Attached files
file | filename |
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EX-32.2 - MACC PEI LIQUIDATING TRUST | form10qex322_021610.htm |
EX-31.2 - MACC PEI LIQUIDATING TRUST | form10qex312_021610.htm |
EX-31.1 - MACC PEI LIQUIDATING TRUST | form10qex311_021610.htm |
EX-32.1 - MACC PEI LIQUIDATING TRUST | form10qex321_021610.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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Form
10-Q
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(Mark
one)
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R
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QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended December 31, 2009
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£
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _________ to __________
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Commission
file number 0-24412
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MACC
PRIVATE EQUITIES INC.
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(Exact
name of registrant as specified in its charter)
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Delaware
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42-1421406
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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580 Second Street; Suite 102, Encinitas,
California 92024
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(Address
of principal executive offices)
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(760) 479-5080
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(Registrant’s
telephone number, including area code)
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__________________________________________________________________
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(Former
name, former address and former fiscal year, if changed since last
report)
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Indicate by check mark whether
the registrant has (1) 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 R No
£
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Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 or Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files.) Yes £ No
R
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated
filer
£ Accelerated
filer £ Non-accelerated
filer R Smaller
reporting company £
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Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes £ No
R
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At
February 1, 2010, the registrant had issued and outstanding 2,464,621
shares of common stock.
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Index
PART
I.
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FINANCIAL
INFORMATION
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|||
Item 1.
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Financial Statements
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Page
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Condensed
Balance Sheets
at
December 31, 2009 and
September
30, 2009 (Unaudited)
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1
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Condensed
Statements of Operations
for
the three months ended
December
31, 2009 and December 31, 2008 (Unaudited)
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2
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Condensed
Statements of Cash Flows
for
the three months ended
December
31, 2009 and December 31, 2008 (Unaudited)
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3
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Notes
to Unaudited
Condensed
Financial Statements
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4
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Schedule
of Investments (Unaudited)
at
December 31, 2009
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10
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Item 2.
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Management’s
Discussion and Analysis
of
Financial Condition and Results of Operations
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13
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Item 3.
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Quantitative
and Qualitative
Disclosure
About Market Risk
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18
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Item 4T.
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Controls
and Procedures
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19
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Part
II.
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OTHER
INFORMATION
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21
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Item 6.
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Exhibits
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21
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Signatures
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21
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Certifications
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See
Exhibits 31 and 32
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PART
I -- FINANCIAL INFORMATION
Item
1.
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Financial
Statements
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MACC
PRIVATE EQUITIES INC.
Condensed
Balance Sheets
(Unaudited)
December
31,
2009
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September
30,
2009
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|||||||
Assets
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||||||||
Cash
and cash equivalents
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$ | 280,836 | 173,521 | |||||
Loans
and investments in portfolio securities, at market or fair
value:
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||||||||
Unaffiliated
companies (cost of $768,306 and $779,807)
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1,112,851 | 1,199,388 | ||||||
Affiliated
companies (cost of $11,094,541 and $10,664,161)
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7,615,028 | 7,973,862 | ||||||
Controlled
companies (cost of $2,874,939 and $2,874,939)
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2,602,022 | 2,602,022 | ||||||
Interest
receivable
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66,931 | 303,656 | ||||||
Other
assets
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232,235 | 264,070 | ||||||
Total
assets
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$ | 11,909,903 | 12,516,519 | |||||
Liabilities
and net assets
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||||||||
Liabilities:
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||||||||
Notes
payable
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4,494,625 | 4,618,659 | ||||||
Incentive
fees payable
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16,361 | 16,361 | ||||||
Accounts
payable and other liabilities
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83,061 | 72,111 | ||||||
Total
liabilities
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4,594,047 | 4,707,131 | ||||||
Net
assets:
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||||||||
Common
stock, $.01 par value per share; authorized 10,000,000 shares; issued and
outstanding 2,464,621 shares
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24,646 | 24,646 | ||||||
Additional
paid-in-capital
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10,158,516 | 10,328,377 | ||||||
Unrealized
depreciation on investments
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(2,867,306 | ) | (2,543,635 | ) | ||||
Total
net assets
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7,315,856 | 7,809,388 | ||||||
Total
liabilities and net assets
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$ | 11,909,903 | 12,516,519 | |||||
Net
assets per share
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$ | 2.97 | 3.17 | |||||
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1
MACC PRIVATE EQUITIES
INC.
Condensed
Statements of Operations
(Unaudited)
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For
the three months ended December 31,
2009
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For
the three months ended December 31,
2008
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|||||||
Investment
income:
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Interest
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||||||||
Unaffiliated
companies
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$ | 16,936 | 7,986 | |||||
Affiliated
companies
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57,358 | 86,823 | ||||||
Controlled
companies
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217,990 | 6,788 | ||||||
Loss
on interest receivable
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(241,843 | ) | --- | |||||
Other
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118 | 158 | ||||||
Dividends
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||||||||
Affiliated
companies
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42,632 | 109,624 | ||||||
Total
investment income
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93,191 | 211,379 | ||||||
Operating
expenses:
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||||||||
Interest
expenses
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71,063 | 76,574 | ||||||
Management
fees
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31,066 | 74,943 | ||||||
Professional
fees
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90,965 | 57,228 | ||||||
Other
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69,958 | 84,654 | ||||||
Total
operating expenses and income tax expense
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263,052 | 293,399 | ||||||
Investment
income (expense), net
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(169,861 | ) | (82,020 | ) | ||||
Realized
and unrealized (loss) gain on investments:
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||||||||
Net
change in unrealized appreciation/depreciation investments
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(323,671 | ) | 269,100 | |||||
Net
(loss) gain on investments
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(323,671 | ) | 269,100 | |||||
Net
change in net assets from operations
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$ | (493,532 | ) | 187,080 |
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
2
MACC
PRIVATE EQUITIES INC.
Condensed
Statements of Cash Flows
(Unaudited)
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For
the three months ended
December
31, 2009
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For
the three months ended
December
31, 2008
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|||||||
Cash
flows (used in) from operating activities:
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||||||||
Net
change in net assets from operations
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$ | (493,532 | ) | 187,080 | ||||
Adjustments
to reconcile net change in net assets from operations to net cash provided
by (used in) operating activities:
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Net
realized and unrealized loss on investments
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323,671 | (269,100 | ) | |||||
Net
realized and unrealized loss on other assets
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--- | --- | ||||||
Proceeds
from disposition of and payments on
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loans
and investments in portfolio securities
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155,042 | 78,388 | ||||||
Purchases
of loans and investments in portfolio securities
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(33,342 | ) | (40,127 | ) | ||||
Change
in interest receivable
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236,725 | 5,886 | ||||||
Change
in other assets
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31,835 | 34,620 | ||||||
Change
in accrued interest, deferred incentive fees payable,
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||||||||
accounts
payable and other liabilities
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10,950 | 49,620 | ||||||
Net
cash provided by operating activities
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231,349 | 46,367 | ||||||
Cash
flows used in financing activities:
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||||||||
Note
repayment
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(124,034 | ) | (48,321 | ) | ||||
Net
cash used in financing activities
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(124,034 | ) | (48,321 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
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107,315 | (1,954 | ) | |||||
Cash
and cash equivalents at beginning of period
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173,521 | 145,790 | ||||||
Cash
and cash equivalents at end of period
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$ | 280,836 | 143,836 | |||||
Supplemental
disclosure of cash flow information -
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||||||||
Cash
paid during the period for interest
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$ | 70,312 | 72,507 | |||||
Supplemental
disclosure of non-cash investing
and financing
information -
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||||||||
In-kind
interest income received in the form of securities
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$ | 241,843 | --- | |||||
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3
MACC
PRIVATE EQUITIES INC.
Notes
to Unaudited Condensed Financial Statements
_____________________________________________________________________________________________
(1) Basis
of Presentation
The
accompanying unaudited condensed financial statements include the accounts of
MACC Private Equities Inc. (“MACC,” “we” or “us”) and have been
prepared in accordance with U.S. generally accepted accounting principles
(“GAAP”) for
investment companies. MACC has elected to be treated as a business
development company under the Investment Company Act of 1940, as
amended. On February 15, 1995, MACC 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, MACC
adopted fresh-start reporting resulting in MACC’s assets and liabilities being
adjusted to fair values. Effective April 30, 2008, MACC’s
wholly-owned subsidary, MorAmerica Capital Corporation, (“MorAm”), was merged
with and into MACC.
The
unaudited condensed financial statements included herein have been prepared in
accordance with GAAP for interim financial information and instructions to Form
10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, certain
information and note disclosures normally included in annual audited financial
statements prepared in accordance with GAAP have been omitted, however MACC
believes that the disclosures made are adequate to make the information
presented not misleading. The unaudited condensed financial
statements should be read in conjunction with the audited financial statements
and notes thereto of MACC as of and for the year ended September 30, 2009
included in the MACC’s Form 10-K, as filed with the Securities and Exchange
Commission (the “SEC”). 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 periods reported are not necessarily indicative of results to be
expected for the year. The balance sheet information as of September
30, 2009 has been derived from the audited balance sheet as of that date, but
does not include all disclosures required by GAAP.
Significant
Risk and Uncertainties
When
global economic conditions are adverse or the global economy is in a recession
as it was during fiscal 2009 and the first quarter of fiscal 2010, it is
difficult for us to estimate future expected realizable value from investments,
the likelihood of our portfolio companies’ ability to meet their financial
obligations, including the debentures and related interest payments due to us,
and therefore our future expected cash flows. All of these factors
increase uncertainty inherent in management’s estimates and
assumptions. As future events and their effects cannot be determined
with precision, particularly those related to the condition of the economy, we
believe actual results related to our realization on the sale of investments,
collection of loans receivable and interest receivable presently pose our
greatest risk and could differ significantly from our current
estimates.
(2)
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Going
Concern Uncertainty and Liquidity
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MACC has
a negative net change in net assets from operations of $493,532 for the three
months ended December 31, 2009 and generated net cash flow from operations of
$231,349 to fund our operating activities and financing requirements for the
three months ended December 31, 2009 and for ongoing operating expenses. Operating expenses have
been funded primarily from the sale of portfolio companies, dividends, interest
and other distributions from our portfolio companies and our bank
financing.
We
continue to have an ongoing need to raise cash from portfolio sales to fund our
operations and pay down outstanding debt. Our efforts to sell certain
investments has taken longer than we initially anticipated while performance of
the underlying portfolio companies in certain cases has
deteriorated. We believe our ability to liquidate positions had been
adversely affected by credit conditions and the downturn in the financial
markets and the global economy. In addition, our Note Payable with
Cedar Rapids Bank & Trust Company (“CRB&T”) with a
balance of $4,494,625 as of December 31, 2009 is due and payable March 31, 2010
(“Note
Payable”). We will need to either extend the due date on the
current Note Payable or consider additional sources of financing and additional
sales of investments in order to meet the current payment and operating
requirements. We are in active discussions with CRB&T about
extension of the maturity of our Note Payable. No assurance can be
given that we will be
4
successful
in our efforts to extend the current financing arrangement or raise additional
funding in the near term and accordingly these facts raise substantial doubt
about our future ability to continue as a going concern.
In
addition to seeking additional cash through future sales of portfolio
securities, we expect to amend our rights offering registration statement
currently on file with the SEC in the near future and thereafter to commence a
rights offering to raise funds for operating purposes and to begin our new
strategy of investing in highly liquid public securities qualified for BDC
investment. Further, we believe that future capital raises will be
necessary and we are exploring those options. We expect the
attractiveness of our new investment strategy, combined with the underlying
value of MACC’s current portfolio, will make additional capital raises possible
in the future. At our next annual meeting, we also expect to seek
approval from our shareholders for authority to issue shares at less than net
asset value.
Absent
financing amendments to the current Note Payable or additional sources of
financing, current working capital and cash will not be adequate for operations
at their current levels. If such efforts are not successful, we may need to
liquidate our current investment portfolio, to the extent possible which could
result in significant realized losses due to the current economic
conditions. We continue to review our investment portfolio and
evaluate potential exit opportunities at the maximum return on our initial
investment. In light of challenging market conditions, however, the
Board will continue to review alternatives, including seeking shareholder
approval to liquidate, should additional capital raising prospects prove
unlikely or inadequate to effectively execute on the new strategy.
(3) Critical Accounting
Policies
Investments
Investments
in securities that are traded in the over-the-counter market or on a stock
exchange are valued by taking the end of day close price (or bid price in the
case of over-the-counter equity securities) for the valuation
date. 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;
overall market conditions and other factors generally pertinent to the valuation
of investments. The Board of Directors has considered the current
illiquid credit market conditions, and the risks and uncertainties associated
with those conditions in determining the values of our portfolio
securities. 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, we use financial information received monthly, quarterly, and
annually from our portfolio companies which includes both audited and unaudited
financial statements. This information is used to assist in assessing
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 authoritative guidance, the fair
value of loans and investments in portfolio securities on February 15, 1995,
MACC’s fresh-start date, is considered the cost basis for financial statement
purposes.
Accounting
Estimates
The
preparation of financial statements in conformity with GAAP 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 financial statements, and the reported amounts of revenues and expenses
during the reporting period.
Actual
results could differ from these estimates. Current economic
conditions, including illiquid credit markets, volatile equity markets, and
deteriorating economic conditions contribute to the inherent uncertainty of such
estimates. Management’s estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the unaudited
condensed financial statements in the periods they are determined to be
necessary.
5
(4) Recent Accounting
Pronouncements
In
September 2006, FASB issued authoritative guidance for fair value measurements
and disclosures which defines fair value, establishes a framework for measuring
fair value and expands disclosures related to assets and liabilities measured at
fair value. In February 2008, the FASB issued additional authoritative guidance
for fair value measurements which delayed the effective date of the
authoritative guidance for fair value measurements to fiscal years beginning
after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. We adopted the provisions of the authoritative guidance for
fair value measurements on January 1, 2008 with the exception of the application
of the guidance to non-recurring nonfinancial assets and nonfinancial
liabilities which we adopted on October 1, 2009. Our disclosures on the use of
fair value measurements for our nonfinancial assets and liabilities are included
in Note 5 “Fair Value Measurements”.
In
April 2009, the FASB issued authoritative guidance for fair value measurements
and disclosures. This guidance provides companies with guidelines on how to
determine fair value measurements when the volume and level of activity for an
asset or liability have significantly decreased and how to identify transactions
that are not orderly. This guidance is effective for interim reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. We adopted this guidance for the quarter ended June 30,
2009, which did not have any impact on our financial statements included in this
report.
In
September 2009, the FASB issued authoritative guidance that allows investors to
use net asset value (NAV) as a practical expedient to estimate fair value of
investments that do not have readily determinable fair values, including
investees that have attributes of investment companies, report net asset value
or its equivalent to their investors, and calculate net asset value or its
equivalent consistent with the measurement principles of the AICPA Investment
Companies Guide. The practical expedient cannot be used for
investments that have a readily determinable fair value. New
disclosures of the attributes of all investments within the scope of the new
guidance is required regardless of whether the entity; used the practical
expedient to measure the fair value of any of its investments. This guidance is
effective for interim and annual periods ending after December 15,
2009. We adopted this guidance for the quarter ended December 31,
2009, which did not have any impact on our financial statements in this
report.
In
January 2010, the FASB issued authoritative guidance that requires reporting
entities to make new disclosures about recurring and non recurring fair-value
measurements including significant transfers into and out of Level I and Level 2
fair-value measurements and information on purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair-value
measurements. The FASB also clarified existing fair-value measurement
disclosure guidance about the level of disaggregation, inputs, and valuation
techniques. The new and revised disclosures are required to be implemented in
fiscal years beginning after December 15, 2009 and December 15,
2010. We are currently evaluating the impact of adopting this
standard on MACC’s financial position and results of operations.
(5) Fair
Value Measurements
Investments
MACC
adopted guidance for fair value measurements on October 1, 2008. In
part, this guidance defines fair value, establishes a framework for measuring
fair value and expands disclosures about assets and liabilities measured at fair
value. The guidance establishes a hierarchal disclosure framework
which prioritizes and ranks the level of market price observability used in
measuring investments at fair value. Market price observability is affected by a
number of factors, including the type of investment and the characteristics
specific to the investment. Investments with readily available active quoted
prices or for which fair value can be measured from actively quoted prices
generally will have a higher degree of market price observability and a lesser
degree of judgment used in measuring fair value.
Investments
measured and reported at fair value are classified and disclosed in one of the
following categories.
6
Level I –
Quoted prices are available in active markets for identical investments as of
the reporting date. The type of investments included in Level 1 include listed
equities and listed derivatives.
Level II
– Pricing inputs are other than quoted prices in active markets, which are
either directly or indirectly observable as of the reporting date, and fair
value is determined through the use of models or other valuation methodologies.
Investments which are generally included in this category include corporate debt
and less liquid and restricted equity securities.
Level III
– Pricing inputs are unobservable for the investments and includes situations
where there is little, if any, market activity for the investment. The inputs
into the determination of fair value require significant management judgment or
estimation and are based on the Board of Director’s own assumptions about the
assumptions that a market participant would use, including inputs derived from
extrapolation and interpolation that are not corroborated by observable market
data. Investments that are included in this category generally
include corporate private equity.
In
certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the determination of which
category within the fair value hierarchy is appropriate for any given investment
is based on the lowest level of input that is significant to the fair value
measurement. MACC’s assessment of the significance of a particular input to the
fair value measurement in its entirety requires judgment and considers factors
specific to the investment.
All of
MACC’s investments at December 31, 2009 were classified and disclosed under the
Level III category. Investments are stated at fair value as
determined by the Board of Directors according to the procedures of MACC’s
Valuation Policy. Securities are valued individually and in the
aggregate as of the end of each quarter of each fiscal year and as of the end of
each fiscal year. Interest-bearing securities are valued in an amount
not greater than cost, with adjustments to their carrying value made to reflect
changes in interest rates. Loan valuation determinations take into
account portfolio companies’ financial condition, outlook, payment histories and
other factors. Equity security valuations take into account the
following factors, among others: the portfolio company’s performance, the
prospects of a portfolio company’s future equity financing and the character of
participants in such financing, and the utilization of various financial
measures, including cash flow multiples, as appropriate. If a
portfolio company appears likely to discontinue operations, a liquidation
valuation technique may be employed. The Board of Directors also
considers credit market conditions, and the risks and uncertainties associated
with those conditions in determining the values of its portfolio
securities. Valuations established by the Board of Directors are not
necessarily indicative of amounts which may ultimately be realized as a result
of future sales or other dispositions of portfolio assets, and these favorable
or unfavorable differences could be material.
The
following table presents the investments at fair value as of December 31, 2009
by type of investment:
Fair
Value Based on
|
Corporate
Private Debt
|
Corporate
Private Equity (1)
|
Total
|
||||
Investment
Level III
|
$ 6,990,213
|
$ 4,339,688
|
100%
|
(1)
represents $2,557,910 in preferred shares; $817,888 in common shares; and
$963,890 in membership interests.
7
The
following table provides a rollforward in the changes in fair value during the
three-months ending December 31, 2009 for all investments which MACC has
determined using unobservable (Level III) factors.
For
the three months ended December 31, 2009
|
Total
|
||||
Balance,
September 30, 2009
|
$11,775,272
|
||||
Purchases
(Debt Repayment)
|
|||||
Detroit
Tool Metal Products Co.
|
33,342
|
||||
Magnum
Systems, Inc.
|
(143,541)
|
||||
Portrait
Displays, Inc.
|
(11,501)
|
||||
Total
Purchases (Debt Repayment)
|
(121,700)
|
||||
Unrealized
Gain (Loss)
|
|||||
Aviation
Manufacturing Group, LLC
|
192,500
|
||||
Feed
Management Systems, Inc.
|
(441,136)
|
||||
Linton
Truss Corporation
|
(75,035)
|
||||
Total
Unrealized Gain (Loss)
|
(323,671)
|
||||
Balance,
December 31, 2009
|
$11,329,901
|
||||
The
amount of total gains (losses) for the period included on the statement of
operations attributable to changes in unrealized gains/losses relating to
investments still held at the reporting date
|
(323,671)
|
Total
unrealized gains and losses recorded for Level III investments are reported in
Net Change in Unrealized Loss in the Statements of Operations.
(6) Note
Payable
MACC has
a term loan in the amount of $4,494,625 with CRB&T as of December 31,
2009. This note is a variable interest rate note secured by a
Security Agreement, Commercial Pledge Agreement and a Master Business Loan
Agreement. The interest rate fluctuates daily and is the greater of
the Wall Street Journal prime rate plus 0.5%, or 6%. The interest
rate on the note at December 31, 2009 was 6.0%. The note has a stated
maturity of March 31, 2010. The note is secured by all of MACC’s assets and MACC
is required to apply 80% of all cash proceeds received on the sale or
liquidation of investments to pay down any amounts outstanding. As
discussed in Note 2, MACC will need to either extend the due date on the current
Note Payable or consider additional sources of financing and additional sales of
investments in order to meet the current payment and operating
requirements. MACC is in active discussions with CRB&T with
respect to extending the Note Payable maturity date. No assurance can
be given that we will be successful in our efforts to extend the current
financing arrangement or raise additional funding in the near term.
(8) Subsequent
Events
The
Company evaluated all events that have occurred subsequent to December 31, 2009
through the date of the filing of this Form 10-Q on February 16,
2010. There were no subsequent events.
8
(9) Financial
Highlights (Unaudited)
For
the three months ended December 31, 2009
|
For
the three months ended December 31, 2008
|
|||||||
Per
Share Operating Performance
(For
a share of capital stock outstanding
throughout
the period):
Net
asset value, beginning of period
|
$
|
3.17
|
4.23
|
|||||
Expense
from investment operations:
|
||||||||
Investment
income (expense), net
|
(0.07)
|
(0.03)
|
||||||
Net
realized and unrealized (loss)
|
||||||||
gain
on investment transactions
|
(0.13)
|
0.11
|
||||||
Total
from investment operations
|
(0.20)
|
0.08
|
||||||
Net
asset value, end of period
|
$
|
2.97
|
4.31
|
|||||
Closing
bid price
|
$
|
0.55
|
0.52
|
|||||
|
For
the three months ended December 31, 2009
|
For
the three months ended December 31, 2008
|
||||||
Total
return
|
||||||||
Net
asset value basis
|
%
|
(6.32)
|
1.79
|
|||||
Market
price basis
|
%
|
(31.25)
|
(62.86)
|
|||||
Net
asset value, end of period
(in
thousands)
|
$
|
7,316
|
10,622
|
|||||
Ratio
to weighted average net assets:
|
||||||||
Investment
expense, net
|
%
|
(2.20)
|
(0.79)
|
|||||
Operating
and income tax expense
|
%
|
3.41
|
2.82
|
The
ratios of investment expense, 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 of the current fiscal year and end of the current year
period. An individual common stockholders’ return may vary from these
returns.
9
MACC
PRIVATE EQUITIES INC.
S
SCHEDULE
OF INVESTMENTS (UNAUDITED)
DECEMBER 31, 2009
Manufacturing:
|
||||||
Company
|
Security
|
Percent
of
Net assets
|
Value
|
Cost
(d)
|
||
Aviation
Manufacturing Group, LLC (a)
|
14%
debt security, due October 1, 2010 (c)
|
616,000
|
616,000
|
|||
Yankton,
South Dakota
|
154,000
units preferred
|
154,000
|
154,000
|
|||
Manufacturer
of flight critical parts for
airplanes
|
Membership
interest
14%
note, due October 1, 2010
|
963,539
77,000
|
39
77,000
|
|||
1,810,539
|
847,039
|
|||||
Detroit
Tool Metal Products Co. (a)(f)
|
12%
debt security, due April 26, 2010 (c)
|
1,371,508
|
1,912,087
|
|||
Lebanon,
Missouri
|
19,853.94
shares Series A preferred (c)
|
---
|
195,231
|
|||
Metal
stamping
|
7,887.17
shares common (c)
|
---
|
126,742
|
|||
|
8%
debt security, due April 26, 2010 (c)
|
33,342
|
33,342
|
|||
1,404,850
|
2,267,402
|
|||||
Handy
Industries, LLC (a)
|
1,015.79
units Class A1 preferred (c)
|
67,042
|
269,093
|
|||
Marshalltown,
Iowa
|
||||||
Manufacturer
of lifts for
motorcycles,
trucks and
|
||||||
Industrial
metal products
|
||||||
Linton
Truss Corporation
|
542.8
common shares (c)
|
----
|
----
|
|||
Delray
Beach, Florida
|
400
shares Series 1 preferred (c)
|
1
|
40,000
|
|||
Manufacturer
of residential roof and
|
3,411.88
common shares (c)
|
---
|
36
|
|||
floor
truss systems
|
1
|
40,036
|
||||
M.A.
Gedney Company (a)
|
648,783
shares preferred (c)
|
---
|
1,450,601
|
|||
Chaska,
Minnesota
|
12%
debt security, due June 30, 2012 (c)
|
1
|
76,000
|
|||
Pickle
processor
|
Warrant
to purchase 83,573 preferred shares (c)
|
---
|
---
|
|||
1
|
1,526,601
|
|||||
Magnum
Systems, Inc. (a)
|
12%
debt security, due November 1, 2011
|
|
430,622
|
430,622
|
||
Parsons,
Kansas
|
48,038
common shares (c)
|
48,038
|
48,038
|
|||
Manufacturer
of industrial bagging equipment
|
292,800
shares preferred (c)
Warrant
to purchase 56,529 common shares (c)
|
304,512
330,565
|
304,512
565
|
|||
1,113,737
|
783,737
|
|||||
Pratt-Read
Corporation (a)(e)
|
13,889
shares Series A preferred (c)
|
---
|
750,000
|
|||
Bridgeport,
Connecticut
|
7,718
shares Series A preferred (c)
|
---
|
416,667
|
|||
Manufacturer
of screwdriver shafts and handles and other hand tools
|
13%
debt security, due January 7, 2009 (c)
Warrants
to purchase common shares (c)
|
1
----
|
277,800
----
|
|||
1 | 1,444,467 |
10
MACC PRIVATE
EQUITIES INC.
SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)
DECEMBER 31, 2009
Manufacturing
Continued:
Company
|
Security
|
Percent
of Net assets
|
Value
|
Cost
(d)
|
||
Spectrum
Products, LLC (b)
|
13%
debt security, due January 1, 2011 (c)
|
1,077,649
|
1,077,649
|
|||
Missoula,
Montana
|
385,000
units Series A preferred (c)
|
385,000
|
385,000
|
|||
Manufacturer
of equipment for the
|
Membership
interest (c)
|
351
|
351
|
|||
swimming
pool industry
|
35,073.50
units Class B preferred (c)
|
47,355
|
47,355
|
|||
1,510,355
|
1,510,355
|
|||||
Superior
Holding, Inc. (a)
|
6%
debt security, due April 1, 2010(c)
|
568,727
|
780,000
|
|||
Wichita,
Kansas
|
Warrant
to purchase 11,143 common shares (c)
|
1
|
1
|
|||
Manufacturer
of industrial and
|
6%
debt security, due April 1, 2010(c)
|
221,000
|
221,000
|
|||
commercial
boilers and shower
|
121,457
common shares (c)
|
---
|
121,457
|
|||
doors,
frames and enclosures
|
6%
debt security, due April 1, 2010(c)
|
308,880
|
308,880
|
|||
312,000
common shares (c)
|
---
|
3,120
|
||||
19%
debt security, due April 1, 2010
|
39,000
|
39,000
|
||||
1,137,608
|
1,473,458
|
|||||
Total
manufacturing
|
62%
|
7,044,134
|
10,162,188
|
|||
Service:
|
||||||
Monitronics
International, Inc.
|
73,214
common shares (c)
|
439,284
|
54,703
|
|||
Dallas,
Texas
|
||||||
Provides
home security systems monitoring services
|
||||||
Morgan
Ohare, Inc. (b)
|
0%
debt security, due January 1, 2011 (c)
|
900,000
|
1,125,000
|
|||
Addison,
Illinois
|
10%
debt security, due January 1, 2011
|
191,666
|
239,583
|
|||
Fastener
plating and heat treating
|
57
common shares (c)
|
1
|
1
|
|||
1,091,667
|
1,364,584
|
|||||
SMWC
Acquisition Co., Inc. (a)
|
13%
debt security due September 30, 2011
|
|
68,750
|
68,750
|
||
Kansas
City, Missouri
|
12%
debt security due September 30, 2011
|
412,500
|
412,500
|
|||
Steel
warehouse distribution and
|
481,250
|
481,250
|
||||
Processing
|
|
|
||||
Total Service
|
18%
|
2,012,201
|
1,900,537
|
|||
11
MACC
PRIVATE EQUITIES INC.
SCHEDULE OF INVESTMENTS CONTINUED (UNAUDITED)
DECEMBER 31, 2009
Service
Continued:
Company
|
Security
|
Percent
of
Net
assets
|
Value
|
Cost
(d)
|
||
Technology
and Communications:
|
||||||
Feed
Management Systems, Inc. (a)
|
540,551
common shares (c)
|
925,691
|
1,327,186
|
|||
Brooklyn
Center, Minnesota
|
674,309
shares Series A preferred (c)
|
674,309
|
674,309
|
|||
Batch
feed software and systems
|
1,600,000
|
2,001,495
|
||||
And
B2B internet services
|
|
|
|
|||
Portrait
Displays, Inc.
|
10%
debt security, due April 1, 2012
|
673,566
|
673,566
|
|||
Pleasanton,
California
|
Warrant
to purchase 39,400 common shares (c)
|
---
|
---
|
|||
Designs
and markets pivot
|
673,566
|
673,566
|
||||
enabling
software for LCD
|
|
|||||
computer
monitors
|
||||||
Total
technology and communications
|
20%
|
2,273,566
|
2,675,061
|
|||
$
|
11,329,901
|
14,737,786
|
(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 as defined in the Investment Company Act of 1940 at or during the
period ended December 31, 2009.
|
(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 as defined in the Investment Company Act of 1940 at or
during the period ended December 31,
2009.
|
(c)
|
Presently
non-income producing.
|
(d)
|
For
all debt securities presented, the cost is equal to the principal
balance.
|
(e)
|
Company
is in bankruptcy.
|
(f)
|
During
the three month period ended December 31, 2009, the 12% debt security held
with Detroit Tool Metal Products Co. was restructured and
extended. As part of this restructuring previously accrued and
unpaid interest in the amount of $439,314 has been added to the
principal. As consideration for the restructuring $101,265 was
also added to the principal debt due to MACC, representing interest and
penalty fees in exchange for the restructuring. MACC is
currently working with the Company to restructure the terms of the debt
security.
|
(
SEE
ACCOMPANYING NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS.
12
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
section of the Quarterly Report on Form 10-Q for MACC Private Equities Inc.
(“MACC” or
“we” or “us”) contains
forward-looking statements. All statements in this Quarterly Report on Form
10-Q, including those made by MACC’s management, other than statements of
historical fact, are forward-looking statements. These
forward-looking statements are based on current management expectations that
involve substantial risks and uncertainties that could cause actual results to
differ materially from the results expressed in, or implied by, these
forward-looking statements. Forward-looking statements relate to
future events or our future financial performance. We generally
identify forward-looking statements by terminology such as “may,” “will,”
“should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “intends,” “targets,” “potential,” and “continue,” or
the negative of these terms, or other similar words. Examples of
forward-looking statements contained in this Quarterly Report on Form 10-Q
include statements regarding MACC’s:
|
·
|
ability
to continue as a going concern;
|
|
·
|
future
financial and operating results;
|
|
·
|
business
strategies, prospects and prospects of its portfolio
companies;
|
|
·
|
ability
to operate as a business development
company;
|
|
·
|
regulatory
structure;
|
|
·
|
adequacy
of cash resources and working
capital;
|
|
·
|
projected
costs;
|
|
·
|
competitive
positions;
|
|
·
|
management’s
plans and objectives for future operations;
and
|
|
·
|
industry
trends.
|
These
forward-looking statements are based on management’s estimates, projections and
assumptions as of the date hereof and include the assumptions that underlie such
statements. Any expectations based on these forward-looking
statements are subject to risks and uncertainties and other important factors,
as disclosed in MACC’s prior Securities and Exchange Commission (“SEC”) filings. These
and many other factors could affect MACC’s future financial condition and
operating results and could cause actual results to differ materially from
expectations based on forward-looking statements made in this document or
elsewhere by MACC or on its behalf. MACC undertakes no obligation to
revise or update any forward-looking statements. The forward-looking
statements contained in this Form 10-Q are excluded from the safe harbor
protection provided by Section 27A of the Securities Act of 1933, as amended
(the “1933
Act”) and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange
Act”). All references to fiscal year apply to MACC’s
respective fiscal years which end on September 30.
Results
of Operations
Our
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.
13
First Quarter Ended December
31, 2009 Compared to First Quarter Ended December 31, 2008
For
the three months ended
December
31,
|
|||||||
2009
|
2008
|
Change
|
|||||
Total
investment income
|
$ |
93,191
|
211,379
|
(118,188)
|
|||
Total
operating expenses
|
(263,052)
|
(293,399)
|
30,347
|
||||
Investment
expense, net
|
(169,861)
|
(82,020)
|
(87,841)
|
||||
Net
realized (loss) gain on investments
|
---
|
---
|
---
|
||||
Net
change in unrealized appreciation/
depreciation
on investments and other assets
|
(323,671)
|
269,100
|
(592,771)
|
||||
Net
(loss) gain on investments
|
(323,671)
|
269,100
|
(592,771)
|
||||
Net
change in net assets from operations
|
$
|
(493,532)
|
187,080
|
(680,612)
|
|||
Net
asset value per share:
|
|||||||
Beginning
of period
|
$
|
3.17
|
4.23
|
||||
End
of period
|
$
|
2.97
|
4.31
|
Total
Investment Income
During
the current fiscal year first quarter, total investment income was $93,191, a
decrease of $118,188, or 56%, from total investment income of $211,379 for the
prior year first quarter. In the current year first quarter as
compared to the prior year first quarter, interest income decreased $51,196, or
50%, and dividend income decreased $66,992, or 61%. The decrease in
interest income is the net result of (i) repayments of principal on debt
portfolio securities issued to us by three portfolio companies, thereby
decreasing interest income, (ii) an increase in interest income due to one
follow-on debt portfolio security investment, (iii) an increase due to one debt
portfolio security paying interest for the year which was on non-accrual of
interest status, (iv) a decrease in interest income on one debt portfolio
security which has been placed on non-accrual of interest status. In
the both current year first quarter and the prior year first quarter, MACC
received a dividend on one existing portfolio investment, however the current
year dividend was smaller. MACC anticipates that its
dividend income will continue to decrease in future periods.
Net
Operating Expenses
Net
operating expenses for the first quarter of the current year were $263,052, a
decrease of $30,347 or 10%, as compared to net operating expenses for the prior
year first quarter of $293,399. Interest expense decreased $5,511 or
7%, in the current year first quarter due to a combination of the decrease in
the interest rate and principal balance of the Note Payable to Cedar Rapids Bank
& Trust Company as discussed below under Going Concern Uncertainty,
Financial Condition, Liquidity
and Capital Resources.
Management
fees decreased $43,877, or 59%, in the current year first quarter due to the
investment adviser, Eudaimonia Asset Management, LLC (“EAM”), having
voluntarily waived its management fee of 1% of net assets , effective in May
2009, for an indefinite period. The remaining 1% of the management
fee continues to be paid to our subadviser, InvestAmerica Investment Advisors,
Inc. (“InvestAmerica”). Professional
fees increased $33,737, or 59%, in the current year first quarter as compared to
the prior year first quarter. The increase is primarily related to the legal
costs incurred in the exploration of capital raising options. Other
expenses decreased $14,696, or 17%, in the current year first quarter as
compared to the prior year first quarter. The decrease in other
expenses is a result of a decrease in Directors and Officers insurance expense
and shareholder expenses.
14
Investment
Expense, Net
For the
current year first quarter, MACC recorded investment expense, net of $169,861,
as compared to investment expense, net of $82,020 during the prior year first
quarter, a decrease of $87,841, or 107%. The decrease in investment
expense, net is primarily the result of the decrease in interest
income.
Net
Realized Gain/(Loss) on Investments
During
the current year first quarter and the prior year first quarter, we had no net
realized gain or loss on investments. 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. Under the Investment Advisory
Agreement, the Investment Adviser is entitled to be paid an incentive fee, which
is calculated as a percentage of the excess of our realized gains in a
particular period, over the sum of net realized losses, unrealized depreciation,
and operating losses 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 Adviser under the Advisory
Agreement.
Effective
April 29, 2008, MACC entered into an investment advisory agreement (the “EAM Advisory Agreement”) with
EAM. Under the EAM Advisory Agreement, EAM earns an incentive fee
which is calculated as percentage of the excess of our 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 EAM under the EAM Advisory
Agreement.
Also
Effective April, 29, 2008, MACC and EAM entered into an Investment Subadvisory
Agreement (the “Subadvisory
Agreement”) with InvestAmerica, pursuant to which InvestAmerica continues
to manage our portfolio of investments which existed on the effective date of
the Subadvisory Agreement (the “Existing
Portfolio”). Under the terms of the Subadvisory Agreement, EAM
pays InvestAmerica an incentive fee based on a portion of the incentive fees
paid to EAM by us under the EAM Advisory Agreement attributable to the Existing
Portfolio.
Net
Change in Unrealized Appreciation/Depreciation of Investments
Net
change in unrealized appreciation/depreciation on investments represents the
change for the period in the unrealized appreciation, net of unrealized
depreciation, on our total investment portfolio based on the valuation method
described under “Critical Accounting Policy”.
We
recorded a net change in unrealized appreciation/depreciation on investments of
($323,671) during the current year first quarter, as compared to $269,100 during
the prior year first quarter. This net change resulted
from:
|
●
|
No
unrealized appreciation in the fair value of portfolio companies during
the current year first quarter, as compared to unrealized appreciation in
the fair value of two portfolio companies totaling $334,050 during the
prior year first quarter.
|
|
●
|
Reversal
of unrealized appreciation in the fair value of two portfolio companies
totaling $74,641 during the current year first quarter, as compared to no
reversal of unrealized appreciation during the prior year first
quarter.
|
|
●
|
Unrealized
depreciation in the fair value of two portfolio companies totaling
$441,530 during the current year first quarter, as compared to unrealized
depreciation in the fair value of two portfolio companies of $64,950
during the prior year first
quarter.
|
|
●
|
Reversal
of unrealized depreciation of $192,500 in one portfolio companies during
the current year first quarter, as compared to no reversals of unrealized
depreciation in the prior year first
quarter.
|
15
Net
Change in Net Assets from Operations
We
experienced a decrease of $493,532 in net assets for the first quarter of fiscal
year 2010, and the resulting net asset value per share was $2.97 as of December
31, 2009, as compared to $3.17 as of September 30, 2009. The decrease
in net asset value during the first quarter ended December 31, 2009 was
primarily the result of the net change in unrealized depreciation on
investments, as described above.
As of
December 31, 2009, we had three portfolio investments valued at cost, had
recorded unrealized appreciation on three portfolio investments, and have
recorded unrealized depreciation on eight portfolio
investments. Quarterly valuations can be affected by a portfolio
company’s short term performance that results in increases or decreases in
unrealized depreciation and unrealized appreciation for the
quarter. Changes in the fair value of a portfolio security may or may
not be indicative of the long term performance of the portfolio
company.
Although
we are not currently making investments in new portfolio companies (but may
periodically make follow-on investments in the Existing Portfolio), as
previously announced, our investment strategy under the EAM Advisory Agreement
going forward is to make new equity investments in small-cap and micro-cap
companies which qualify for investment by business development companies (“BDCs”) under the 1940
Act when we have capital available. Under the Subadvisory Agreement,
InvestAmerica will continue to oversee the Existing Portfolio. We
will continue to prudently sell the Existing Portfolio investments and use the
resulting proceeds to pay down the Note Payable, as further described
below. The ability to exit the Existing Portfolio investments
is affected by company performance and external factors unrelated to the
portfolio companies. These factors include available credit, health
of the markets in which our portfolio companies operate, inflationary
expectations and pressures, commodity prices, and the general state of the
economy.
We have
initiated the process to raise additional capital by filing a registration
statement to effect a rights offering, which was approved by shareholder vote on
April 28, 2008, which we anticipate effecting in the coming quarter and hope to
yield near $1 million in new capital. We further believe that future
capital raises will be necessary and that they should be done at prices that are
not excessively dilutive to current shareholders.
Going
Concern Uncertainty, Financial Condition, Liquidity and Capital
Resources
Global
capital markets entered into a period of significant disruption in 2008, as
evidenced by a lack of liquidity in debt capital markets, significant write-offs
in the financial services sector, the re-pricing of credit risk and the failure
of major financial institutions. Despite actions of the United States
federal government and foreign governments, these events have contributed to
difficult economic conditions that are materially and adversely impacting the
broader financial and credit markets and have significantly reduced the
availability of debt and equity capital for the market as a whole and financial
services firms in particular. These conditions could continue for a
prolonged period of time or worsen in the future. While these
conditions persist, we and other companies in the financial services sector may
need, or may choose to access alternative markets for debt and equity capital
which may only be available at a higher cost, and or on less favorable terms and
conditions. Conversely, our portfolio companies may not be able to
service or refinance their debt which could materially and adversely affect our
financial condition as we would experience reduced income or even losses. The
inability to raise capital and the risk of portfolio company defaults may have a
negative effect on our business, financial condition and results of
operations.
As of
December 31, 2009, our cash and money market accounts totaled
$280,836. MACC has a note payable (“Note Payable”) with
Cedar Rapids Bank & Trust Company (“CRB&T”) in the
amount of $4,494,625 at December 31, 2009 that is due and payable March 31,
2010. MACC will need to either extend the due date on the current
Note Payable or consider additional sources of financing and additional sales of
investments in order to meet current payment and operating
requirements. No assurance can be given that MACC will be successful
in its efforts to extend its current financing arrangement or raise additional
funding in the near term and accordingly these facts raise substantial doubt
about MACC’s ability to continue as a going concern.
MACC
continues to seek additional cash through future sales of portfolio equity and
debt securities and from other financing arrangements. The efforts to
sell certain investments have taken longer than initially
anticipated
16
while
performance of the underlying portfolio companies in certain cases has
deteriorated. The ability to liquidate positions had been adversely
affected by credit conditions and the downturn in the financial markets and the
global economy. Absent financing amendments to the current Note
Payable or additional sources of financing, current working capital and cash
will not be adequate for operations at their current levels. MACC is
in active discussions with CRB&T about extension of the maturity of the Note
Payable. No assurance can be given that the extension will be granted
by CRB&T or that another financing arrangement or raise of additional
funding in the near term will be successful. If such efforts are not
successful, MACC may need to liquidate its current investment portfolio, to the
extent possible, which could result in significant realized losses due to the
current economic conditions. MACC continues to review its current
investment portfolio and evaluate potential exit opportunities at the maximum
return on initial investment.
The
following table shows our significant contractual obligations for the repayment
of the Note Payable and other contractual obligations as of December 31,
2009:
Payments due by period
|
|||||||||||
Contractual
Obligations
|
|||||||||||
Total
|
Less
than 1 Year
|
1-3
Years
|
3-5
Years
|
More
than 5 Years
|
|||||||
Note
Payable
|
$
|
4,494,625
|
4,494,625
|
---
|
---
|
---
|
|||||
Incentive
Fees Payable
|
$
|
16,361
|
16,361
|
---
|
---
|
---
|
Although
we believe we will be able to refinance the term loan, failure to do so or find
alternative financing could pose significant financial risks to MACC given the
relative illiquid nature of the Existing Portfolio. In addition, we
anticipate that our current cash and money market accounts will not be adequate
enough to fund our cash flow short-fall from operations during fiscal
2010. We will need to liquidate portfolio assets to fund the
operating cash short-fall. Although management believes we will be
able liquidate portfolio assets sufficient to provide funds for MACC to meet its
fiscal year 2010 anticipated cash requirements, there can be no assurance that
MACC’s cash flows from portfolio sales, operations or cash requirements will be
as projected.
MACC
expects to amend its rights offering registration statement currently on file
with the SEC in the near future and thereafter to commence a rights offering to
raise funds for operating purposes and to being the new strategy of investing in
highly liquid public securities qualified for BDC
investment. Further, MACC believes that future capital raises will be
necessary. MACC believes that the attractiveness of the new
investment strategy, combined with the underlying value of the Existing
Portfolio will make additional capital raises possible in the
future. At the next annual meeting MACC expects to seek shareholder
approval for authority to issue shares at less than net asset
value.
Portfolio
Activity
With
respect to the Existing Portfolio, we have invested in and lended to businesses
through investments in subordinated debt (generally with detachable equity
warrants), preferred stock and common stock. We, however, are not
currently making investments in new portfolio companies. As of
December 31, 2009, certain debt investments have or were near
expiration. Since the quarter end, we have either restructured or
continue to work toward restructuring these investments. The total
portfolio value of our investments in illiquid securities was $11,329,901 at
December 31, 2009 and $11,775,272 at September 30, 2009. During the
three months ended December 31, 2009, we made one follow-on investment in the
amount of $33,342 in an existing portfolio company.
With
respect to the Existing Portfolio, we have frequently co-invested with other
funds managed by InvestAmerica. All of the $33,342 invested during
the current quarter ended December 31, 2009 represented co-investments with
another fund managed by InvestAmerica. When we make any co-investment
with these related funds, we follow certain procedures consistent with orders of
the SEC for related party co-investments to mitigate conflict of interest
issues.
17
Critical
Accounting Policy
In
September 2006, the FASB issued authoritative guidance for fair value
measurements and disclosures which defines fair value, establishes a framework
for measuring fair value and expands disclosures related to assets and
liabilities measured at fair value. In February 2008, the FASB issued additional
authoritative guidance for fair value measurements which delayed the effective
date of the authoritative guidance for fair value measurements to fiscal years
beginning after November 15, 2008 for all nonfinancial assets and nonfinancail
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. We adopted the provisions of the
authoritative guidance for fair value measurements on January 1, 2008 with the
exception of the application of the guidance to nonrecurring non financial
assets and nonfinancial liabilities which we adopted on October 1,
2009.
Investments
in securities that are traded in the over-the-counter market or on a stock
exchange 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. 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;
overall market conditions and other factors generally pertinent to the valuation
of investments. 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, we use financial information received monthly, quarterly, and
annually from our 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.
The
preparation of financial statements in conformity with GAAP requires management
to estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
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
|
We are
subject to market risk from changes in market prices of publicly-traded equity
securities held from time to time in our investment portfolio. At
December 31, 2009, we had no publicly-traded equity securities in the Existing
Portfolio, but, as noted elsewhere, we intend to pursue an investment strategy
consisting of new equity investments in very small public companies that qualify
for investment by BDCs under the 1940 Act, to the extent we are able to raise
additional capital.
We
currently have a portfolio of debt and equity securities for which no regular
trading market exists. The fair value of these investments may not be
readily determinable. We value these investments quarterly at fair
value as determined in good faith under the direction of our board of directors
pursuant to a valuation policy and consistently applied valuation process
utilizing the input of our investment advisers and audit
committee. The types of factors that may be considered in fair value
pricing of these investments include the nature and realizable value of any
collateral, the portfolio company’s ability to make payments and its earnings,
the markets in which the portfolio company does business, comparison to more
liquid securities, indices and other market related inputs,
discounted
18
cash flow
and other relevant factors. Because such valuations and particularly
valuations of private securities and private companies, are inherently
uncertain, may fluctuate over short periods of time and may be based on
estimates, our determinations of fair value may differ materially from the
values that would have been used if a readily available market for these
investments existed and may differ materially from the amounts we realize on any
disposition of such investments. Our net asset value could be adversely affected
if our determinations regarding the fair value of these investments were
materially higher than the values that we ultimately realize upon the disposal
of such investments. In addition, decreases in the market values or
fair values of our investments are recorded as unrealized
depreciation. Continued declines in prices and liquidity in the debt
markets could result in substantial unrealized/realized losses, which could have
a material adverse impact on our business, financial condition and results of
operations.
The
current economic conditions generally and the disruptions in the capital markets
in particular have decreased liquidity, where available. The longer these
conditions persist, the greater the probability that these factors
could reduce our ability to effectively liquidate portfolio
positions, increase our cost and significantly limit our access to debt and
equity capital, and thus have an adverse effect on our operations and financial
results. Many of our portfolio companies may also be susceptible to the economic
downturn, which could affect the ability of one or more of our portfolio
companies to repay our loans or engage in a liquidity event, such as a sale or
recapitalization.
A
continued economic downturn could also disproportionately impact some of the
industries in which we invest, causing us to be more vulnerable to further
losses in our portfolio. Therefore, the number of our non-performing assets
could increase and the fair market value of our portfolio decrease during these
periods. The economic downturn has affected the availability of
credit generally and may prevent us from replacing or renewing our credit
facility on reasonable terms, if at all. If market instability
persists or intensifies, we may continue to experience difficulty in raising
capital.
Recent
market conditions have also affected the trading price of our common stock and
thus our ability to finance new investments through the issuance of
equity. The economic downturn may also continue to decrease the value
of collateral securing the Note Payable, as well as the value of our equity
investments. For the three months ended December 31, 2009, we
recorded net unrealized depreciation on our portfolio of investments of
$323,671, which was attributable to the decrease in fair value of our
portfolio. We may continue to see further decreases in the value of
our portfolio in the event that the economic downturn continues and the general
illiquidity of capital markets continues.
We are
also subject to financial market risks from changes in market interest
rates. We currently have a outstanding Note Payable with a variable
interest rate that is based on an independent index. Therefore,
general interest rate fluctuations may have a materially adverse effect on our
investment expense.
We are
also subject to financial market risk from the short term nature of our credit
facilities in combination with current market conditions and the relatively
illiquid nature of our Existing Portfolio. Our Note Payable is due
March 31, 2010. Given the currently challenging market environment as
discussed elsewhere, we may have difficultly refinancing the Note Payable, or
finding alternative sources of financing. Failure to refinance the
Note Payable could result in significant financial difficulties for us including
the seizure and sale of Existing Portfolio assets at prices which would likely
be as prices significantly less than fair value. Further, the cost of
financing could be significantly more costly which could have a material impact
on our financial condition.
Item
4T.
|
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 1933 Act, our Chief Executive Officer and
Chief Financial Officer (the “Certifying Officers”)
have conducted evaluations of our disclosure controls and
procedures. As defined under Sections 13a-15(e) and 15d-15(e) of 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 SEC’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
19
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
our disclosure controls and procedures and have concluded that those disclosure
controls and procedures were effective as of December 31, 2009. In
compliance with Section 302 of the Sarbanes-Oxley Act of 2002, each of the
Certifying Officers has executed an Officer’s Certification included in this
Quarterly Report on Form 10-Q.
As of
December 31, 2009, there have not been any significant changes in our internal
controls or other factors that could significantly affect these controls
subsequent to the date of their evaluation.
20
PART
II. OTHER INFORMATION
Item
1.
|
Legal
Proceedings.
|
There are
no items to report.
Item
1A.
|
Risk
Factors.
|
There are
no material changes to report from the risk factors disclosed in MACC’s Annual
Report on Form 10-K for the year ended September 30, 2009.
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.
|
There are
no items to report.
Item
6.
|
Exhibits.
|
The
following exhibits are filed with this Quarterly Report on Form
10-Q:
|
3(i).11
|
Certificate
of Incorporation of the Company.
|
|
3(i).22
|
Articles
of Amendment to the Certificate of Incorporation of the
Company.
|
|
3(ii)3
|
Third
Amended and Restated By-Laws of the
Company.
|
|
10.14
|
Investment
Advisory Agreement between MACC Private Equities Inc. and Eudaimonia Asset
Management, LLC dated April 29,
2008.
|
|
10.24
|
Investment
Subadvisory Agreement among the Company, Eudaimonia Asset Management, LLC
and InvestAmerica Investment Advisors, Inc. dated April 29,
2008
|
|
10.35
|
Term
Loan and Line of Credit Agreement by and among MACC Private Equities Inc.
successor in interest to MorAmerica Capital Corporation and Cedar Rapids
Bank and Trust Company dated August 30,
2007.
|
|
10.46
|
Second
Amendment to Business Loan Agreement and Security Agreements by and among
MACC Private Equities Inc. successor in interest to MorAmerica Capital
Corporation and Cedar Rapids Bank and Trust Company dated August 14,
2009.
|
|
147
|
Code
of Business Conduct and Ethics
|
|
31.1
|
Section
302 Certification of Travis T. Prentice (President and
CEO).
|
|
31.2
|
Section
302 Certification of Derek J. Gaertner
(CFO).
|
|
32.1
|
Section
1350 Certification of Travis T. Prentice (President and
CEO).
|
|
32.2
|
Section
1350 Certification of Derek J. Gaertner
(CFO).
|
21
|
1
|
Incorporated
by reference to the 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 the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2005, as filed with the SEC on August 15,
2005.
|
|
3
|
Incorporated
by reference to the Current Report on Form 8-K, as filed with the SEC on
October 14, 2008.
|
|
4
|
Incorporated
by reference to the Current Report on Form 8-K, as filed with the SEC on
May 1, 2008.
|
|
5
|
Incorporated
by reference to the Current Report on Form 8-K, as filed with the SEC on
September 6, 2007.
|
|
6
|
Incorporated
by reference to Exhibit 10.4 to the Annual Report on Form 10-K, as filed
with the SEC on December 28, 2009.
|
|
7
|
Incorporated
by reference to Exhibit 99.1 to the Current Report on Form 8-K, as filed
with the SEC on October 14, 2008.
|
22
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:
February 16, 2010
|
By:
|
/s/ Travis T. Prentice | |
Travis T. Prentice, President and CEO | |||
|
|||
Date: February 16, 2010 | By: | /s/ Derek J. Gaertner | |
Derek J. Gaertner, Chief Financial Officer |
23
EXHIBIT
INDEX
Exhibit
|
Description
|
Page
|
31.1
|
Section
302 Certification of Travis T. Prentice (CEO)
|
25
|
31.2
|
Section
302 Certification of Derek J. Gaertner (CFO)
|
26
|
32.1
|
Section
1350 Certification of Travis T. Prentice (CEO)
|
27
|
32.2
|
Section
1350 Certification of Derek J. Gaertner (CFO)
|
28
|
24