<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998
[ ] 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 00-22383
TRANSCEND THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 04-3174575
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
640 MEMORIAL DRIVE, CAMBRIDGE, MA 02139
(Address of principal executive offices)
(617) 374-1200
(Registrant's telephone number, including area code)
Indicate by check [x] 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 [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of May 12, 1998, was 5,762,749 shares of Common Stock, par value $0.01
outstanding.
This quarterly report on Form 10-Q contains 11 pages, of which this is page one.
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TRANSCEND THERAPEUTICS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
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PAGE
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (Unaudited)
- Condensed Balance Sheets - March 31, 1998 and
December 31, 1997 3
- Condensed Statements of Operations - Three months ended
March 31, 1998 and 1997, and the period from January 1, 1993
(Commencement of Operations) to March 31, 1998 4
- Condensed Statements of Cash Flows - Three months ended
March 31, 1998 and 1997 and the period from January 1, 1993
(Commencement of Operations) to March 31, 1998 5
- Notes to Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 7
OPERATIONS
PART II OTHER INFORMATION 10
</TABLE>
2
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PART 1: FINANCIAL INFORMATION
Transcend Therapeutics, Inc.
(A development stage company)
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Unrestricted cash and cash equivalents $ 10,999 $ 10,988
Restricted cash 3,526 5,805
Prepaid expenses and other current assets 76 161
Other assets 25 25
--------- ----------
Total current assets 14,626 16,980
Property and equipment, net 148 111
Other assets:
Patents and licenses, net 322 335
--------- ----------
Total Assets $ 15,096 $ 17,426
========= ==========
Current liabilities:
Accounts payable and accrued expenses $ 2,119 $ 1,660
Stockholder's equity:
Common stock 58 58
Additional paid-in capital 38,434 38,395
Deferred compensation (639) (707)
Deficit accumulated during the (24,876) (21,980)
development stage
--------- ----------
Total stockholder's equity 12,977 15,766
========= ==========
Total liabilities and stockholder's equity $ 15,096 $ 17,426
========= ==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
Transcend Therapeutics, Inc.
(A development stage company)
Condensed Statements of Operations
(Unaudited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Period Jan. 1, 1993
Ended March 31, (Commencement of
------------------------- operations) to
1998 1997 March 31, 1998
--------- -------- -------------------
<S> <C> <C> <C>
Research and development contract revenues
and license fees $ -- $ 5,000 $ 11,095
Operating expenses:
Research and development 2,224 501 18,565
General and administrative 883 971 10,441
--------- -------- --------
Total operating expenses 3,107 1,472 29,006
Interest income 213 25 1,081
Interest expense -- -- (532)
--------- -------- --------
Net income (loss) $ (2,894) $ 3,553 $ 17,362
========
Accretion of dividends and liquidation
preference on redeemable non-convertible
preferred stock -- (30)
========= ========
Net income (loss) to common $ (2,894) $ 3,523
stockholders
========= ========
Net income (loss) per common share $ (0.50) $ 4.47
========= ========
Net income (loss) per common share
assuming dilution $ (0.50) $ 0.83
========= ========
</TABLE>
See accompanying notes.
4
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Transcend Therapeutics, Inc.
(A development stage company)
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three months ended Period Jan. 1, 1993
March, 31, Commencement of
--------------------------- operations
1998 1997 to March 31, 1998
---------- ---------- --------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (2,894) $ 3,553 $(17,362)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization 23 18 286
Loss on sale of property and equipment -- -- 5
Expenses incurred with related party settled
with the issuance of common stock -- -- 304
Amortization of deferred compensation
expense 68 68 456
Issuance of preferred stock in lieu of interest -- -- 533
Change in operating assets and liabilities:
Restricted cash 2,279 (4,350) (3,526)
Prepaid expenses and other current assets 84 16 (77)
Other assets -- 16 (21)
Accounts payable and accrued expenses 493 64 2,077
-------- ------- -------
Net cash used in operating activities 53 (615) (17,325)
INVESTING ACTIVITIES:
Purchase of equipment and improvements (47) -- (224)
Proceeds from sale of equipment -- -- 2
-------- ------- -------
Net cash used in investing activities (47) -- (222)
FINANCING ACTIVITIES:
Issuance of common stock -- -- 16,740
Proceeds from issuance of debt -- 178 3,170
Payment on note payable to related party -- -- (170)
Deferred costs of public offering -- 77 (925)
Issuance of series A preferred stock warrants -- -- 16
Issuance of series A redeemable convertible
preferred stock -- -- 6,630
Issuance of series C redeemable convertible
preferred stock -- -- 2,000
Issuance of redeemable non-convertible
preferred stock -- 861 1,039
Proceeds from exercise of stock options 5 5 48
Purchase of treasury stock -- -- (2)
-------- ------- --------
Net cash provided by financing activities 5 1,121 28,546
-------- ------- --------
Increase in cash and cash equivalents 11 506 10,999
Cash and cash equivalents at beginning of period 10,988 640 --
======== ======= ========
Cash and cash equivalents at end of period $ 10,999 $ 1,146 $ 10,999
======== ======= ========
</TABLE>
See accompanying notes.
5
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Transcend Therapeutics, Inc.
(A development stage company)
Notes to Condensed Financial Statements
March 31, 1998
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements as of
March 31, 1998 and for the three-month periods ended March 31, 1998 and 1997
and for the period January 1, 1993 (commencement of operations) to March 31,
1998 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and the rules of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles to be presented for complete financial
statements. In the opinion of management, such financial information includes
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the financial position at such date and
the operating results and cash flows for such periods. Operating results for
the three-month period ended March 31, 1998 are not necessarily indicative of
the results that may be expected for the entire year. These condensed
financial statements and the related notes should be read in conjunction with
the Company's audited annual financial statements for the year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1998.
OVERVIEW
Transcend Therapeutics, Inc. (the "Company") develops novel
pharmaceuticals for unmet medical needs, with its initial compounds focusing on
the treatment of diseases associated with oxidative stress and resultant tissue
damage. In the second quarter of 1997, the Company began a Phase III clinical
trial to determine the safety and efficacy of the Company's lead product
candidate, Procysteine(R), in the treatment of acute respiratory distress
syndrome ("ARDS"). In March 1998, the Company suspended the Phase III Clinical
Trial following a recommendation of an independent Safety Monitoring Board. The
Safety Monitoring Board had determined following a review of preliminary
mortality data on a total of 214 patients enrolled through March 18, 1998 that
the incidence of all-cause mortality in patients receiving Procysteine i.v. was
higher than the incidence in patients receiving a placebo. In May 1998, the
Company announced that it was discontinuing the Phase III Clinical Trial because
its preliminary review of the mortality data on the 214 patients enrolled in the
study prior to its suspension uncovered no clear explanation of the lower
mortality observed in the placebo group. The Company intends to conduct a full
review of both the safety and efficacy data to determine whether to resume work
with Procysteine i.v. for the treatment of ARDS and expects to make a
determination concerning the future development of Procysteine in the third
quarter of 1998. If the Company does not resume, or significantly delays, its
work with Procysteine i.v. for the treatment of ARDS, the Company's business,
financial condition and results of operations would be adversely affected.
6
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NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of net income (loss)
per share:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Numerator:
Net income (loss): $(2,894,000) $3,553,000
Accretion of redeemable nonconvertible preferred stock -- (30,000)
----------- ----------
Numerator for basic earnings per share - net income
(loss) to common stockholders (2,894,000) 3,523,000
Numerator for diluted earnings per share - net income
(loss) to common stockholders after assumed
conversion (2,894,000) 3,523,000
----------- ----------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 5,761,399 789,023
Effect of dilutive securities:
Stock Options 307,342
Common Stock Warrants 5,000
Preferred Stock 3,122,167
----------- ----------
Dilutive potential common shares -- 3,434,509
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 5,761,399 4,223,532
----------- ----------
Basic earnings per share $ (0.50) $ 4.47
----------- ----------
Diluted earnings per share $ (0.50) $ 0.83
----------- ----------
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Financial Accounting Standard 130,
Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholder's equity to be included in other comprehensive income. During the
first quarters of 1998 and 1997, total comprehensive income was not materially
different from net income (loss).
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES.
THE FOLLOWING DISCUSSION CONSTITUTES FORWARD LOOKING STATEMENTS INSOFAR AS IT
RELATES TO PROGRESS IN THE COMPANY'S RESEARCH AND DEVELOPMENT PROGRAMS AND
CLINICAL TRIALS, PRODUCT DEVELOPMENT EXPECTATIONS, IN-LICENSING PLANS, EXPECTED
CASH EXPENDITURES AND EXPENSE LEVELS AND THE ADEQUACY OF THE COMPANY'S AVAILABLE
RESOURCES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE
AVAILABILITY OF FUNDS AND OTHER FACTORS DISCUSSED BELOW AND IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-22817), AS AMENDED AND THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1997. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS FORM 10-Q. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
7
<PAGE> 8
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
The Company earned no revenues in the three-month period ended
March 31, 1998. In the three-month period ended March 31, 1998, the Company
recognized as revenue a $5.0 million license fee received from BI in exchange
for which the Company granted BI exclusive rights to various patents related to
intravenous Procysteine(R) and which the Company has no obligation to repay.
The Company's total operating expenses for the three-month periods
ended March 31, 1998 and 1997 were $3.1 million and $1.5 million, respectively.
Research and development expenses increased to approximately $2.2 million for
the three months ended March 31, 1998 from approximately $0.5 million for the
three months ended March 31, 1997. The increase was due primarily to the
expenditures associated with the Company's Phase III ARDS trial which commenced
in the first quarter of 1997 and was discontinued in May 1998, including
staffing costs, clinical investigator grants, clinical site monitoring, clinical
supplies and data management expenses ("ARDS Development Expenses"). The Company
expects that ARDS Development Expenses related to the discontinued Phase III
Trial will continue through the third quarter of 1998 as the Company, together
with BI, continues to examine the safety and efficacy data to determine whether
to resume its work with Procysteine i.v. for the treatment of ARDS. In addition,
the Company expects that other research and development expenses will increase
as the Company undertakes additional clinical and preclinical programs. Prior to
the suspension of enrollment in March 1998, the Company had initiated 66
clinical sites, including 10 sites in Europe and enrolled 214 patients in the
Phase III ARDS trial.
General and administrative expenses decreased to approximately
$0.9 million for the three months ended March 31, 1998 from approximately
$1.0 million for the three months ended March 31, 1997. However, general and
administrative expenses for the first quarter of 1997 included approximately
$0.6 million of non-recurring administration charges associated with the signing
of the BI Agreement and costs associated with the Company's initial public
offering which was completed in July 1997. Excluding these non-recurring
charges, general and administration expenses increased due to higher
compensation expenses and recruiting costs and costs associated with the
transition of the Company's operations from a private entity to a publicly
traded company. As of May 1, 1998 the Company employed 21 full-time staff.
Other income (expense) for each of the three-month periods ended
March 31, 1998 and 1997 consists of interest income. Interest income for each
of the three-month periods ended March 31, 1998 and 1997 was $212,000 and
$25,000, respectively. The increase in interest income was due to higher
average cash balances following the Company's initial public offering of
Common Stock in July 1997.
For the three-month periods ended March 31, 1998 and 1997, the Company
had a net loss of $2.9 million and net income of $3.6 million, respectively. The
net income in the first quarter of 1997 was due to the receipt and recognition
of revenue consisting of a $5.0 million license fee from BI.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $14.5
million at March 31, 1998, compared to $16.8 million at December 31, 1997. These
balances included cash, the use of which is restricted for ARDS Development
Expenses, of approximately $3.6 million and $5.8
8
<PAGE> 9
million, respectively. Pursuant to the BI Agreement entered in February 1997,
the Company must use the BI license fee of $5.0 million and an equity investment
by BI of $5.0 million (received in the Company's initial public offering)
exclusively for ARDS Development Expenses. Since March 1997, the Company has
incurred $8.2 million of ARDS Development Expenses under the BI Agreement (of
which $6.4 million has been paid as of March 31, 1998), including $2.6 million
of ARDS Development Expenses incurred in the three-month period ended March 31,
1998.
Since its inception through March 31, 1998, the Company has financed
its operations primarily with $30.3 million from the sale of equity securities
and convertible notes, $11.1 million in contract research and license fee
payments, and $1.1 million in interest income.
The Company expects negative cash flows from operations to continue and
to increase for the foreseeable future.
If the Company were not to resume its work with Procysteine i.v. for
the treatment of ARDS, the Company's business, financial condition and results
of operations would be adversely affected. Even if the Company does continue its
work with Procysteine i.v. for the treatment of ARDS, the suspension and
discontinuation of the Phase III Clinical Trial is likely to result in a
substantial increase in costs, which would have a material adverse affect on the
business, financial condition and results of operations of the Company. There
can be no assurance however, that the Company's estimates of future operating
losses and operating expenses are accurate.
The Company's actual working capital needs and funding requirements
will depend upon numerous factors, some of which are beyond the Company's
control, including the progress of the external research and development
programs, the magnitude and scope of these activities, the timing, costs and
results of preclinical and clinical testing, the determination as to whether to
resume work with Procysteine i.v. for the treatment of ARDS, the costs of any
acquisitions and/or licensing of technology rights, the timing and costs of
obtaining regulatory approvals, the level of resources that the Company commits
to the development of manufacturing, marketing and sales capabilities, the
ability of the Company to establish new and maintain existing collaborative
arrangements with BI and other companies, the technological advances and
activities of competitors, the costs involved in preparing, filing, prosecuting,
maintaining, enforcing and defending patent claims and other intellectual
property rights, and other factors.
The Company intends to seek additional funding through public or
private financing, research and development financing, mergers and/or
acquisitions, collaborative relationships or otherwise. If additional funds are
raised by issuing equity securities, further dilution to stockholders will
result. Debt financing, if available, may involve restrictive covenants. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate certain of its product development programs, to license to
others rights to commercialize products or technologies that the Company would
otherwise seek to develop and commercialize itself or cease operations.
9
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PART II: OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds
(d) USE OF PROCEEDS
(1) The effective date of the registration statement on Form S-1
(the "Registration Statement") for the Company's initial
public offering of shares of its common stock, $.01 par
value per share, was July 2, 1997, and the commission file
number of the Registration Statement is 333-22817.
(2) (vii) From July 2, 1997, the effective date of
the Registration Statement, to March 31, 1998,
the Company has used the net offering proceeds
to the Company as follows:
Accrued contract research payment........... $130,000
Payment of operating expenses............... $390,000
Payment of expenses related to the Phase III
Clinical Trial.............................. $1,475,000
Total....................................... $1,995,000
Payment of expenses were to persons other than
directors, officers, general partners of the
Company or their associates, persons owning 10%
or more of the equity securities of the Company
or affiliates of the Company.
ITEM 6 Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) During the three months ended March 31, 1998, the Company filed one
Current Report on Form 8-K under the Securities Exchange Act of 1934,
as amended (Commission File No. 000-22383, filed March 25, 1998),
disclosing under Item 5 thereof (Other Events), its suspension of the
Phase III Trial of Procysteine for the treatment of ARDS.
10
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSCEND THERAPEUTICS, INC.
(Registrant)
Date May 15, 1998 By: /s/ Hector J. Gomez
------------ --------------------------------------
Hector J. Gomez, M.D., Ph.D.
President and Chief Executive Officer
Date May 15, 1998 /s/ B. Nicholas Harvey
------------ --------------------------------------
B. Nicholas Harvey
Chief Financial Officer
(Principal Financial and Accounting
Officer)
11
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EXHIBIT INDEX
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Item Description
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3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant is incorporated herein by reference to Exhibit 3.2 to
the Registrant's registration statement on Form S-1
(File No. 333-22817) under the Securities Act of 1933, as amended,
as declared effective on July 2, 1997 (the "S-1).
3.2 Amended and Restated By-Laws of the Registrant are incorporated
herein by reference to Exhibit 3.3 to the S-1.
27.1 Financial Data Schedule (period ended March 31, 1998)
27.2 Financial Data Schedule-Amended (period ended March 31, 1997)
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,998,503
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,626,359
<PP&E> 211,987
<DEPRECIATION> 63,972
<TOTAL-ASSETS> 15,096,176
<CURRENT-LIABILITIES> 2,119,079
<BONDS> 0
0
0
<COMMON> 57,628
<OTHER-SE> 12,919,469
<TOTAL-LIABILITY-AND-EQUITY> 15,096,176
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,106,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,894,302)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,894,302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,894,302)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TRANSCEND THERAPEUTICS, INC. FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,145,752
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,543,957
<PP&E> 76,189
<DEPRECIATION> 33,349
<TOTAL-ASSETS> 6,796,383
<CURRENT-LIABILITIES> 1,189,859
<BONDS> 0
0
21,067,350
<COMMON> 7,898
<OTHER-SE> (15,468,724)
<TOTAL-LIABILITY-AND-EQUITY> 6,796,383
<SALES> 5,000,000
<TOTAL-REVENUES> 5,000,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,472,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,552,637
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,552,637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,552,637
<EPS-PRIMARY> 4.47
<EPS-DILUTED> 0.83
</TABLE>
