<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission file number 0-24412
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MACC Private Equities Inc.
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(Exact name of registrant as specified in its charter)
Delaware 42-1421406
---------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 Second Street SE, Suite 800, Cedar Rapids, Iowa 52401
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(Address of principal executive offices)
(Zip Code)
(319) 363-8249
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Please indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At June 30, 2000, the registrant had issued and outstanding 1,941,879
shares of common stock.
Page 1 of 17
Exhibit Index appears at page 14
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INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Consolidated Balance
Sheets at June 30, 2000 (Unaudited),
and September 30, 1999.............................. 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three
months ended June 30, 2000, and
June 30, 1999, and the nine months
ended June 30, 2000 and June 30, 1999............... 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the nine
months ended June 30, 2000, and
the nine months ended June 30, 1999................. 5
Notes to Condensed Consolidated
Financial Statements................................. 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results Of Operations..... 7
Item 3. Quantitative and Qualitative
Disclosure About Market Risk......................... 11
PART II. OTHER INFORMATION.................................... 12
Item 6. Exhibits and Reports on Form 8-K..................... 12
Signatures........................................... 13
EXHIBIT INDEX.......................................................... 14
2
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
(Unaudited)
----------- -------------
Assets
<S> <C> <C>
Loans and investments in portfolio securities at market
or fair value, cost of $36,828,949;
$26,974,282 at September 1999 $37,461,750 26,665,556
U.S. treasury bills, at cost, which approximates market -- 7,393,765
Cash 1,545,440 2,261,678
Certificates of deposit 399,999 1,092,999
Other assets, net 1,295,036 1,121,447
----------- -----------
Total assets $40,702,225 38,535,445
=========== ===========
Liabilities and stockholders' equity
Liabilities:
Debentures payable, net of discount $16,319,287 13,763,123
Incentive fees payable 152,908 991,980
Accrued interest 212,689 291,862
Accounts payable and other liabilities 97,478 94,332
----------- -----------
Total liabilities 16,782,362 15,141,297
----------- -----------
Stockholders' equity:
Common stock, $.01 par value per share;
4,000,000 shares authorized;
1,941,879 shares issued and outstanding 19,419 16,191
Additional paid-in-capital 16,510,381 16,510,381
Net investment income 323,278 365,079
Net realized gain on investments 6,331,268 6,811,223
Unrealized appreciation (depreciation) on investments 735,517 (308,726)
----------- -----------
Total stockholders' equity 23,919,863 23,394,148
----------- -----------
Total liabilities and stockholders' equity $40,702,225 38,535,445
=========== ===========
Net assets per share $ 12.32 12.05
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
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MACC PRIVATE EQUITIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Investment income:
Interest $ 472,321 464,579 1,436,595 1,385,751
Dividends 256,761 1,503 437,436 227,536
Other 43,039 17,247 130,800 100,607
---------- ---------- ---------- ----------
Total income 772,121 483,329 2,004,831 1,713,894
---------- ---------- ---------- ----------
Operating expenses:
Financial expenses 341,746 274,821 960,952 761,448
Management fee 235,220 206,826 705,660 604,055
Professional fees 41,973 37,598 111,139 143,336
Other 86,653 86,397 258,881 302,739
---------- ---------- ---------- ----------
Total operating expenses 705,592 605,642 2,036,632 1,811,578
---------- ---------- ---------- ----------
Investment income (expense), net
before taxes 66,529 (122,313) (31,801) (97,684)
---------- ---------- ---------- ----------
Income taxes (10,000) -- (10,000) --
---------- ---------- ---------- ----------
Investment income (expense), net 56,529 (122,313) (41,801) (97,684)
---------- ---------- ---------- ----------
Realized and unrealized (loss) gain
on investments:
Net realized (loss) gain on investments (639,064) 163,731 (465,575) 77,732
Net change in unrealized appreciation
on investments 324,189 3,370,178 1,044,243 3,708,188
---------- ---------- ---------- ----------
Net (loss) gain on investments
before income taxes (314,875) 3,533,909 578,668 3,785,920
---------- ---------- ---------- ----------
Income taxes -- (501,000) -- (501,000)
---------- ---------- ---------- ----------
Net (loss) gain on investments (314,875) 3,032,909 578,668 3,284,920
---------- ---------- ---------- ----------
Net change in net assets
from operations $ (258,346) 2,910,596 536,867 3,187,236
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Increase in net assets from operations $ 536,867 3,187,236
------------ ------------
Adjustments to reconcile increase in net assets
from operations to net cash (used in)
provided by operating activities:
Net realized and unrealized gain on investments (578,668) (3,785,920)
Other 57,580 54,108
Change in assets and liabilities:
Other assets 109,817 48,348
Deferred income taxes -- 501,000
Accrued interest, accounts payable,
and other liabilities (926,470) 93,360
------------ ------------
Total adjustments (1,337,741) (3,089,104)
------------ ------------
Net cash (used in) provided by operating activities (800,874) 98,132
------------ ------------
Cash flows from investing activities:
Proceeds from disposition of and payments on
loans and investments in portfolio securities 1,343,833 4,068,191
Purchases of loans and investments in
portfolio securities (11,759,810) (4,671,824)
Proceeds from disposition of other investments 5,782,133 721,670
Purchases of other investments (99,000) --
------------ ------------
Net cash (used in) provided by investing activities (4,732,844) 118,037
------------ ------------
Cash flows from financing activities:
Proceeds from debt issuance 5,000,000 2,500,000
Payments of principal on debt (2,450,000) --
Payments for fractional shares in connection with stock split (11,152) (9,677)
Payments for debt issuance and commitment fees (125,000) (62,500)
------------ ------------
Net cash provided by financing activities 2,413,848 2,427,823
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,119,870) 2,643,992
Cash and cash equivalents at beginning of period 5,065,309 1,886,985
------------ ------------
Cash and cash equivalents at end of period $ 1,945,439 4,530,977
============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 981,849 885,251
============ ============
Supplemental disclosure of noncash investing and financing information -
Assets received in lieu of cash $ 848,944 72,872
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
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MACC PRIVATE EQUITIES INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of MACC Private Equities Inc. (MACC) and its wholly-owned
subsidiary MorAmerica Capital Corporation (MorAmerica Capital) which have been
prepared in accordance with generally accepted accounting principles for
investment companies. All material intercompany accounts and transactions have
been eliminated in consolidation.
The financial statements included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and instructions to Form 10-Q and Article 6 of Regulation S-X. The
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of MACC Private Equities Inc. and its
Subsidiary as of and for the year ended September 30, 1999. 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, 1999 has been derived from the
audited balance sheet as of that date.
Certain reclassifications have been made to the September 30, 1999,
financial statements to conform to the June 30, 2000, presentation.
6
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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, 1999, important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of MACC, including, without limitation, the high risk nature of MACC's
portfolio investments, any failure to achieve annual investment level
objectives, changes in prevailing market interest rates, and contractions in the
markets for corporate acquisitions and initial public offerings. MACC further
cautions that such factors are not exhaustive or exclusive. MACC does not
undertake to update any forward-looking statement which may be made from time to
time by or on behalf of MACC.
RESULTS OF OPERATIONS
Third Quarter and Nine Months Ended June 30, 2000, Compared to Third
Quarter and Nine Months Ended June 30, 1999
MACC's investment income includes income from interest, dividends and
fees. Net investment income represents total investment income minus operating
and interest expenses, net of applicable income taxes. The main objective of
portfolio company investments is to achieve capital appreciation and realized
gains in the portfolio. These are not included in net investment income.
However, another one of MACC's long-term goals is to achieve net investment
income and increased earnings stability in future years. In this regard, a
significant proportion of new portfolio investments are structured so as to
provide a current yield through interest or dividends. MACC also earns interest
on short term investments of cash.
During the current year, third quarter total investment income of
$772,121 was approximately 60% higher than total investment income of $483,329
for the prior year third quarter. In the current year third quarter as compared
to the prior year third quarter, interest income increased $7,742, dividend
income increased $255,258 and other income increased $25,792. The receipt of
dividend income is based on the performance of the limited liability companies
in MACC's portfolio and the timing of when these companies make distributions.
In the current year third quarter dividends were received on five portfolio
companies as compared to dividends received on four portfolio companies in the
prior year third quarter. In addition, during the prior year third quarter, MACC
reversed $113,312 of dividend income relating to a distribution received in the
prior year second quarter, which was subsequently repaid to the portfolio
company. Other income increased due to two new portfolio company investments
made in the current year third quarter in which MACC received processing fees at
the closing compared to one new portfolio company investment in the prior year
third quarter which MACC received a processing fee at closing.
7
<PAGE> 8
During the current year nine-month period, total income of $2,004,831
was a 17% increase over total income of $1,713,894 in the prior year nine-month
period. For the current year nine-month period as compared to the prior year
nine-month period, interest income increased to $1,436,595 from $1,385,751,
dividend income increased to $437,436 from $227,536 and other income increased
to $130,800 from $100,607. The increase in interest income is primarily due to
the growth in MACC's interest bearing portfolio investments and the interest
received from these investments. Dividend income for the current year nine-month
period is attributable to $419,436 received from four limited liability company
investments and a dividend of $18,000 received from one other portfolio company
investment compared to $67,030 received from three limited liability company
investments and dividends of $160,505 received from two other portfolio company
investments in the prior year nine-month period. Other income increased because
MACC made more new portfolio investments for which it received processing fees
during the current year nine-month period, as compared to the prior year
nine-month period.
Total operating expenses for the third quarter and nine-month period of
the current year total $705,592 and $2,036,632, respectively, increases of 17%
and 12%, respectively, as compared to total operating expenses for the prior
year third quarter of $605,642 and nine-month period of $1,811,578. Financial
expense increased by $66,925 and $199,504 due to additional borrowings of
SBA-guaranteed debentures in the current year third quarter and nine-month
period, respectively. Management fees increased to $235,220 from $206,826 in the
current year third quarter as compared to the prior year third quarter and
increased to $705,660 from $604,055 in the current nine-month period as compared
to the prior year nine-month period due to the increase in assets under
management. Professional fees increased by $4,375 in the current year third
quarter as compared to the prior year third quarter and decreased by $32,197 in
the current year nine-month period as compared to the prior year nine-month
period. Other expenses, which include administrative expenses associated with
being a public corporation, were substantially unchanged in the current year
third quarter as compared to the prior year third quarter, and decreased by
$43,858 in the current year nine-month period.
For the current year third quarter and nine-month period, MACC recorded
net investment income before income taxes of $66,529 and net investment loss
before income taxes of ($31,801), respectively, as compared to net investment
loss of ($122,313) and ($97,684) during the prior year third quarter and
nine-month period, respectively.
During the current year third quarter and nine-month period, MACC
recorded net realized loss on investments before income taxes of ($639,064) and
($465,575), respectively, as compared with net realized gain on investments
before income taxes during the prior year third quarter and nine-month period of
$163,731 and $77,732, respectively. In the current year third quarter, MACC
realized a gain of $937,498 from one portfolio investment and realized losses of
$1,576,562 from two portfolio investments. Management does not attempt to
maintain a comparable level of realized gains from year to year or quarter to
quarter but instead attempts to maximize total investment portfolio appreciation
through realizing gains in the disposition of securities and investing in new
portfolio investments.
8
<PAGE> 9
MACC recorded net change in unrealized appreciation/depreciation on
investments of $324,189 during the current year third quarter, as compared to
$3,370,178 during the prior year period. For the current year nine-month period
as compared to the prior year nine-month period, net change in unrealized
appreciation/depreciation on investments was $1,044,243 and $3,708,188,
respectively. The net change in unrealized appreciation/depreciation on
investments of $324,189 recorded during the current year third quarter is the
net effect of a reversal of appreciation of $400,000 in one portfolio investment
which was sold for a realized gain, the reversal of depreciation of $1,483,333
in two portfolio investments which were written off as MACC realized the losses
from these investments and decreases in the fair value of two portfolio
investments totaling $759,144 in the MACC consolidated investment portfolio,
calculated in accordance with MACC's valuation polices.
Net change in unrealized appreciation/depreciation on investments
represents the change for the period in the unrealized appreciation on MACC's
total investment portfolio net of unrealized depreciation on MACC's total
portfolio investment. Generally, when MACC increases the fair value of a
portfolio investment above its cost, the unrealized appreciation item for the
portfolio as a whole increases, and when MACC decreases the fair value of a
portfolio investment below its cost, the unrealized depreciation item for the
portfolio as a whole increases. When MACC sells an appreciated portfolio
investment for a gain, unrealized appreciation for the portfolio as a whole
decreases as the gain is realized. Similarly, when MACC sells a depreciated
portfolio investment for a loss, unrealized depreciation for the portfolio as a
whole decreases as the loss is realized.
At the end of the current year third quarter, MACC's net asset value
per share was $12.32 as compared to the net asset value per share on September
30, 1999 of $12.05.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
To date, MACC has relied upon several sources to fund its investment
activities, including MACC's cash equivalents and cash, and the Small Business
Investment Company ("SBIC") capital program operated by the Small Business
Administration (the "SBA").
MACC, through its wholly-owned subsidiary, MorAmerica Capital, from
time to time may seek to procure additional capital through the SBIC capital
program to provide a portion of its future investment capital requirements. At
present, there is availability of capital for the next five years through the
SBIC capital program and MACC anticipates that there will be capital available
in future periods.
As of June 30, 2000, MACC's certificates of deposit and cash totaled
$1,945,439. MACC has a commitment for an additional $10,790,000 in SBA
guaranteed debentures. MACC believes that its existing certificates of deposit
and cash, together with the available proceeds from the $10,790,000 in SBA
guaranteed debentures, additional commitments anticipated through the SBIC
capital program and other anticipated cash flows, will provide adequate funds
for MACC's anticipated cash requirements during the current fiscal year and over
the next two years, including portfolio investment activities, principal and
interest payments on outstanding debentures payable and administrative expenses.
In June of the current year, MACC increased its investment level objectives for
the current year to $17,000,000 from $14,000,000 in new and follow-on
investments.
9
<PAGE> 10
Liquidity for the next several years will be impacted by principal
payments on MACC's debentures payable. Debentures payable are composed of
$16,340,000 in principal amount of SBA-guaranteed debentures issued by MACC's
subsidiary, MorAmerica Capital, which mature as follows: $5,690,000 in 2001,
$2,150,000 in 2003, $1,000,000 in 2007, $2,500,000 in 2009, and $5,000,000 in
2010. It is anticipated MorAmerica Capital would be able to roll over this debt
with new ten year debentures when it matures. As indicated above, the total
amount of MorAmerica Capital's commitment from the SBA is $10,790,000.
PORTFOLIO ACTIVITY
During the nine months ended June 30, 2000, MACC invested $11,759,809
in 20 portfolio companies, consisting of $8,340,051 invested in ten new
portfolio companies and $3,419,758 invested in follow-on investments in ten
existing portfolio companies. MACC's investment level objectives for fiscal year
2000 call for a revised investment goal of total new and follow-on investments
of $17,000,000. Although the timing of new and follow-on portfolio investments
is somewhat uncertain, MACC anticipates that it will meet its investment level
objectives for the current fiscal year. However, management views investment
level objectives for any given year as secondary in importance to MACC's
overriding concern of investing in only those portfolio companies which satisfy
MACC's investment criteria.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of MACC's outstanding common stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus total liabilities
by the total number of shares outstanding at the date as of which the
determination is made.
In calculating the value of total assets, securities that are traded in
the over-the-counter market or on a stock exchange are valued in accordance with
the current valuation policies of the Small Business Administration ("SBA").
Under SBA regulations, publicly traded equity securities are valued by taking
the average of the close (or bid price in the case of over-the-counter equity
securities) for the valuation date and the preceding two days. This policy
differs from the Securities and Exchange Commission's guidelines which utilize
only a one day price measurement. MACC's use of SBA valuation procedures did not
result in a material variance as of June 30, 2000, from valuations using the
Securities and Exchange Commission's guidelines.
All other investments are valued at fair value as determined in good
faith by the Board of Directors. The Board of Directors has determined that all
other investments will be valued initially at cost, but such valuation will be
subject to semi-annual adjustments and on such other interim periods as are
justified by material portfolio company events if the Board of Directors
determines in good faith that cost no longer represents fair value.
10
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MACC is exposed to market risk from changes in market prices of
publicly traded equity securities held in the MACC consolidated investment
portfolio. At June 30, 2000, publicly traded equity securities in the MACC
consolidated investment portfolio were recorded at a fair value of $195,059. In
accordance with MACC's valuation policies and SBA regulations, the fair value of
publicly traded equity securities is determined based upon the average of the
closing prices (or bid price in the case of over-the-counter equity securities)
for the valuation date and the preceding two days. The publicly traded equity
securities in the MACC consolidated investment portfolio thus have exposure to
price risk, which is estimated as the potential loss in fair value due to a
hypothetical 10% adverse change in quoted market prices, and would amount to a
decrease in the recorded value of such publicly traded equity securities of
approximately $19,505. Actual results may differ.
MACC is also exposed to market risk from changes in market interest
rates that affect the fair value of MorAmerica Capital's debentures payable
determined in accordance with Statement of Financial Accounting Standards No.
107, Disclosures About Fair Value of Financial Instruments. The estimated fair
value of MorAmerica Capital's outstanding debentures payable at June 30, 2000,
was $16,032,000, with a cost of $16,340,000. Fair value of MorAmerica Capital's
outstanding debentures payable is calculated by discounting cash flows through
estimated maturity using the borrowing rate currently available to MorAmerica
Capital for debt of similar original maturity. None of MorAmerica Capital's
outstanding debentures payable are publicly traded. Market risk is estimated as
the potential increase in fair value resulting from a hypothetical 0.5% decrease
in interest rates. Actual results may differ.
-----------------------------------------------------
2000
-----------------------------------------------------
Fair Value of Debentures Payable $16,032,000
Amount Below Cost $ 308,000
Additional Market Risk $ 156,000
-----------------------------------------------------
EFFECT OF NEW ACCOUNTING STANDARDS
SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by SFAS 137, will be effective for MACC for periods beginning after
October 1, 2000. MACC has no derivative or hedging activities, therefore, it is
not anticipated this statement will have a material effect on its results of
operations or financial position.
11
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no items to report.
ITEM 2. CHANGES IN SECURITIES
There are no items to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no items to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
There are no items to report.
ITEM 5. OTHER INFORMATION
There are no items to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(27) Financial Data Schedule
No other exhibits are applicable.
(b) Reports on Form 8-K
MACC filed no reports on Form 8-K during the three months ended June
30, 2000.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACC PRIVATE EQUITIES INC.
Date: 8/10/00 By: /s/ David Schroder
------------------------------------
David Schroder, President
Date: 8/10/00 By: /s/ Robert A. Comey
-------------------------------------
Robert A. Comey, Treasurer
13
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EXHIBIT INDEX
Exhibit Description Page
(27) Financial Data Schedule 15
14
