponement
of the 2005 Annual Shareholders Meeting.
Investment Expense, Net
For the current year third quarter, MACC recorded investment expense, net
of $154,081, as compared to investment expense, net of $17,911 during the prior
year third quarter. The increase in investment expense, net is the result of the
decrease in investment income described above, partially offset by the decrease
in operating expenses described above.
13
Net Realized (Loss) Gain on Investments
During the current year third quarter, MACC recorded net realized loss on
investments of $705,226, as compared with net realized gain on investments of
$655,214 during the prior year third quarter. In the current year third quarter,
MACC realized a loss of $705,226 from the sale of one portfolio company.
Management does not attempt to maintain a comparable level of realized gains
quarter to quarter but instead attempts to maximize total investment portfolio
appreciation through realizing gains in the disposition of securities. MACC's
investment advisor earns an incentive fee which is calculated as a percentage of
the excess of MACC's realized gains in a particular period, over the sum of net
realized losses and unrealized depreciation during the same period. As a result,
the timing of realized gains, realized losses and unrealized depreciation can
have an effect on the amount of the incentive fee payable to the investment
advisor.
Net Change in Unrealized Appreciation/Depreciation of Investments and Other Assets
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation, net of
unrealized depreciation, on MACC's total investment portfolio based on the
valuation method described under "Critical Accounting Policy".
MACC recorded net change in unrealized appreciation/depreciation on
investments of $1,043,716 during the current year third quarter, as compared to
$1,651,887 during the prior year third quarter. This net change resulted from:
o Unrealized appreciation in the fair value of three portfolio companies
totaling $878,355.
o Unrealized depreciation in the fair value of five portfolio companies
of $459,663.
o Reclassification of unrealized depreciation of $625,024 relating to
the sale of one portfolio company.
Net Change in Net Assets from Operations
MACC experienced a decrease of $2,657,079 in net assets at the end of the
third quarter of fiscal year 2006, and the resulting net asset value per share
was $4.47 as of June 30, 2006, as compared to $5.54 as of September 30, 2005.
MACC has seven portfolio investments valued at cost, has recorded
unrealized appreciation on seven portfolio investments, and has recorded
unrealized depreciation on eleven portfolio investments. The increase in net
assets recorded during the current year third quarter was primarily the result
of increases in the fair value of two portfolio investments. Valuations from
quarter to quarter are affected by a portfolio company's short term performance
that changes unrealized depreciation and unrealized appreciation in the quarter.
This may or may not be indicative of the long term performance of the portfolio
company.
While MACC may periodically make follow-on investments, MACC is not
currently making investments in new portfolio companies, and is instead using
any excess cash generated
14
from portfolio investment liquidity events to prepay MorAmerica Capital's
outstanding SBA-guaranteed debentures when appropriate. MACC recorded
significant reductions in its interest expense and management fees in the third
quarter of the current fiscal year as a result of these prepayments.
While the economy continues to perform well, it is not even in all sectors.
Portfolio companies have had to deal with high energy costs, high raw material
costs, and in some cases flat or decreased sales. The growth of China and India
and continued competition from imported products from Asia, Central America, and
South America have made it more difficult to increase prices as commodity prices
rise. Gas prices, world tensions, terrorism, and the continuing conflict in Iraq
increase the uncertainty of future performance. Management believes MACC's
investment portfolio may benefit from an anticipated robust market for corporate
acquisitions and investments. The overall activity in the market for corporate
acquisitions is strong. MACC has exited four investments in 2006 and continues
to explore other potential exits.
Nine Months Ended June 30, 2006 Compared to Nine Months Ended June 30, 2005
For the nine months ended June 30,
2006 2005 Change
-------------------------------------------------------
Total investment income $ 937,117 2,180,120 (1,243,003)
Net operating expense (1,658,884) (2,806,303) 1,147,419
Income taxes (110,000) (50,000) (60,000)
------------- ---------------- ----------------
Investment expense, net (831,767) (676,183) (155,584)
------------- ---------------- ----------------
Net realized (loss) gain on investments 1,984,114 (1,773,869) 3,757,983
Net change in unrealized depreciation/
appreciation on investments (3,790,066) 5,148,084 (8,938,150)
Net change in unrealized gain on other assets (19,360) 88,196 (107,556)
Net (loss) gain on investments (1,825,312) 3,462,411 (5,287,723)
------------- ---------------- ----------------
Net change in net assets from operations $ (2,657,079) 2,786,228 (5,443,307)
================ ================ ================
Net asset value:
Beginning of period $ 5.54 4.61
================ ================
End of period $ 4.47 5.81
================ ================
Total Investment Income
During the current year nine-month period, total investment income was
$937,117, a decrease of $1,243,003, or 57%, from total investment income of
$2,180,120 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 $856,259, or 52%, dividend income decreased $336,889, or 70%,
processing fees decreased $7,700, or 100%, and other income decreased $42,155,
or 100%. The decrease in interest income is the net result of repayments of
principal on debt portfolio securities issued by thirteen portfolio companies, a
decrease in interest income on four portfolio securities which have been placed
on non-accrual of interest status, a decrease in interest income on one debt
portfolio security of which interest has been forgiven since the end of the
prior year fiscal year end, an increase in interest income on one debt portfolio
security which made a deferred interest payment in the current year nine-month
period, and the conversion of interest to stock in one portfolio company in the
prior year nine-month period. In the current year nine-month period, MACC
received dividends on five existing portfolio investments, two of
15
which were distributions from limited liability companies, as compared to
dividend income received in the prior year nine-month period from seven existing
portfolio companies, three of which were distributions from limited liability
companies. The dividends in the prior year nine-month period were also larger
than in the current year nine-month period. Processing fees decreased because no
fees were received in the current year nine-month period, whereas MACC received
a processing fee on one follow-on investment made in the prior year nine-month
period. The decrease in other income is due to a distribution received by MACC
in the prior year nine-month period with respect to the insurance claim of a
former MACC subsidiary against an insurance company in liquidation.
Net Operating Expenses
Net operating expenses for the nine-month period of the current year were
$1,658,884, a decrease of $1,147,419, or 41%, as compared to net operating
expenses for the prior year nine-month period of $2,806,303. Interest expense
decreased $645,225, or 41%, in the current year nine-month period due to the
repayment of borrowings from the SBA of $9,000,000 in the prior fiscal year and
$2,000,000 in the current year nine-month period. Management fees decreased
$329,347, or 50%, in the current year nine-month period due to the decrease in
capital under management and a decrease in the management fee as a percentage of
capital under management from 2.50% to 1.50%, which became effective April 30,
2005. Incentive fees increased by $5,011 or 100%, because no incentive fees were
earned in the prior year nine-month period. Incentive fees are calculated on an
annual basis, but MACC accrues incentive fees expense on a quarterly basis.
Accordingly, MACC's financial results for the last three months of the current
fiscal year may impact the amount of incentive fee expense accrued during the
nine-month period of the current year. Professional fees decreased $282,055, or
64%, in the current year nine-month period primarily due to the legal expenses
incurred in the prior year nine-month period from the arbitration proceedings
related to the sale of a former portfolio company which has been settled, legal
expenses from a lawsuit related to another portfolio company which has been
settled, and legal expenses incurred in the change of MACC's investment advisor.
Investment Expense, Net
For the current year nine-month period, MACC recorded investment expense,
net of $831,767, as compared to investment expense, net of $676,183 during the
prior year nine-month period. The increase in investment expense, net is the
result of the decrease in investment income, partially offset by the decrease in
operating expenses described above.
Net Realized (Loss) Gain on Investments
During the current year nine-month period, MACC recorded net realized gain
on investments of $1,984,114, as compared with net realized loss on investments
of $1,773,869 during the prior year nine-month period. In the current year
nine-month period, MACC realized gains of $1,987,604 from the sale of one
portfolio company, $667,803 from the sale of warrant shares in two other
portfolio companies, $33,933 on two previously sold portfolio companies, and a
realized loss of $705,226 from the sale of one portfolio company. Management
does not attempt to maintain a comparable level of realized gains quarter to
quarter but instead attempts to maximize total investment portfolio appreciation
through realizing gains in the disposition of securities. MACC's investment
advisor earns an incentive fee which is calculated as a percentage of the excess
of MACC's realized gains in a particular period, over the sum of net
16
realized losses and unrealized depreciation during the same period. As a result,
the timing of realized gains, realized losses and unrealized depreciation can
have an effect on the amount of the incentive fee payable to the investment
advisor.
Net Change in Unrealized Appreciation/Depreciation of Investments and Other
Assets
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation, net of
unrealized depreciation, on MACC's total investment portfolio based on the
valuation method described under "Critical Accounting Policy".
MACC recorded net change in unrealized appreciation/depreciation on
investments of ($3,790,066) during the current year nine-month period, as
compared to $5,148,084 during the prior year nine-month period. This net change
resulted from:
• Unrealized appreciation in the fair value of three portfolio companies
totaling $1,150,205.
• Unrealized depreciation in the fair value of eleven portfolio
companies totaling $3,324,210.
• Reclassification of unrealized appreciation of $1,508,206 relating to
the sale of one portfolio company and $532,879 relating to the sale of
warrant shares of two portfolio companies.
• Reclassification of unrealized depreciation of $425,024 relating to
sale of one portfolio company.
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").
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, 2006, the capital of MorAmerica Capital was impaired less than the
55% maximum impairment percentage permitted under SBA Regulations. MorAmerica
Capital's impairment percentage was 50% at June 30, 2006. If MorAmerica Capital
continues to experience negative operating results, no assurances can be given
that MorAmerica Capital's impairment percentage will continue to be less than
the maximum impairment percentage in future periods. If MorAmerica Capital would
exceed the maximum impairment percentage in future periods, a number of events
could occur which would have a material adverse affect on the financial
condition, results of operations, cash flow and liquidity of MACC and MorAmerica
Capital. MorAmerica Capital is also currently limited by the SBA Regulations in
the amount of distributions it may make to MACC.
17
As of June 30, 2006, MACC's cash and cash equivalents totaled $5,929,634.
MACC has a commitment for an additional $6,500,000 in SBA-guaranteed debentures,
which expires on September 30, 2007. In December, 2004, MorAmerica Capital and
three other SBICs entered into an agreement with the SBA in connection with an
arbitration settlement. As a result of the terms of this agreement, MACC does
not believe that MorAmerica Capital will have access to the SBIC capital program
in fiscal year 2006. In light of the agreement with SBA, at the present time
MACC is not making new investments, is prudently selling portfolio companies and
is using the resulting proceeds to reduce debt by prepaying SBA-guaranteed
debentures when appropriate. Subject to the other risks and uncertainties
described in this quarterly report, MACC believes that its existing cash and
money market accounts and other anticipated cash flows will provide adequate
funds for MACC's anticipated cash requirements during fiscal year 2006,
including follow-on portfolio investment activities, interest payments on
outstanding debentures payable, prepayments of principal on outstanding
debentures payable, and administrative expenses.
Debentures payable are composed of $14,790,000 in principal amount of
SBA-guaranteed debentures issued by MACC's subsidiary, MorAmerica Capital, which
mature as follows: $1,500,000 in fiscal year 2010, $5,835,000 in fiscal year
2011, and $7,455,000 in fiscal year 2012. MACC anticipates that MorAmerica
Capital will not be able to refinance these debentures through the SBIC capital
program when they mature. The following table shows MACC's significant
contractual obligations for the repayment of debt and other contractual
obligations as of June 30, 2006:
Payments due by period
Contractual Obligations
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
------------ --------- --------- --------- -----------
SBA Debentures(1) $ 14,790,000 --- --- 1,500,000 13,290,000
Incentive Fees Payable(2) $ 99,983 --- --- --- 99,893
(1) On September 1, 2006, MACC will repay $4,000,000 of SBA Debentures.
(2) Under the terms of the Incentive Fee Subscription Agreement described below
under Item 5, accrued incentive fees payable to the investment advisor are
subordinated to all amounts payable by MorAmerica Capital to the SBA, including
outstanding SBA-guaranteed debentures, and any losses the SBA may incur in
connection with the settlement of arbitration proceedings occurring in late
2004.
MACC currently anticipates that it will rely primarily on its current cash
and cash equivalents and its cash flows from operations to fund its cash
requirements during fiscal year 2006. Although management believes these sources
will provide sufficient funds for MACC to meet its fiscal year 2006 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.
18
Portfolio Activity
MACC's primary business is investing in and lending to businesses through
investments in subordinated debt (generally with detachable equity warrants),
preferred stock and common stock. MACC, however, is not currently making new
investments. The total portfolio value of investments in publicly and
non-publicly traded securities was $18,849,274 at June 30, 2006 and $25,845,548
at September 30, 2005. During the three months ended June 30, 2006, MACC
invested $183,800 in follow-on investments in three existing portfolio
companies. As noted above, MACC does not expect to make any investments in new
portfolio companies during fiscal year 2006, but may invest up to $500,000 in
follow-on investments in existing portfolio companies, subject to further
adjustment based on current economic and operating conditions.
MACC frequently co-invests with other funds managed by MACC's investment
advisor. When it makes any co-investment with these related funds, MACC follows
certain procedures consistent with orders of the Securities and Exchange
Commission for related party co-investments to reduce or eliminate conflict of
interest issues. All of the $183,800 invested during the current year third
quarter represented co-investments with funds managed by MACC's investment
advisor.
Critical Accounting Policy
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are stated at the 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 MACC's Board of
Directors. Among the factors considered in determining the fair value of
investments are the cost of the investment; developments, including recent
financing transactions, since the acquisition of the investment; the financial
condition and operating results of the investee; the long-term potential of the
business of the investee; market interest rates on similar debt securities; and
other factors generally pertinent to the valuation of investments. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
In the valuation process, MorAmerica Capital uses financial information
received monthly, quarterly, and annually from its portfolio companies which
includes both audited and unaudited financial statements. This information is
used to determine financial condition, performance, and valuation of the
portfolio investments.
Realization of the carrying value of investments is subject to future
developments. Investment transactions are recorded on the trade date and
identified cost is used to determine realized gains and losses. Under the
provisions of SOP 90-7, the fair value of loans and investments in portfolio
securities on February 15, 1995, the fresh-start date, is considered the cost
basis for financial statement purposes.
19
Determination of Net Asset Value
The net asset value per share of MACC's outstanding common stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus total liabilities
by the total number of shares outstanding at the date as of which the
determination is made.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
MACC is subject to market risk from changes in market interest rates that
affect the fair value of MorAmerica Capital's debentures payable determined in
accordance with Statement of Financial Accounting Standards No. 107, Disclosures
About Fair Value of Financial Instruments. The estimated fair value of
MorAmerica Capital's outstanding debentures payable at June 30, 2006, was
$15,223,000, with a cost of $14,790,000. Fair value of MorAmerica Capital's
outstanding debentures payable is calculated by discounting cash flows through
estimated maturity using a SBA borrowing rate currently available (6.4% at June
30, 2006) for debt of similar original maturity. None of MorAmerica Capital's
outstanding debentures payable are publicly traded. Market risk is estimated as
the potential increase in fair value resulting from a hypothetical 0.5% decrease
in interest rates. Actual results may differ.
----------------------------------------------------------------
June 30, 2006
----------------------------------------------------------------
Fair Value of Debentures Payable $ 15,223,000
Amount Above Cost $ 433,000
Additional Market Risk $ 307,000
----------------------------------------------------------------
Item 4. Controls and Procedures
As of the end of the period covered by this report, in accordance with Item
307 of Regulation S-K promulgated under the Securities Act of 1933, as amended,
the Chief Executive Officer and Chief Financial Officer of MACC (the "Certifying
Officers") have conducted evaluations of MACC's disclosure controls and
procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the term "disclosure
controls and procedures" means controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. The
Certifying Officers have reviewed MACC's disclosure controls and procedures and
have concluded that those disclosure controls and procedures are effective as of
the date of
20
this Quarterly Report on Form 10-Q. In compliance with Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), each of the Certifying Officers
executed an Officer's Certification included in this Quarterly Report on Form
10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not been
any significant changes in MACC's internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no items to report.
Item 1A. Risk Factors.
There are no changes to report from the risk factors disclosed in
MACC's Annual Report on Form 10-K for the year ended September 30,
2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There are no items to report.
Item 3. Defaults Upon Senior Securities.
There are no items to report.
Item 4. Submission of Matters to a Vote of Security Holders.
There are no items to report.
Item 5. Other Information.
As previously reported, the SBA required that MorAmerica Capital enter into
a subordination agreement effective July 21, 2005, among it, InvestAmerica
Investment Advisors, Inc. ("InvestAmerica") and the SBA (the "Subordination
Agreement") as a condition to the SBA's approval of the investment advisory
agreement between InvestAmerica and MorAmerica Capital (the "Advisory
Agreement"). The Subordination Agreement provides that MorAmerica Capital's
payment to InvestAmerica, and InvestAmerica's receipt of, incentive fees are
subordinated to MorAmerica Capital's repayment of all obligations owing to the
SBA. Those obligations include the repayment of all outstanding SBA debentures
and MorAmerica Capital's agreement, along with other SBA licenses, to reimburse
the SBA for any losses the SBA may incur in connection with the settlement of an
arbitration proceeding which was concluded in late 2004 (collectively, the "
Obligations"). The Subordination Agreement provides that: (i) MorAmerica Capital
will not pay InvestAmerica incentive fees under the Advisory Agreement unless
and until the Obligations are satisfied, and (ii) to the extent (A) incentive
fees have been escrowed under the Advisory Agreement because MorAmerica
Capital's capital has been impaired as provide in Section 5.2(c)(ii) of the
Advisory Agreement, and (B) MorAmerica Capital is delinquent in repaying the SBA
any amounts respecting SBA debentures, the SBA may require MorAmerica Capital to
pay any so escrowed funds to the SBA to satisfy any arrearage respecting SBA
debentures. The Subordination Agreement does not, however, affect: (i)
InvestAmerica's ability to earn incentive fees under the Advisory Agreement,
(ii) MorAmerica Capital's payment to InvestAmerica of management fees under the
Advisory Agreement, or (iii) any other terms of the Advisory Agreement.
22
Item 6. Exhibits.
The following exhibits are filed with this Quarterly Report on Form 10-Q:
31.1 Section 302 Certification of David R. Schroder (CEO)
31.2 Section 302 Certification of Robert A. Comey (CFO)
32.1 Section 1350 Certification of David R. Schroder (CEO)
32.2 Section 1350 Certification of Robert A. Comey (CFO)
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACC PRIVATE EQUITIES INC.
Date: 8/10/06 By: /s/ David R. Schroder
----------------------------- ---------------------------------------
David R. Schroder, President
Date: 8/10/06 By: /s/ Robert A. Comey
----------------------------- ---------------------------------------
Robert A.Comey, Chief Financial Officer
24
EXHIBIT INDEX
Exhibit Description
31.1 Section 302 Certification of David R. Schroder (CEO)
31.2 Section 302 Certification of Robert A. Comey (CFO)
32.1 Section 1350 Certification of David R. Schroder (CEO)
32.2 Section 1350 Certification of Robert A. Comey (CFO)
25