<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 December 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission file number 0-24412
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MACC Private Equities Inc.
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(Exact name of registrant as specified in its charter)
Delaware 42-1421406
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(State or other jurisdiction 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
---- ----
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
---- ----
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 December 31, 1999, the registrant had issued and outstanding 1,619,097
shares of common stock.
Page 1 of 17
Exhibit Index appears at page 14
<PAGE> 2
<TABLE>
<CAPTION>
INDEX
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PART I . FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets at
December 31, 1999 (Unaudited), and
September 30,
1999................................................ 3
Condensed Consolidated Statements of
Operations (Unaudited) for the three
months ended December 31, 1999, and the
three months ended December 31,
1998................................................ 4
Condensed Consolidated Statements of Cash
Flows (Unaudited) for the three months
ended December 31, 1999, and the three
months ended December 31,
1998................................................ 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........................ 10
PART II. OTHER INFORMATION................................... 12
Item 6. Exhibits and Reports on Form 8-K.................... 12
Signatures.......................................... 13
EXHIBIT INDEX.................................................... 14
</TABLE>
2
<PAGE> 3
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
(Unaudited)
----------- -------------
<S> <C> <C>
Assets
Loans and investments in portfolio securities at market
or fair value, cost of $31,773,604;
$26,770,110 at September 1999 $31,374,153 26,461,384
U.S. treasury bills, at cost, which approximates market 3,408,883 7,393,765
Cash 790,952 2,261,678
Certificates of deposit 498,999 1,092,999
Other assets, net 1,541,162 1,325,619
----------- ----------
Total assets $37,614,149 38,535,445
----------- ----------
Liabilities and stockholders' equity
Liabilities:
Debentures payable, net of discount $13,765,668 13,763,123
Incentive fees payable 177,679 991,980
Accrued interest 167,558 291,862
Accounts payable and other liabilities 57,946 94,332
----------- ----------
Total liabilities 14,168,851 15,141,297
----------- ----------
Stockholders' equity:
Common stock, $.01 par value per share;
4,000,000 shares authorized;
1,619,097 shares issued and outstanding 16,191 16,191
Additional paid-in-capital 16,510,381 16,510,381
Net investment income 333,465 365,079
Net realized gain on investments 6,984,712 6,811,223
Unrealized depreciation on investments (399,451) (308,726)
----------- ----------
Total stockholders' equity 23,445,298 23,394,148
----------- ----------
Total liabilities and stockholders' equity $37,614,149 38,535,445
=========== ==========
Net assets per share $ 14.48 14.45
=========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
MACC PRIVATE EQUITIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
December 31, December 31,
1999 1998
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<S> <C> <C>
Investment income:
Interest $ 503,677 458,398
Dividends 39,082 0
Other 53,815 22,010
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Total income 596,574 480,408
--------- ---------
Operating expenses:
Financial expenses 306,076 255,431
Management fees 235,220 197,666
Professional fees 30,302 49,223
Other 56,590 74,473
--------- ---------
Total operating expenses 628,188 576,793
--------- ---------
Investment expense, net (31,614) (96,385)
--------- ---------
Realized and unrealized gain on investments:
Net realized gain (loss) on investments 173,489 (46,217)
Net change in unrealized (depreciation)
appreciation on investments (90,725) 396,534
--------- ---------
Net gain on investments 82,764 350,317
--------- ---------
Net change in net assets
from operations $ 51,150 253,932
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
4
<PAGE> 5
MACC PRIVATE EQUITIES INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
December 31, December 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Increase in net assets from operations $ 51,150 253,932
----------- ----------
Adjustments to reconcile increase in net
assets from operations to net cash
used in operating activities:
Net realized and unrealized gain on investments (82,764) (350,317)
Other 19,199 17,466
Change in assets and liabilities:
Other assets (47,337) 112,717
Accrued interest, accounts payable,
and other liabilities (986,362) (248,063)
----------- ----------
Total adjustments (1,097,264) (468,197)
----------- ----------
Net cash used in operating activities (1,046,114) (214,265)
----------- ----------
Cash flows from investing activities:
Proceeds from disposition of and payments on
loans and investments in portfolio securities 8,928 155,327
Purchases of loans and investments in
portfolio securities (5,012,422) 0
Proceeds from disposition of other investments 2,274,250 721,670
Purchases of other investments (99,000) 0
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Net cash (used in) provided by investing activities (2,828,244) 876,997
Net (decrease) increase in cash and cash equivalents (3,874,358) 662,732
Cash and cash equivalents at beginning of period 5,065,309 1,886,985
----------- ----------
Cash and cash equivalents at end of period $ 1,190,951 2,549,717
=========== ==========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 411,124 411,124
=========== ==========
Supplemental disclosure of noncash investing and financing
information - Assets received in lieu of cash $ 184,860 0
=========== ==========
</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.
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<PAGE> 7
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
Three Months Ended December 31, 1999, Compared to Three Months Ended
December 31, 1998
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, first quarter total investment income of $596,574
was approximately 24% greater than total investment income of $480,408 for the
prior year first quarter. In the current year first quarter as compared to the
prior year first quarter, interest income increased $45,279, dividend income
increased $39,082 and other income increased $31,805. The increase in interest
income is attributable primarily to the new and follow-on portfolio investments
made by MACC in the current year first quarter that were structured as
subordinated debentures. The increase in dividend income is due to limited
liability corporation distributions received on two existing portfolio companies
in the current year first quarter as compared to no dividends received in the
prior year first quarter. The increase in other income is due to two new
portfolio company investments made in the current year first quarter in which
MACC received processing fees at the closing compared to an advisory fee
received on one portfolio company in the prior year first quarter.
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<PAGE> 8
Total operating expenses for the first quarter of the current year total
$628,188, an increase of approximately 9% as compared to total operating
expenses for the prior year first quarter of $576,793. Financial expense
increased by $50,645 due to additional borrowings of SBA-guaranteed debentures.
Management fees increased by $37,554 in the current year first quarter as
compared to the prior year first quarter due to the increase of assets under
management. Professional fees and other expenses decreased by $18,921 and
$17,883, respectively, in the current year first quarter as compared to the
prior year first quarter.
For the current year first quarter, MACC recorded net investment expense of
($31,614) as compared to net investment expense of ($96,385) during the prior
year first quarter.
During the current year first quarter, MACC recorded net realized gain on
investments of $173,489, as compared with net realized loss on investments of
$46,217 during the prior year period. The net realized gain on investments
during the current year first quarter consisted of an adjustment to the
valuation of an escrow to be received from the sale of one portfolio company
that closed in July 1999. These funds were received in January 2000. 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.
MACC recorded net change in unrealized appreciation/depreciation on
investments of ($90,725) during the current year first quarter, as compared to
$396,534 during the prior year period. 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.
The net change in unrealized appreciation/depreciation on investments of
($90,725) recorded during the current year first quarter is the effect of a
decrease in the fair value of one publicly traded equity investment in the MACC
consolidated investment portfolio, calculated in accordance with MACC's
valuation policies.
At the end of the current year first quarter, MACC's net asset value per
share was $14.48 as compared to the net asset value per share on September 30,
1999 of $14.45.
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").
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<PAGE> 9
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 December 31, 1999, MACC's U.S. treasury bills, certificates of
deposit and cash totaled $4,698,834. MACC has a commitment for an additional
$15,790,000 in SBA guaranteed debentures. MACC believes that its existing U.S.
treasury bills, certificates of deposit and cash, together with the available
proceeds from the $15,790,000 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. MACC has planned $11,000,000 in new and
follow-on investment activities during the current fiscal year.
Liquidity for the next several years will be impacted by principal
payments on MACC's debentures payable. Debentures payable are composed of
$13,790,000 in principal amount of SBA-guaranteed debentures issued by MACC's
subsidiary, MorAmerica Capital, which mature as follows: $2,450,000 in 2000,
$5,690,000 in 2001, $2,150,000 in 2003, $1,000,000 in 2007, and $2,500,000 in
2009. It is anticipated MorAmerica Capital would be able to roll over this debt
with new ten year debentures when it matures. MorAmerica Capital has obtained a
commitment of leverage from SBA which includes commitments to refinance these
debentures for another 10 year term. As indicated above, the total amount of
MorAmerica Capital's commitment from the SBA is $15,790,000.
PORTFOLIO ACTIVITY
During the three months ended December 31, 1999, MACC invested $5,012,422
in eight portfolio companies, consisting of $3,375,000 invested in three new
portfolio companies and $1,637,422 invested in follow-on investments in five
existing portfolio companies. MACC's investment level objectives for fiscal year
2000 call for total new and follow-on investments of $11,000,000. 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
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<PAGE> 10
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
December 31, 1999, 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.
YEAR 2000 COMPLIANCE
MACC has not experienced any Year 2000-related problems with its internal
data processing systems and software, and its not aware of any such problems
with its portfolio companies or other third parties (such as banks and vendors)
with whom it does business. It is possible, however, that Year 2000 compliance
problems exist that MACC cannot yet identify. If such problems result in
business losses for MACC's portfolio companies, MACC could incur losses in its
investments in such portfolio companies. MACC incurred no additional costs due
to Year 2000 compliance. Any additional costs were paid by the investment
advisor under the investment advisory agreement with MACC.
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
December 31, 1999, publicly traded equity securities in the MACC consolidated
investment portfolio were recorded at a fair value of $270,965. 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
$27,096. 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 December 31, 1999, was
$13,625,000, with a cost of $13,790,000. 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
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<PAGE> 11
MorAmerica Capital for debt of similar original maturity. None of MorAmerica
Capital's outstanding debentures payable are publicly traded. Market risk is
estimated as the potential increase in fair value resulting from a hypothetical
0.5% decrease in interest rates. Actual results may differ.
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2000
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Fair Value of Debentures Payable $13,625,000
Amount Over Cost $ 165,000
Additional Market Risk $ 183,000
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[Remainder of page intentionally left blank]
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
The Company filed no reports on Form 8-K during the three months ended
December 31, 1999.
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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: February 8, 2000 By: /s/ DAVID SCHRODER
----------------------------- --------------------------------
David Schroder, President
Date: February 8, 2000 By: /s/ ROBERT A. COMEY
----------------------------- --------------------------------
Robert A. Comey, Treasurer
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EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
(27) Financial Data Schedule 16
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 35,182,487
<INVESTMENTS-AT-VALUE> 34,783,036
<RECEIVABLES> 0
<ASSETS-OTHER> 1,541,162
<OTHER-ITEMS-ASSETS> 1,289,951
<TOTAL-ASSETS> 37,614,149
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 13,765,668
<OTHER-ITEMS-LIABILITIES> 400,183
<TOTAL-LIABILITIES> 14,168,851
<SENIOR-EQUITY> 16,191
<PAID-IN-CAPITAL-COMMON> 16,510,381
<SHARES-COMMON-STOCK> 1,619,097
<SHARES-COMMON-PRIOR> 1,246,392
<ACCUMULATED-NII-CURRENT> 333,465
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,984,712
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (399,451)
<NET-ASSETS> 23,445,298
<DIVIDEND-INCOME> 39,082
<INTEREST-INCOME> 503,677
<OTHER-INCOME> 53,815
<EXPENSES-NET> 628,188
<NET-INVESTMENT-INCOME> (31,614)
<REALIZED-GAINS-CURRENT> 173,489
<APPREC-INCREASE-CURRENT> (90,725)
<NET-CHANGE-FROM-OPS> 51,150
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 51,150
<ACCUMULATED-NII-PRIOR> 365,079
<ACCUMULATED-GAINS-PRIOR> 6,811,223
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
</TABLE>
