SOUTHERN INVESTORS SERVICE CO INC, 10KSB40, 1996-03-29

SOUTHERN INVESTORS SERVICE CO INC
10KSB40, 1996-03-29
HOTELS & MOTELS

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 04863

SOUTHERN INVESTORS SERVICE COMPANY, INC.
(Name of small business issuer in its charter)

Delaware 74-1223691
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2727 North Loop West, Suite 200,
Houston, Texas 77008
(Address of principal executive offices) (Zip Code)

Issuer's telephone number (713) 869-7800

Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered
None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock $1.00 Par Value
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]

Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]

State issuer's revenues for its most recent fiscal year. $3.8 Million

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act). $0.00 as
of March 17, 1996

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 3,168,929 shares, Common Stock $1.00
Par Value as of March 17, 1996

DOCUMENTS INCORPORATED BY REFERENCE

Information contained in the Company's proxy statement to be used in connection
with the 1996 annual meeting is incorporated by reference into Part III.
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PART I

ITEM 1. DESCRIPTION OF BUSINESS

Southern Investors Service Company, Inc., was incorporated under the laws of
the State of Delaware in 1972. Southern Investors Service Company, Inc. and its
subsidiaries (Company) are engaged in real estate management and development in
Texas.

The Company's real estate development operations have been significantly
reduced as a result of debt settlements with lenders and other creditors during
the past several years. The Company's ability to generate cash flow from
operations has also been severely reduced. Cash flow from operations has not
been adequate to meet the Company's obligations for the past several years and
management projects negative cash flow from operations for 1996. The Company
has emphasized the management of its resort development in west Texas and the
management of real estate development and operations for others. Currently, the
Company's primary operations include the management of nine residential
developments, two office buildings and its resort in west Texas. See Note 7 of
the Notes to Consolidated Financial Statements of the Company for a discussion
of related party transactions. Some of these activities are conducted through
joint ventures in which the Company has equity interests. Unless otherwise
indicated, the term "Company" includes these joint ventures.

The Company's future financial condition depends upon its ability to generate
cash at levels to meet operating needs and debt obligations. Management is
currently reviewing possible options to settle the Company's existing
liabilities with its very limited resources. These options include, but are not
limited to, continued efforts to reduce operating expenses (including interest),
attempts to increase revenues of the Company's resort development, continued
negotiations with various creditors to settle their accounts for cash payments
at substantially less than the amount due, the settlement of liabilities through
the transfer of assets to creditors in satisfaction of their claims, a possible
plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code or possible
liquidation of the Company.

LIABILITY SETTLEMENTS

During 1992, the Company restructured the debt of one of its partnerships. In
connection with this restructure, the Company issued a $300,000 principal amount
note payable to the other joint venture partner. This note was secured by the
Company's 20% equity interest in the venture and was due September 1995. Due to
the Company's financial condition, it was unable to retire this note at
maturity. During December 1995, the partnership through which the Company held
its 20% interest in the joint venture admitted a new limited partner (Walter M.
Mischer, Trustee) in exchange for a capital contribution of $306,000. Mr.
Mischer is Chairman of the Board of Directors of the Company. These funds were
used to repay the note and accrued interest. In exchange for the capital
contribution, the new limited partner will receive (i) the first $306,000 of any
future cash flow, (ii) interest on the $306,000 at 10% compounded annually, and
(iii) 66 2/3% of any remaining cash flow. As a result of this transaction, the
Company's effective ownership in this partnership was reduced to 6.7%.

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During 1995, a joint venture note payable with an outstanding principal
balance of $5.2 million was due and payable. The joint venture in which the
Company had a 19.4% ownership interest was unable to repay this note at its
maturity. During January 1996, the venture obtained a new loan from a bank in
the original principal amount of $3.0 million. The proceeds of this new loan
were used to settle the $5.2 million loan plus accrued interest in full. As a
condition of the new loan, the bank required a ten year lease on the entire
building to be executed by the partners in the ratio of their ownership
interests. However, due to the financial condition of the Company, the bank
would not accept the Company's lease. In addition, the building is in need of
approximately $400,000 in repairs. The Company would have been required to make
an $80,000 capital contribution to fund these repairs. The Company, also owed
the venture approximately $70,000 in past due rent for periods prior to 1992.
This amount was forgiven in January 1996. As a result, the Company sold its
partnership interest to Hallmark Residential Group, Inc. (Hallmark), a company
controlled by Mr. Mischer. In exchange, Hallmark assumed the Company's
obligations in connection with this joint venture and entered into the ten year
lease. In connection with this sale, the Company retained a 25% cash flow
interest in Hallmark's 20% ownership interest.

The Company's other debt consists of unsecured notes payable which were due
September 30, 1993. These notes are payable to trade creditors of a subsidiary
of the Company that ceased operations during 1989. The Company has made offers
to these creditors to settle existing claims at less than the amounts due. As
of December 31, 1994, the Company had made payments of $78,000 in settlement of
$313,000 in principal amount of these trade creditor notes. During 1995, the
Company made payments of $7,000 in settlement of $29,000 in principal amount of
these trade creditor notes plus accrued interest. As of December 31, 1995,
$732,000 in trade creditor notes and related accrued interest remain in default.

During 1994, the Company reached agreements with several of its creditors to
settle outstanding liabilities for less than the amount due. These settlements
included the payment of $258,000 in settlement of a promissory note which had an
outstanding principal balance of $1,148,000. This promissory note had been
issued by the Company in connection with the 1992 restructure of a partnership
in which the Company owns a minority interest.

In addition, during 1994, the Company reached an agreement with one of its
lenders to settle a promissory note that matured September 30, 1993 for a cash
payment of $114,000. This note had been issued by the Company as part of the
1990 debt settlement and had a balance of $892,000 including accrued and unpaid
interest.

The Company had an incentive plan for certain key employees (Incentive Plan).
To implement the Incentive Plan, the Company formed limited partnerships to
purchase, hold, develop and dispose of improved and unimproved real estate as
authorized by the Compensation Committee of the Board of Directors. The Company
is the general partner of such limited partnerships, holding an 85% interest.
The limited partners who hold the remaining 15% interest are certain current and
former employees, including one who serves as a director of the Company. Under
the terms of the limited partnership agreements, the Company may, at its option,
and is required, at the option of the limited partner, to purchase the
partnership interest of a limited partner who is no longer employed by the
Company or any of its subsidiaries. The agreements contain complex provisions
regarding the purchase price payable, which may be substantial, to a limited
partner upon exercise of such option. As of December 31, 1993, the Company had
accrued $807,000 in connection with its obligations in

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connection with the Incentive Plan. During 1994, the Company made payments of
$202,000 in satisfaction of all obligations under the Incentive Plan, and
recorded an extraordinary gain of $605,000.

The settlements discussed above resulted in extraordinary gains of $33,000 in
1995 and $2,374,000 in 1994.

LITIGATION SETTLEMENTS

During 1995, the Company settled a 1992 lawsuit in connection with the
Company's guarantee of performance of a former subsidiary. The lawsuit was
settled for a promissory note of $175,000 and a $10,000 initial cash payment.
This amount had been accrued by the Company during 1991.

On April 20, 1994, the Company executed an agreement to settle a 1988 lawsuit
against KeepRite, Inc. (KeepRite), Intercity Gas Company (IGC) and Heil-Quaker
(collectively, Defendants). In accordance with this agreement, the Defendants
agreed to pay the Company $1,300,000 (including $100,000 attributable to claims
by Jackson Supply Company, a former subsidiary of the Company). In addition,
the Company and the Defendants individually and collectively released all of
their respective claims, including the Defendants' claim against the Company
which had been recorded by the Company at $318,000. The Company received
$892,000 after the payment of the amount attributable to Jackson Supply Company
and the payment of outstanding legal fees and other expenses totaling $308,000
(of which $108,000 had been accrued in prior periods). See Note 1 of the Notes
to Consolidated Financial Statements of the Company for a discussion of the
litigation settlements.

CONTINUED OPERATIONS

Management believes that the settlements discussed above have improved the
Company's financial condition and its ability to pursue and realize investment,
development and management opportunities in real estate properties. However,
debt totaling $1,859,000 has matured and is currently due and debt totaling
$4,064,000 matures in 1996. See Note 5 of the Notes to Consolidated Financial
Statements for a discussion of the Company's debt.

The ability of the Company to continue as a going concern is dependent upon
its ability to settle or restructure its remaining debt and other obligations
and generate positive cash flow to cover its operating expenses and other cash
requirements. The Company may develop real estate if it is able to obtain
financing for the acquisition and development of real estate and subsequently
sell the developed residential lots and commercial tracts. There is no
assurance that the Company could arrange to borrow funds or raise capital from
other sources. The Company's financial statements have been prepared in
conformity with generally accepted accounting principles assuming that the
Company will continue as a going concern. The financial statements of the
Company do not include any adjustments relating to the recoverability of asset
carrying amounts that might be necessary should the Company be unable to
continue as a going concern. In the event the Company fails to continue as a
going concern, the value of its assets may be substantially less than the value
that normally would be realized in the ordinary course of business.

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REAL ESTATE OPERATIONS

GENERAL

The Company's most significant real estate asset consists of a resort
development in west Texas known as Lajitas on the Rio Grande. Rental and other
revenue from the operation of this facility totaled $2.3 million and $2.1
million for the years ended December 31, 1995 and 1994, respectively. See Item
2, "Description of Property" for more information concerning this investment.

Since 1990, the Company has emphasized the management of real estate
development for others. The Company has entered into contracts for the
management, operation and development of residential property, which provide for
the various administrative functions. As of December 31, 1995, the Company
managed eight residential developments, which provide for total monthly payments
of approximately $47,000. Mr. Mischer has effective ownership interests ranging
from 50% to 100% in these residential developments. In addition, during 1995,
the Company entered into a management agreement which provides for monthly
payments of $6,000 with a partnership in which Mr. Walter M. Mischer, Jr. has a
50% ownership interest. Such contracts may be canceled on thirty days notice.
See Note 7 of the Notes to Consolidated Financial Statements of the Company for
a discussion of management contracts with related parties.

The Company has developed commercial office buildings and currently has a 6.7%
equity interest in a ten-story building located at 2707 North Loop West. The
Company also has a cash flow interest in 2727 North Loop West, where its
corporate headquarters are located. The Company has management contracts
covering these two properties which provide for monthly fees of approximately
$10,000. Approximately 85% of the aggregate space in these two buildings is
leased.

RESIDENTIAL MANAGEMENT AND DEVELOPMENT

In connection with its development and management activities, the Company has
historically formed ventures with one or more parties to develop residential
subdivisions and commercial sites in order to obtain additional financing
capacity, spread any risk of loss and, in some instances, obtain rights to land
owned by venture partners. These subdivisions, most of which are located in
independent school districts within a 25-mile radius of downtown Houston, may
include residential lots and commercial sites held for sale to builders and
other developers. Acquisitions of multi-acre tracts are generally made on terms
which include a cash down payment and the issuance to the selling party or a
bank of an interest-bearing promissory note secured by a mortgage on the
development acreage.

Following the purchase of development acreage, a master plan is devised for
the proposed subdivision setting forth the residential lots and commercial sites
to be developed. The Company contracts for and supervises the construction of
all improvements to the development acreage to prepare the lots for sale to
homebuilders. Unless the acreage is located within a municipality or an
existing utility district, a municipal utility district is formed to supply
water, sanitary sewage and storm drainage service to the planned subdivision.
The Company bears the full cost of construction of underground utilities in
those subdivisions not located in utility districts. The cost of development is
partially defrayed in subdivisions located in utility districts, since the
utility districts usually finance 70% of the cost of engineering and
constructing the water and sanitary lines, storm sewer facilities

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and other storm drainage, and 100% of the cost of sewage treatment and water
plants. The Company will advance the utility district's share of such costs
during construction, which advance is later reimbursed by the utility district
out of designated proceeds from the sale of an issue of its municipal tax and
revenue bonds. Reimbursement is dependent upon each utility district's ability
to sell bonds.

Improved lots are sold to builders in parcels of lots for cash or pursuant to
contracts which may provide for an initial down payment on the aggregate lot
purchase price. The balance of the purchase price, including interest thereon,
must be paid within a specified time period. Before builders can commence
construction, the full purchase price of the lots upon which they intend to
build must be paid. Upon such payment, the lots are conveyed to the builder.
The lot sales contracts are generally option contracts and cannot be
specifically enforced by the Company. These lot sales contracts provide for the
forfeiture of any down payment in the event the builder does not timely purchase
the lots.

Commercial sites are sold either for cash, cash and nonrecourse promissory
notes secured by the property, or contracts of sale providing for a cash down
payment and subsequent repayment of the indebtedness over a period of years.

To finance the development of a subdivision, the Company has historically
obtained development loans from banks, which loans are secured by the acreage
under development. Although the development acreage is available to satisfy
such loans, the loans are usually guaranteed in part by the Company and its
joint venture partners. The terms of each development loan are negotiated at
the time the loan is extended. The Company can offer no assurance that it will
be able to continue to obtain such financing in the future. The debts and
obligations of the Company and its joint ventures are discussed more fully in
Notes 3 and 5 of the Notes to Consolidated Financial Statements of the Company.

The Company's equity interests in real estate joint ventures range from 6.7%
to 50%. As of December 31, 1995, the real estate joint ventures accounted for
on the equity method had total assets of $7.0 million. See Note 3 of the Notes
to Consolidated Financial Statements of the Company for a discussion of the
Company's investments in joint ventures, and Note 7 for a discussion of lot
sales contracts with related parties.

EMPLOYEES

The Company employed a total of 84 persons on a full-time basis and a total of
4 persons on a part-time basis, as of December 31, 1995.

COMPETITION

Real estate management and development are highly competitive businesses. The
Company competes with a number of other experienced managers and developers in
the greater Houston area. Certain of these competitors operate on a nationwide
basis and have substantially greater financial resources than the Company. The
Company's resort development in west Texas does not have any direct competition
due to its location. The only other resort facility in the area offering
accommodations and other amenities is the Big Bend National Park.

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REGULATION

The Company's real estate management and development activities are subject to
regulation by municipal, county, state and federal governments. Federal
regulatory agencies, such as the Veterans Administration and the Federal Housing
Administration, provide mortgage guarantees or insurance to lenders only when
the mortgaged properties comply with requirements affecting the design criteria
of the subdivisions. Most of the Company's subdivisions are designed to comply
with the requirements of such federal agencies, although in many instances
mortgage funds are supplied by conventional lenders. The Company may be
required to participate in filing environmental impact statements or similar
documents prior to the commencement of the development of certain subdivisions
that are subject to the provisions of the Environmental Protection Act.
Subdivision developments within the city of Houston or its extraterritorial
jurisdiction are also subject to certain land platting and other standards
administered by the City Planning Commission. In addition, the Texas Water
Commission must issue a permit approving the discharge of treated sewage
effluents and the Harris-Galveston Coastal Subsidence District must issue a
water well permit. Compliance with the regulations promulgated by these
authorities does not have a materially adverse effect on the operations of the
Company.

The successful development of subdivisions in the greater Houston area is
dependent to a significant degree upon the developer's ability to secure the
formation of municipal utility districts for its subdivisions. The organization
of municipal utility districts is subject to approval by either the Legislature
of the State of Texas or the Texas Water Commission. The issuance of bonds by a
municipal utility district is subject to the approval of the projects as
feasible by the Texas Water Commission and the approval of the bonds as legally
issuable by the Attorney General of the State of Texas. Municipal and county
governments also regulate certain municipal utility district activities.

The Company's real estate management and development activities are subject to
local building code requirements.

CURRENT BUSINESS CONDITIONS

Current economic conditions affecting the Company and its financial condition
are discussed more fully in Item 6, "Management's Discussion and Analysis or
Plan of Operation" and in Note 1 of the Notes to Consolidated Financial
Statements of the Company.

ENVIRONMENTAL MATTERS

The operations of the Company are subject to various federal, state and local
laws and regulations relating to the environment. Violation of any of these
federal statutes and regulations or orders issued thereunder, as well as any
relevant state and local laws and regulations, could result in civil or criminal
enforcement actions. In general, the Company's investment in real estate will
continue to be affected by federal, state and local environmental laws and
regulations. Prior to land acquisition or development, the Company currently
has engineers or other qualified experts perform geological fault and
environmental site assessments, wetland determinations and review of hazardous
and toxic waste site history. Development of some properties may be
significantly impacted by wetlands regulations. There is a controversy between
the Army Corps of Engineers and the U.S. Fish and Wildlife Department as to the
application of certain wetlands regulations. The U.S. Fish and Wildlife

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Department's interpretation of these regulations could mean that significant
portions of properties that were considered not to contain wetlands, now, in
fact, contain significant wetland areas. To qualify for Federal Housing
Administration's approved status, all subdivisions are subject to inspection for
wetlands by the U.S. Fish and Wildlife Department. In the absence of the Army
Corps of Engineers or U.S. Fish and Wildlife Department's inspection of the
property, it cannot be accurately predicted as to whether or not any particular
property contains wetlands. In addition to other applicable law, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (CERCLA), provides for cleanup of sites from which there has been a
release or threatened release of hazardous substances and authorizes the
Environmental Protection Agency (EPA) to take any necessary response actions at
such sites, including requiring potentially responsible parties (PRPs) to take
or pay for such actions. PRPs are broadly defined under CERCLA and include past
and present owners and operators of a site. Courts have interpreted CERCLA to
impose strict, joint and several liability upon persons liable for response
costs. The Company is not aware of any potentially material environmental
liability relating to any property in which the Company has an interest;
however, there can be no assurance that no such liability exists, or that future
developments will not result in material costs and liabilities being imposed on
the Company. It is possible that future environmental requirements may be more
stringent than current requirements.

OTHER FACTORS

The real estate management and development businesses are sensitive to changes
in economic conditions, interest rates, availability of mortgage funds for new
residential and commercial construction, employment levels and demand for
housing in a particular area. Adverse changes in these factors have from time
to time resulted in the inability by builders to perform under contracts for the
purchase of lots in certain of the Company's subdivisions. Such contracts are
usually renegotiated or terminated without penalty except for the forfeiture of
the builder's down payment. Scarcity of mortgage funds, high unemployment and
decreased housing demand could affect the Company adversely.

The Company's subdivision management and development activities, as well as
its resort in west Texas, are sensitive to weather conditions. Prolonged
periods of inclement weather may impact these operations adversely.

FEDERAL TAX LAW CHANGES

The effects on the Company of the Revenue Reconciliation Act of 1993 and the
Tax Reform Act of 1986 are discussed in Note 4 of the Notes to Consolidated
Financial Statements of the Company.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's most significant real estate asset consists of a resort
development in west Texas known as Lajitas on the Rio Grande. The Company's net
investment in this property was $2.7 million or 66% of total assets as of
December 31, 1995. The development consists of approximately 24,000 acres of
land located in the southwest portion of Brewster County adjacent to the western
border of Big Bend National Park. A substantial portion of the 24,000 acres is
pledged to secure borrowings of the Company. The development includes a hotel,
condominiums, a restaurant, meeting rooms,

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various shops and other facilities in 47 separate one and two-story buildings
containing a total of approximately 118,000 square feet. The development has
ancillary site improvements consisting of a nine-hole golf course, a
recreational vehicle park, a swimming pool, tennis courts, a landing strip and
two airplane hangars.

Rental and other revenues from the operation of these facilities totaled $2.3
million and $2.1 million for the years ended December 31, 1995 and 1994,
respectively. Rental revenue and occupancy statistics for the Company's resort
operations for each of the two years ended December 31, 1995 are summarized as
follows:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1994
------------ -----------
<S> <C> <C>
Hotel rooms:
% Occupancy 52% 44%
Average rate $ 55.19 $ 58.78
Total revenue $ 950,000 $ 830,000
Condominiums:
% Occupancy 34% 28%
Average rate $ 116.21 $ 98.13
Total revenue $ 312,000 $ 227,000

Total rental revenues $1,262,000 $1,057,000
Restaurant, bar and golf course revenues 740,000 700,000
Other revenues 331,000 348,000
---------- ----------
Total revenues $2,333,000 $2,105,000
========== ==========
</TABLE>

The development has a basis for federal income tax reporting of approximately
$1.8 million as of December 31, 1995. The improvements are depreciated using
the straight-line method with lives which range from twelve to forty years. The
realty tax rate for 1995 was $1.84 per $100 assessed value and total taxes were
approximately $69,000 for the year ended December 31, 1995. Due to the location
of the development and lack of public fire protection, the cost of obtaining
insurance is considered prohibitive; consequently, property insurance is not
carried by the Company for this development.

The Company's principal executive offices are located in northwest Houston and
are leased on a month to month basis for an aggregate annual rental of
approximately $75,000. Of the 20,000 square feet contained on the second floor,
the Company has subleased approximately 3,000 square feet from companies
affiliated with Mr. Mischer. The Company owns or leases office furniture,
furnishings, equipment and vehicles as management deems necessary for its
operations. Information concerning encumbrances on the property owned by the
Company and subleases from a related party is contained in Notes 3, 5 and 7 of
the Notes to Consolidated Financial Statements of the Company.

See "Real Estate Operations" in Item 1 for information with respect to
additional properties owned or managed by the Company.

The Company has planned no significant additions to its properties during
1996.

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ITEM 3. LEGAL PROCEEDINGS

The information with respect to legal proceedings is contained in Note 6 of
the Notes to Consolidated Financial Statements of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter
ended December 31, 1995.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the over-the-counter market, but is
not quoted on the National Association of Securities Dealers Automated Quotation
(NASDAQ) system. According to National Quotation Bureau, Incorporated, the last
reported price of the Company's common stock was $.0625 on June 18, 1993. There
were no prices quoted after that date.

The approximate number of holders of record of the Company's stock as of March
17, 1996 was 518. No dividends have been paid by the Company since its
inception and the Company has no plans to pay dividends in the foreseeable
future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following is a summary of certain financial information regarding the
Company. All amounts are stated in thousands of dollars, except per share
amounts. This summary should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto.
<TABLE>
<CAPTION>

Year Ended December 31,
-------------------------
1995 1994
----------- ------------
<S> <C> <C>

Resort revenues $ 2,333 $ 2,105
Real estate revenues, net 1,431 985
Resort operating expenses (2,268) (2,292)
Other operating expenses (966) (1,031)
Interest expense (458) (468)
Litigation settlement - 1,318
-------- --------
Income before extraordinary gain 72 617
Extraordinary gain on debt settlements 33 2,374
-------- --------
Net income $ 105 $ 2,991
======== ========
Income per common share:
Before extraordinary gain $0.02 $0.19
Net income $0.03 $0.94
Total assets $ 4,074 $ 4,135
Total debt $ 6,134 $ 6,310
Total stockholders' deficit $ (4,854) $ (4,959)
</TABLE>

CURRENT BUSINESS CONDITIONS, CERTAIN EVENTS AND UNCERTAINTIES

Prior to 1995, the Company had sustained losses from operations for the past
several years and anticipates that it will incur a loss from operations for
1996. Such losses depleted the Company's stockholders' equity in 1989. Cash
flow from operations has not been sufficient to meet liquidity needs during the
past several years and the Company anticipates negative cash flow from
operations during 1996. The Company's operations are concentrated in Texas,
which from 1986 to 1988 was

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adversely affected by the downturn in the energy and real estate markets.
Reduced revenues during this period resulted in a deterioration of the Company's
financial condition and its ability to meet its obligations. As a result, the
Company entered into a series of transactions to significantly reduce its debt
obligations through the transfer of a significant amount of the Company's assets
to its lenders and creditors since 1989.

LIABILITY SETTLEMENTS

During 1992, the Company restructured the debt of one of its partnerships. In
connection with this restructure, the Company issued a $300,000 principal amount
note payable to the other joint venture partner. This note was secured by the
Company's 20% equity interest in the venture and was due September 1995. Due to
the Company's financial condition, it was unable to retire this note at
maturity. During December 1995, the partnership through which the Company held
its 20% interest in the joint venture admitted a new limited partner (Walter M.
Mischer, Trustee) in exchange for a capital contribution of $306,000. These
funds were used to repay the note and accrued interest. In exchange for the
capital contribution, the new limited partner will receive (i) the first
$306,000 of any future cash flow, (ii) interest on the $306,000 at 10%
compounded annually, and (iii) 66 2/3% of any remaining cash flow. As a result
of this transaction, the Company's effective ownership in this partnership was
reduced to 6.7%.

During 1995, a joint venture note payable with an outstanding principal
balance of $5.2 million was due and payable. The joint venture in which the
Company had a 19.4% ownership interest was unable to repay this note at its
maturity. During January 1996, the venture obtained a new loan from a bank in
the original principal amount of $3.0 million. The proceeds of this new loan
were used to settle the $5.2 million loan plus accrued interest in full. As a
condition of the new loan the bank required a ten year lease on the entire
building to be executed by the partners in the ratio of their ownership
interests. However, due to the financial condition of the Company, the bank
would not accept the Company's lease. In addition, the building is in need of
approximately $400,000 in repairs. The Company would have been required to make
an $80,000 capital contribution to fund these repairs. The Company also owed
the venture approximately $70,000 in past due rent for periods prior to 1992.
This amount was forgiven in January 1996. As a result, during January 1996, the
Company sold its partnership interest to Hallmark Residential Group, Inc.
(Hallmark), a company controlled by Mr. Mischer. In exchange, Hallmark assumed
the Company's obligations in connection with this joint venture and entered into
the ten year lease. In connection with this sale, the Company retained a 25%
cash flow interest in Hallmark's 20% ownership interest.

12
<PAGE>

notes plus accrued interest. As of December 31, 1995, $732,000 in trade creditor
notes and related accrued interest remain in default.

The Company had an incentive plan for certain key employees (Incentive Plan).
To implement the Incentive Plan, the Company formed limited partnerships to
purchase, hold, develop and dispose of improved and unimproved real estate as
authorized by the Compensation Committee of the Board of Directors. The Company
is the general partner of such limited partnerships, holding an 85% interest.
The limited partners holding the remaining 15% interest are certain current and
former employees, including one who serves as a director of the Company. Under
the terms of the limited partnership agreements, the Company may, at its option,
and is required, at the option of the limited partner, to purchase the
partnership interest of a limited partner who is no longer employed by the
Company or any of its subsidiaries. The agreements contain complex provisions
regarding the purchase price payable, which may be substantial, to a limited
partner upon exercise of such option. As of December 31, 1993, the Company had
accrued $807,000 in connection with its obligations in connection with the
Incentive Plan. During 1994, the Company made payments of $202,000 in
satisfaction of all obligations under the Incentive Plan, and recorded an
extraordinary gain of $605,000.

The settlements discussed above resulted in extraordinary gains of $33,000 in
1995 and $2,374,000 in 1994.

LITIGATION SETTLEMENTS

13
<PAGE>

CONTINUED OPERATIONS

As more fully described in Note 5 of the Notes to Consolidated Financial
Statements, the Company continues to be delinquent on certain debt with an
outstanding principal balance of approximately $1.9 million and debt with
aggregate outstanding balances of approximately $4.1 million will mature during
1996. The Company has also guaranteed certain debt of one of its former
subsidiaries which had an outstanding balance of $1.6 million at December 31,
1995. The Company must settle or restructure existing debt and generate
positive cash flow to cover operating expenses and other cash requirements to
continue as a going concern and to realize the carrying amount of its assets.
Management is currently reviewing possible options to settle or restructure
existing debt. These options include, but are not limited to, continued efforts
to procure management and consulting contracts for a fee, increase revenues of
its resort development and reduce its operating expenses (including interest
expense), continued negotiations with various creditors to settle their accounts
for cash payments at substantially less than the amount due, the settlement of
liabilities through the transfer of assets to creditors in satisfaction of their
claims, a possible plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code or possible liquidation of the Company. The Company may develop
real estate if it is able to obtain financing for the acquisition and
development of real estate and subsequently sell the developed residential lots
and commercial tracts. There can be no assurance that the Company could arrange
to borrow funds from other sources. The consolidated financial statements do
not include any adjustments relating to the recoverability of asset carrying
amounts or the amount and classification of liabilities that might be necessary
if the Company is unable to continue as a going concern.

RESULTS OF OPERATIONS

Income before extraordinary gains was $72,000 in 1995 compared with income
before extraordinary gains of $617,000 in 1994. Included in income before
extraordinary gain for 1994 is income of $1,318,000 from the settlement of
litigation that the Company had been involved in for several years. See Note 1
of the Notes to the Consolidated Financial Statements for a discussion of this
litigation. In addition, the Company recorded extraordinary gains on debt
settlements of $33,000 during 1995 and $2,374,000 during 1994. Net income was
$105,000 or $.03 per share for 1995 compared to net income of $2,991,000 or $.94
per share for 1994.

Rentals and other income from the Company's resort in west Texas were $2.3
million and $2.1 million for the years ended December 31, 1995 and 1994,
respectively. See Item 2, "Description of Property" included herein for a
discussion of the Company's resort development.

Real estate revenues, net increased to $1,431,000 in 1995 from $985,000 in
1994. This increase was primarily due to the receipt of $225,000 in connection
with its ownership of a net profits interest in a Houston subdivision. The net
profits interest was retained by the Company as part of a 1990 debt restructure
and during 1995 the conditions on the profits interest were satisfied. In
addition, the Company received a construction supervision fee of $239,000 in
connection with a lease of a portion of the building in which the Company had a
joint venture ownership interest. During 1995, the Company sold all of its
shares of the stock of Space Industries, Inc. for a gain of $143,000. All of
these transactions represented 100% of the revenues to be earned from these
sources and are

14
<PAGE>

considered nonrecurring items of income. These amounts are included in interest
and other income shown below.

Real estate revenues, net include the following amounts:

(Thousands of Dollars) Year Ended December 31 ,
- --------------------- -------------------------
1995 1994
------------ -----------
<S> <C> <C>

Equity in income of real
estate joint ventures $ 21 $ 143
Management fees 777 753
Interest and other income 633 89
Sales of real estate ---- 23
Cost of real estate sales ---- (23)
- -----------------------------------------------------------
Total real estate revenues, net $1,431 $ 985
===========================================================
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations has not been sufficient to meet the Company's
obligations for the past several years and management anticipates that cash flow
from operations will not be sufficient to meet its liquidity needs in 1996.
During 1995, the Company received approximately $474,000 from the sale of
investments and the proceeds of a net profits interest as previously discussed.
These funds represented 100% of the Company's interests in the assets and as
such are nonrecurring sources of cash. During 1994, the Company received
$892,000 from the settlement of certain litigation. The financial condition of
the Company indicates that, unless operating results and cash flow improve, the
Company will be required to borrow funds or to continue to sell assets. There
can be no assurance that the Company could arrange to borrow funds from other
sources or to sell sufficient assets to meet its cash needs or restructure its
existing debt.

As of December 31, 1995, the Company was delinquent on notes payable and other
long-term debt of approximately $1,859,000 and interest payments of $760,000.
At present, the Company has received notice from two of its lenders that notes
with aggregate outstanding principal balances of $345,000 are in default and
that the indebtedness will be accelerated. The Company is currently negotiating
settlement of these debts. During 1996, approximately $4.1 million of principal
payments on real estate notes, mortgages payable and other long-term debt will
be due. In addition, as of December 31, 1995, the Company had recorded accounts
payable and accrued expenses of $2.5 million. Management is currently reviewing
possible options to settle the Company's existing liabilities with its very
limited resources. These options include, but are not limited to, continued
efforts to reduce operating expenses (including interest), attempts to increase
revenues of the Company's resort development, continued negotiations with
various creditors to settle their accounts for cash payments at substantially
less than the amount due, the settlement of liabilities through the transfer of
assets to creditors in satisfaction of their claims, a possible plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code or possible
liquidation of the Company. The Company's debts and obligations are discussed
in Notes 1, 3, 5, 6, and 7 of Notes to Consolidated Financial Statements of the
Company.

15
<PAGE>

With the exception of the improvements and a portion of the land located at
the Company's resort development in west Texas, substantially all of the
Company's real estate assets are pledged to secure debt. Management believes
that in a stable market the values of the properties would exceed the balances
of the loans which they secure. If the Company were to sell or dispose of its
real estate assets as a result of the maturity or acceleration of the underlying
debt or for reasons other than those arising in the normal course of business,
it is anticipated that sales prices would be significantly less than the current
carrying amount of the assets and such sales or dispositions would not generate
sufficient funds to retire the related debt.

In assessing the Company's liquidity, the impact of the Revenue Reconciliation
Act of 1993 has been considered. Although the impact of the tax law changes is
difficult to determine, the Company does not expect these changes to
significantly affect its cash flow in the foreseeable future because of its net
operating loss carryforward. The Company's federal income taxes are disclosed
in Note 4 of the Notes to Consolidated Financial Statements of the Company.

The impact of inflation on the Company over the past several years has been
minimal.

No major additions to property, plant and equipment are anticipated.

ITEM 7. FINANCIAL STATEMENTS

The financial statement data required pursuant to this item are included
herein.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

16
<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The information required by Item 9 is contained in the Company's proxy
statement to be used in connection with its 1996 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Directors,"
which information is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

The information required by Item 10 is contained in the Company's proxy
statement to be used in connection with its 1996 annual meeting of stockholders
under the caption "Executive Compensation," which information is incorporated
herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 11 is contained in the Company's proxy
statement to be used in connection with its 1996 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Directors,"
which information is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 12 is contained in the Company's proxy
statement to be used in connection with its 1996 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Directors,"
which information is incorporated herein by reference.

17
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits Required by Item 601 of Regulation S-B

<TABLE>
<CAPTION>
*Filed Herein or
Incorporated by Reference
from Exhibit
--------------------------
<S> <C> <C> <C>
(3) (a) Certificate of Incorporation as 3(a) 1981 Form 10-K
Amended through June 6, 1989
(b) Articles of Amendment to 3(b) 1989 Form 10-K
Certificate of Incorporation
dated June 7, 1989
(c) Articles of Amendment to 3(c) 1993 Form 10-KSB
Certificate of Incorporation
dated May 21, 1993
(d) Bylaws as Amended through 3(b) June 30, 1989
date hereof Form 10-Q

(21) Subsidiaries of the Registrant Exhibit 21

(27) Financial Data Schedule Exhibit 27

(2) Financial Statements -

Report of Independent Public Accountants

Consolidated Balance Sheet -
December 31, 1995

Consolidated Statements of Income for
each of the Two Years Ended
December 31, 1995 and 1994

Consolidated Statements of Changes in Stock-
holders' Deficit for each of the Two Years
Ended December 31, 1995 and 1994

Consolidated Statements of Cash Flows for
each of the Two Years Ended
December 31, 1995 and 1994

Notes to Consolidated Financial Statements
</TABLE>

(B) Reports on Form 8-K

The Company filed no reports on Form 8-K during the quarter ended
December 31, 1995.

18
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Southern Investors Service Company, Inc.:

We have audited the accompanying consolidated balance sheet of Southern
Investors Service Company, Inc. (a Delaware Corporation), and subsidiaries (the
Company) as of December 31, 1995, and the related consolidated statements of
income, changes in stockholders' deficit and cash flows for each of the two
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Investors Service
Company, Inc. and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

The Company's cash flow from operations has not been adequate to meet the
Company's obligations for the past several years. Management projects negative
cash flow from operations for 1996 and the company has a deficit in
stockholders' equity. As described in Note 5 to the Consolidated Financial
Statements, even though the Company has restructured certain indebtedness in the
last several years, it continues to be delinquent on a significant amount of
debt and debt with an aggregate outstanding balance of approximately $4.1
million matures in 1996. As discussed in Note 6 to the Consolidated Financial
Statements, the Company is involved in litigation and other contingencies, the
outcome of which are uncertain at this time. These factors raise substantial
doubt about the Company's ability to continue as a going concern and to realize
the carrying amount of its assets. Management is currently reviewing options in
regard to these matters as described in Note 1 to the Consolidated Financial
Statements. There can be no assurance that actual events will occur in
accordance with the assumptions considered in the options management is
currently reviewing. The accompanying consolidated financial statements have
been prepared assuming the Company will continue as a going concern and the
consolidated financial statements do not include any adjustments, which could be
significant, that might result from the outcome of the uncertainties described
above.

Arthur Andersen LLP
Houston, Texas
March 15, 1996

19
<PAGE>

SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(Thousands of Dollars)

ASSETS
- ------
<S> <C>
REAL ESTATE ASSETS:
Resort development, net $2,669
Real estate held for resale or development 325
Equity in real estate joint ventures, net 201
------
Total real estate assets 3,195

CASH 317
ACCOUNTS RECEIVABLE 197
OTHER ASSETS 365
------
Total assets $4,074
======

LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------

LIABILITIES:
Notes payable $ 5,402
Other debt 732
Accounts payable and accrued expenses 2,467
Other liabilities 327
--------
Total liabilities 8,928
--------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
Preferred stock, $1 par, 1,000,000
shares authorized, none issued --
Common stock, $1 par, 10,000,000 shares authorized,
3,281,331 shares issued 3,281
Additional paid-in capital 3,031
Retained deficit (11,040)
Less treasury stock, 112,402 shares, at cost (126)
--------
Total stockholders' deficit (4,854)
--------
Total liabilities and stockholders' deficit $ 4,074
========
</TABLE>

The accompanying notes are an integral part of this statement.

20
<PAGE>

SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars,
Except Per Share Amounts)

<TABLE>
<CAPTION> Year ended December 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
RESORT REVENUES $ 2,333 $ 2,105
REAL ESTATE REVENUES, NET 1,431 985
---------- ----------
3,764 3,090
---------- ----------
RESORT OPERATING EXPENSES 2,268 2,292
OTHER OPERATING EXPENSES 966 1,031
---------- ----------
3,234 3,323
---------- ----------
INCOME (LOSS) FROM OPERATIONS 530 (233)
INTEREST EXPENSE (458) (468)
LITIGATION SETTLEMENT --- 1,318
---------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN 72 617
INCOME TAXES (Net of tax operating loss
carryforward realization of $24 and $210) --- ---
---------- ----------
INCOME BEFORE EXTRAORDINARY GAIN 72 617

EXTRAORDINARY GAIN ON DEBT SETTLEMENTS
(Net of tax provision and operating loss carryforward
realization of $11 and $807) 33 2,374
---------- ----------
NET INCOME $ 105 $ 2,991
========== ==========
INCOME PER COMMON SHARE:
Income before extraordinary gain $0.02 $0.19
========== ==========
Net Income $0.03 $0.94
========== ==========
AVERAGE NUMBER OF SHARES OUTSTANDING 3,168,929 3,168,929
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.

21
<PAGE>

SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Thousands of Dollars)

<TABLE>
<CAPTION>
Common Stock
----------------- Additional
Paid-In Retained Treasury
Shares Amount Capital Deficit Stock
--------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>

BALANCE, December 31, 1993 3,281,331 $3,281 $3,031 ($14,136) ($126)
Net income -- -- -- 2,991 --
--------- ------ ------ -------- -----

BALANCE, December 31, 1994 3,281,331 3,281 3,031 (11,145) (126)
Net income -- -- -- 105 --
--------- ------ ------ -------- -----

BALANCE, December 31, 1995 3,281,331 $3,281 $3,031 ($11,040) ($126)
========= ====== ====== ======== =====

</TABLE>

The accompanying notes are an integral part of these statements.

22
<PAGE>

SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>

Year Ended December 31,
-------------------------
1995 1994
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 105 $ 2,991
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary gain on debt settlements (33) (2,374)
Equity in undistributed income of real estate
joint ventures (21) (143)
Distribution from real estate joint ventures, net 36 ---
Gain from sale of assets (143) ---
Cost of real estate sales, net of deferred gross profit --- 23
Depreciation and amortization 234 255
Change in assets and liabilities:
Investments in real estate --- (123)
Increase in accounts receivable and other
assets (365) (39)
Increase (decrease) in accounts payable, accrued expenses
and other 207 (171)
----- -------
Net cash from operating activities 20 419

Cash flows from investing activities:
Proceeds from sale of stock 250 ---
----- -------

Cash flows from financing activities:
Payments on notes payable and other debt (46) (575)
----- -------

Net increase (decrease) in cash 224 (156)
Beginning cash 93 249
----- -------
Ending cash $ 317 $ 93
===== =======

</TABLE>

The accompanying notes are an integral part of these statements.

23
<PAGE>

SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) CURRENT BUSINESS CONDITIONS

Southern Investors Service Company, Inc. and its subsidiaries' (Company)
operations are concentrated in Texas, which from 1986 to 1988 was adversely
affected by the downturn in the energy and real estate markets. During 1990,
the Company reached an agreement with certain of its creditors to resolve
defaults under various loans and to settle the outstanding debt and remaining
deficiencies. The settlement provided for the conveyance to the creditors of
title to certain collateral securing the loans and the assignment of
distribution rights of certain real estate projects. Total debt satisfied was
$85.4 million for the conveyance and assignments of a significant portion of the
Company's assets. As a result, the Company's cash flow from operations has not
been sufficient to meet the Company's obligations for the past several years.
The Company has sustained net operating losses prior to 1995 and anticipates
that it will incur a net operating loss for 1996. Such losses depleted the
Company's stockholders' equity in 1989. The 1995 income from operations was due
primarily to nonrecurring sales of assets and restructure of partnership
interests in equity joint ventures. The Company's ability to continue as a
going concern is dependent upon its ability to settle or restructure existing
debt and generate positive cash flow to cover operating expenses and other cash
requirements.

Management believes that the debt settlements discussed below have improved
the Company's financial condition and its ability to pursue and realize
investment, development and management opportunities in real estate properties.
However, debt totaling $1,859,000 has matured and is currently due and debt
totaling $4,064,000 matures in 1996. The ability of the Company to continue as
a going concern is dependent upon its ability to settle or restructure its
remaining debt and other obligations and generate positive cash flow to cover
operating expenses and other cash requirements. Management is currently
reviewing possible options to settle the Company's existing liabilities with its
very limited resources. These options include, but are not limited to,
continued efforts to reduce operating expenses (including interest), attempts to
increase revenues of the Company's resort development, continued negotiations
with various creditors to settle their accounts for cash payments at
substantially less than the amount due, the settlement of liabilities through
the transfer of assets to creditors in satisfaction of their claims, a possible
plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code or possible
liquidation of the Company. The Company may develop real estate if it is able
to obtain financing for the acquisition and development of real estate and
subsequently sell the developed residential lots and commercial tracts. There
is no assurance that the Company could arrange to borrow funds or raise capital
from other sources. While management believes that its assumptions are
reasonable, there is no assurance that actual events will occur in accordance
with such assumptions. Accordingly, management's assumptions may need to be
revised as actual events occur which differ from such assumptions. The
consolidated financial statements do not include any adjustments, which could be
significant, relating to the recoverability of asset carrying amounts or the
amount and classification of liabilities that might be necessary if the Company
is unable to continue as a going concern.

24
<PAGE>

LIABILITY SETTLEMENTS

During 1992, the Company restructured the debt of one of its partnerships. In
connection with this restructure, the Company issued a $300,000 principal amount
note payable to the other joint venture partner. This note was secured by the
Company's 20% equity interest in the venture and was due September 1995. Due to
the Company's financial condition, it was unable to retire this note at
maturity. During December 1995, the partnership through which the Company held
its 20% interest in the joint venture admitted a new class of limited partner
(Walter M. Mischer, Trustee) in exchange for a capital contribution of $306,000.
These funds were used to repay the note and accrued interest. In exchange for
the capital contribution, the new limited partner will receive (i) the first
$306,000 of any future cash flow, (ii) interest on the $306,000 at 10%
compounded annually, and (iii) 66 2/3% of any remaining cash flow. As a result
of this transaction, the Company's effective ownership in this partnership was
reduced to 6.7%.

During 1995, a joint venture note payable with an outstanding principal
balance of $5.2 million was due and payable. The joint venture in which the
Company had a 19.4% ownership interest was unable to repay this note at its
maturity. During January 1996, the venture obtained a new loan from a bank in
the original principal amount of $3.0 million. The proceeds of this new loan
were used to settle the $5.2 million loan plus accrued interest in full. As a
condition of the new loan, the bank required a ten year lease on the entire
building to be executed by the partners in the ratio of their ownership
interests. However, due to the financial condition of the Company, the bank
would not accept the Company's lease. In addition, the building is in need of
approximately $400,000 in repairs. The Company would have been required to make
an $80,000 capital contribution to fund these repairs. The Company also owed
the venture approximately $70,000 in past due rent for periods prior to 1992.
This amount was forgiven in January 1996. As a result, the Company sold its
partnership interest to Hallmark Residential Group, Inc. (Hallmark), a company
controlled by Mr. Mischer. In exchange, Hallmark assumed the Company's
obligations in connection with this joint venture and entered into the ten year
lease. In connection with this sale, the Company retained a 25% cash flow
interest in Hallmark's 20% ownership interest.

In addition, during 1994, the Company reached an agreement with one of its
lenders to settle a promissory note that matured September 30, 1993 for a cash
payment of $114,000. This note had

25
<PAGE>

been issued by the Company as part of the 1990 debt settlement and had a balance
of $892,000 including accrued and unpaid interest.

The Company had an incentive plan for certain key employees (Incentive Plan).
To implement the Incentive Plan, the Company formed limited partnerships to
purchase, hold, develop and dispose of improved and unimproved real estate as
authorized by the Compensation Committee of the Board of Directors. The Company
is the general partner of such limited partnerships, holding an 85% interest.
The limited partners holding the remaining 15% interest are certain current and
former employees, including one who serves as a director of the Company. Under
the terms of the limited partnership agreements, the Company may, at its option,
and is required, at the option of the limited partner, to purchase the
partnership interest of a limited partner who is no longer employed by the
Company or any of its subsidiaries. The agreements contain complex provisions
regarding the purchase price payable, which may be substantial, to a limited
partner upon exercise of such option. As of December 31, 1993, the Company had
accrued $807,000 in connection with its obligations in connection with the
Incentive Plan. During 1994, the Company made payments of $202,000 in
satisfaction of all obligations under the Incentive Plan, and recorded an
extraordinary gain of $605,000.

The settlements discussed above resulted in extraordinary gains of $33,000 in
1995 and $2,374,000 in 1994.

LITIGATION SETTLEMENTS

On April 20, 1994, the Company executed an agreement to settle a 1988 lawsuit
against KeepRite, Inc. (KeepRite), Intercity Gas Company (IGC) and Heil-Quaker
(collectively, Defendants). In accordance with this agreement, the Defendants
agreed to pay the Company $1,300,000 (including $100,000 attributable to claims
by Jackson Supply Company, a former subsidiary of the Company). In addition, the
Company and the Defendants individually and collectively released all of their
respective claims, including the Defendants' claim against the Company which had
been recorded by the Company at $318,000. The Company received $892,000 after
the payment of the amount attributable to Jackson Supply Company and the payment
of outstanding legal fees and other expenses totaling $308,000 (of which
$108,000 had been accrued in prior periods). The Company recorded a gain of
$1,318,000 in connection with this settlement during 1994.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries and joint ventures. Income and expenses are
recorded on the accrual basis of accounting, and all significant intercompany
accounts and transactions have been eliminated. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets

26
<PAGE>

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.

The Company records its investment in real estate joint ventures in which its
ownership equals or exceeds 20% but is 50% or less and which the Company does
not control on the equity method. Those ventures in which the Company's
ownership is less than 20% are carried at cost unless the Company exercises
significant influence. The Company recorded its investment in joint ventures in
which it has assigned its rights to cash distributions at zero and has not
recorded earnings or losses of these ventures. As of December 31, 1995, the
ventures in which the Company has assigned its rights to cash distributions had
total assets of $0.1 million.

Income taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences, and operating loss and tax
credit carryforwards, and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.

NEW ACCOUNTING STANDARD REGARDING IMPAIRMENT

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes the recognition and measurement standards related to the impairment
of long-lived assets. The Company adopted this standard during 1995. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, accounts receivable and other assets approximate
fair value due to relatively short maturities. It was not practicable to
estimate the fair value of debt and related accrued interest as significant
amounts of debt have matured or will mature during 1996. The Company is in
process of negotiating with lenders to settle debt for cash payments or transfer
of other assets at substantially less than amounts due.

REAL ESTATE OPERATIONS

Profits from sales of real estate are recognized only upon delivery of a deed,
transfer of all attributes of ownership, receipt from the purchaser of an
adequate cash down payment, and the absence of obligations to perform
significant activities after the sale. If the required cash down payments have
not been received, sales and related costs are recorded but the gross profits
are deferred and recognized on the installment method of accounting until
sufficient cash payments have been received. Deferred gross profit of $327,000
as of December 31, 1995 is included in other liabilities in the accompanying
Consolidated Balance Sheet.

27
<PAGE>

Residential lots and real estate held for resale or development are stated at
the lower of cost or estimated net realizable value. If the Company estimates
that the cost upon completion will exceed the net realizable value, the Company
provides a reserve for such excess costs. Cost includes the land acquisition
cost, general improvements and interest, property taxes and other carrying costs
capitalized during development. Interest is capitalized on the average amount
of accumulated expenditures for property being developed using an effective rate
based on related debt. Interest and property tax capitalization continues until
the assets are ready for sale or until development of the property is suspended.
Costs are allocated to tracts based upon the relative sales value of the tracts.

The majority of the Company's real estate remaining after the debt settlements
discussed above is located in Texas which, as discussed in Note 1, has been
adversely affected by economic conditions generally related to the downturn in
the energy business and the slow recovery from a national recession. Accounting
practice does not require such assets to be recorded at fair market value, which
may be lower than the estimated net realizable value. Management will continue
to monitor and consider the impact of changes in economic conditions to
determine the effect on the net realizable value. The effect of any significant
changes will be reported in income in the period such effect can be reasonably
estimated. If the Company were to sell or dispose of its real estate assets as
a result of the maturity or acceleration of the underlying debt or because the
Company is not able to continue as a going concern, it is anticipated that sales
or dispositions would not generate sufficient funds to retire the related debt
and would be significantly less than the current carrying amount of assets.

DEPRECIATION

Resort development properties are depreciated on the straight-line basis over
their estimated useful lives net of estimated salvage value. At December 31,
1995, accumulated depreciation totaled approximately $3,934,000.

Upon sale or retirement of depreciable assets, the cost and the related
accumulated depreciation are removed from the accounts and the resulting profit
or loss is reflected in income. The costs of ordinary maintenance and repairs
are expensed, whereas renewals and major replacements are capitalized and
expensed to future operations through depreciation charges.

INCOME PER COMMON SHARE

Income per common share is computed by dividing income by the weighted average
number of shares outstanding giving effect to treasury stock.

PREFERRED STOCK

The Company has authorized 1 million shares of $1.00 par value preferred
stock. No such stock has been issued. The preferred stock may be issued in one
or more series, with the shares in each such series having such voting powers
and such designations, preferences and relative participating, optional
redemption, conversion, exchange and other special rights and restrictions as
may be fixed by a resolution of the Company's Board of Directors.

28
<PAGE>

(3) REAL ESTATE OPERATIONS

Real estate revenues, net include the following amounts:
<TABLE>
<CAPTION>

(Thousands of Dollars) Year Ended December 31,
- -------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------
<S> <C> <C>
Sales of real estate $ -- $ 23
Cost of real estate sales -- (23)
Equity in income of real estate joint ventures 21 143
Management fees 777 753
Interest and other income 633 89
- ------------------------------------------------------------------------
Total real estate revenues, net $1,431 $985
========================================================================
</TABLE>

29
<PAGE>

The combined condensed balance sheet and statements of income of the real
estate joint ventures accounted for on the equity method in which the Company
has not assigned its rights to cash distributions are set forth below:

Balance Sheet December 31,
- ----------------------------------------------------------------
(Thousands of Dollars) 1995
- ----------------------------------------------------------------
<S> <C>
ASSETS:
Cash $ 62
Receivables 117
Developed residential lots 707
Real estate held for resale or development 1,656
Income producing properties, net 4,153
Other assets 306
- -----------------------------------------------------------
$7,001
===========================================================

LIABILITIES & VENTURERS' EQUITY:
Accounts payable and accrued liabilities $ 436
Notes payable 5,381
Venturers' equity:
Company and its subsidiaries (154)
Other ventures 1,338
- -----------------------------------------------------------
$7,001
===========================================================
</TABLE>

Statements of Income Year Ended December 31,
- ------------------------------------------------------------------------
(Thousands of Dollars) 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales of real estate $1,286 $1,706
Cost of sales 855 866
- ------------------------------------------------------------------------
431 840
Rental and other income 3,828 3,831
- ------------------------------------------------------------------------
4,259 4,671
EXPENSES:
Operating expenses 3,287 3,014
Interest expense 662 533
- ------------------------------------------------------------------------

Net income $ 310 $1,124
========================================================================
Equity of the Company and its subsidiaries
in income $ 21 $ 143
========================================================================
</TABLE>

On March 27, 1990, the Company restructured and settled certain debt of the
real estate joint ventures. The Company's real estate revenues and operations
were affected by the conveyance of a significant amount of its real estate
assets and the assignment of its distribution rights in certain real estate
projects to the lenders. The Company recorded its investment in joint ventures
in which it has assigned its rights to cash distributions at zero and has not
recorded earnings or losses of these ventures. As of December 31, 1995, the
ventures in which the Company has assigned its rights to cash distributions had
total assets of $100,000. As of December 31, 1995, $356,000 had been

30
<PAGE>

received by the Company in connection with this assignment and is included in
other assets and accounts payable and accrued expenses in the accompanying
Consolidated Balance Sheet. The Company had a 20% equity interest in a joint
venture that owned a 10 story office building. During December 1995, the
Company's ownership was reduced to 6.7%. Accordingly, as of December 31, 1995,
the investment is accounted for on the cost method. The Company's investment in
this joint venture is $355,000.

No federal income tax provision is included in the combined condensed
statements of income for the joint ventures since each venturer will report in
its tax return its share of each joint venture's income.

(4) FEDERAL INCOME TAXES

The estimated tax effect of temporary differences and tax attributes
representing deferred tax liabilities and assets is summarized as follows:

December 31,
(Thousands of Dollars) 1995
- ------------------------------------------ ----------
<S> <C>
Tax benefits due to:
Tax loss carryforwards $ 10,007
Accrued expenses and other liabilities 156
Other 79
--------
Gross deferred tax asset 10,242
Deferred tax liability due to:
Accelerated depreciation (46)
Basis difference in real estate assets (940)
--------
Net deferred tax asset 9,256
Less-Valuation allowance (9,256)
--------
$ --
========
</TABLE>

The Company estimates that as of December 31, 1995, its loss carryforward for
federal income tax reporting purposes, after giving consideration to the tax
effect of the debt settlements as discussed in Note 1, is approximately $29.4
million, of which approximately $7.5 million is capital loss carryforward. The
capital loss carryforward will begin to expire in 1997 and the operating loss
carryforward will begin to expire in 2002. The tax benefit of the operating
loss carryforward has been recognized as a reduction of the deferred taxes
provided on temporary differences which are expected to reverse during the
carryforward period. The valuation allowance as of December 31, 1994 totaled
$7,505,000. The increase in the valuation allowance was due to adjustments of
the loss carryforwards during 1995.

No taxes were paid during 1995. During 1994, the Company paid 1993
alternative minimum taxes of $13,500.

In October 1986, the Tax Reform Act of 1986 (the Act) was passed. The Act
substantially changed the rules regarding the availability of a corporation's
operating loss carryforward following a significant change of ownership. Under
most circumstances, the limitations on the use of the

31
<PAGE>

operating loss carryforward are imposed if the equity ownership of a
corporation's 5% stockholders increases by more than 50% over the lowest
percentage of equity ownership of such stockholders during the three year period
prior to the date of the ownership change. No change of ownership had occurred
through December 31, 1995. The Revenue Reconciliation Act of 1993 did not have a
material impact on the Company's financial position or results of operation.

(5) NOTES PAYABLE AND OTHER DEBT

NOTES PAYABLE

The Company's notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(Thousands of Dollars) 1995
- ----------------------------------------------------------------
<S> <C>
Matured notes, partially secured by real
estate, bearing interest at rates ranging
from 6% to 10% $1,127

Notes issued to various debenture holders,
due in 1996, bearing interest at 6% 3,440

Note payable to Walter M. Mischer secured by
real estate, due during 1996, and bearing
interest at the prime rate plus 1% 338

Note payable issued in partial settlement of
insurance premium claims secured by real
estate, due in 1996, bearing interest at 9% 286

Other 211
------
$5,402
======
</TABLE>

As of December 31, 1995, the Company was delinquent on principal and interest
payments of $1,859,000 and $760,000, respectively, on its notes payable. At
present, the Company has received notice from two of its lenders that notes with
total outstanding principal balances of $345,000 are in default and that the
indebtedness will be accelerated. The Company is currently negotiating
settlement of these debts.

During 1993 the Company restructured debentures with an aggregate principal
balance of $2,331,000, debenture loans advanced by certain debenture holders
with aggregate principal balances of $639,000 and accrued and unpaid interest
with respect to these Debentures and debenture loans of approximately $470,000
in exchange for unsecured promissory notes of the Company. These notes with an
aggregate principal balance of $3,440,000 bear interest at 6% compounded
annually and are due October 2, 1996.

32
<PAGE>

OTHER DEBT

At December 31, 1995, other debt of $732,000 consists of unsecured notes
payable and related accrued interest payable to trade creditors of a subsidiary
of the Company that ceased operations during 1989, which were due September 30,
1993. See Note 1 for a discussion of the settlement of certain of these notes.

With the exception of the improvements and a portion of the land located at
the Company's resort in west Texas, substantially all of the Company's real
estate assets are pledged as collateral. Minimum annual principal payments on
total notes, mortgages payable and other debt during the years 1996 and 1998 are
$4,064,000, and $36,000, respectively, not including the delinquent principal
amounts discussed above. Additional amounts may become due to obtain the
release of real estate which is sold.

To date, the Company has not received any notices of default or acceleration
from any of its lenders other than the notices discussed above.

Interest paid on the consolidated indebtedness during the years ended December
31, 1995 and 1994 was $28,000 and $53,000, respectively.

(6) COMMITMENTS AND CONTINGENCIES

The Company has guaranteed a revolving line of credit of a former subsidiary.
This loan has an outstanding balance of $1.6 million at December 31, 1995.

Due to the location of the Company's investment in the west Texas resort
development and lack of public fire protection, the cost of obtaining insurance
is considered prohibitive; consequently, property insurance is not carried by
the Company for this development.

The Company has a month to month lease with Hallmark which provides for
aggregate annual payments of approximately $75,000.

A suit was filed May 17, 1993, against the Company and thirteen others in the
165th District Court of Harris County, Texas by Angela and Daniel Thibodeaux, et
al, seeking unspecified damages for injuries that allegedly occurred during
1991, as the result of a fall by Angela Thibodeaux and her son at the Point
Royal Apartments. The suit claims that the Company and the other defendants
were negligent in failing to adequately inspect and repair the property. The
Company was a general partner in a partnership which owned the Point Royal
Apartments. The Company denies any wrongdoing and intends to vigorously defend
against these allegations.

The Company is also named a defendant in lawsuits and other claims arising in
the ordinary course of the Company's business. If the Company, in the light of
its present circumstances, were required to make substantial cash expenditures
in connection with current and future lawsuits and other claims, such
expenditures might have a material adverse effect on the Company's consolidated
financial position and might affect the Company's ability to continue as a going
concern.

33
<PAGE>

(7) RELATED PARTY TRANSACTIONS

During 1995 and 1994 the Company settled certain obligations with related
parties. These settlements are discussed in Note 1.

In connection with various debt settlements during the past several years, Mr.
Mischer had loaned or advanced the Company various amounts. In 1993, these
loans and advances were consolidated into a single note in the principal amount
of $338,000. This note bears interest at the prime rate plus 1% and is due May
18, 1996. This note is secured by approximately 14,720 acres of land located
adjacent to the Company's resort in west Texas.

During 1990, the Company entered into a series of transactions relating to its
75% joint venture interest in Heritage Park Venture II (Heritage Park) and its
net profits interest in the Fairwood subdivision. Prior to these transactions,
the Company had effectively conveyed to others substantially all of its
beneficial interest in Heritage Park. The Company arranged the sale to Hallmark
Residential Group, Inc. (Hallmark), a Company in which Mr. Mischer then owned
56% of the common stock, of an unencumbered 62.5% interest in Heritage Park for
$2,285,000 in cash and $186,000 payable from future cash flow from Heritage
Park. To consummate the sale of an unencumbered 62.5% interest in the venture,
the Company negotiated recission of its purchase of Hallmark common stock and
subordinated debentures and reacquisition of the rights to proceeds from
Heritage Park that had been conveyed to its lenders. The Company paid
$2,285,000 of the proceeds received from the sale of the 62.5% interest in
Heritage Park to reacquire its beneficial interest in Heritage Park that it had
conveyed to its lenders and to settle $1,267,000 of its indebtedness with the
lenders. The Company retained all rights to the $186,000 portion of sale
proceeds payable from future cash flow from Heritage Park, a 12.5% joint venture
interest in Heritage Park and a net profits interest in Fairwood and recognized
a $685,000 gain on this series of transactions. The Company received cash
distributions of $261,000 and $0 and recognized income of $272,000 and $99,000
during 1995 and 1994, respectively, relating to its remaining 12.5% equity
interest in Heritage Park and cash flow interest in Fairwood.

On December 15, 1989, Mr. Mischer and Walter M. Mischer, Jr. agreed to make
debenture loans to the Company equal to all future principal payments and 72% of
future interest payments received on the Debentures held by them. In 1991, Mr.
Mischer and Mr. Mischer, Jr. agreed to make debenture loans to the Company equal
to 100% of the interest payments received on the Debentures on June 1 and
December 1, 1991. Such debenture loans made to the Company bear interest at the
same rate as the applicable 7% or 8.5% Debenture and were due on September 30,
1993. See Note 5 describing the terms of the Debenture modification. In
addition, Mr. Mischer and Mr. Mischer, Jr. made debenture loans of $133,000
which amount is equal to 72% of interest payments received during 1989 on the
Debentures held by them. Such debenture loans made to the Company during 1989
bear interest at 6% and 7% per annum and were due on September 30, 1993. During
1993, in connection with the restructure of the Company's Debentures, the
Company issued $3,440,000 in unsecured promissory notes to certain directors,
stockholders and affiliates including notes to Mr. Mischer, Mr. Mischer, Jr.,
John D. Weil and John W. Storms, Trustee, in the aggregate principal amount of
$2,995,000 to consolidate amounts due for the debenture loans discussed above,
Debentures held by them and accrued and unpaid interest. These notes bear
interest at 6% compounded annually and are due October 2, 1996.

34
<PAGE>

Mr. Mischer and Mr. Mischer, Jr. participate in real estate projects in the
Houston area which may compete with the Company's projects.

As a result of a series of transactions occurring during 1989 and 1990, the
Company's effective investment in Jackson Supply Company (Jackson), an
established distributor of air conditioning equipment located in Jackson,
Mississippi, was reduced to 10%. In connection with these transactions, Mr.
Mischer and the president of Jackson have effective investments in Jackson of
75% and 15%, respectively. Since the Company has an effective investment of
less than 20% of the voting stock of Jackson, it accounted for its investment in
Jackson on the cost method subsequent to December 31, 1990. The Company has
guaranteed Jackson's revolving line of credit with a bank. At December 31,
1995, the revolving line of credit had an outstanding principal balance of $1.6
million.

In January 1990, the Company entered into an agreement with a limited
partnership, in which Mr. Mischer holds an effective interest of 50%, to manage
the development and sales of a residential property for a monthly fee of
$10,000. In addition, the Company manages real estate projects in which Mr.
Mischer has effective ownership interests ranging from 81% to 100% for an
aggregate monthly management fee of $37,000. The Company also has management
contracts on the two office buildings in which it has an ownership interest
which provide for aggregate monthly management fees of $10,000. In addition,
during 1995, the Company entered into a management agreement with a partnership
in which Mr. Mischer, Jr. has a 50% ownership interest which provides for
monthly payments of $6,000. The management contracts are cancelable upon thirty
days notice. As of December 31, 1995, the Company had accounts receivable from
these projects of $45,000.

Various companies or joint ventures in which Mr. Mischer has ownership
interests have options to purchase lots from the Company or from a joint venture
in which the Company is a venturer. A total of 75 lots and 104 lots were
purchased by these affiliated entities for an aggregate amount of $1,286,000 and
$1,751,000 during 1995 and 1994, respectively. These affiliated entities have
outstanding option contracts totaling $1,273,000 covering 75 lots with the
Company or its affiliated joint ventures at December 31, 1995.

Due to the Company's lack of adequate resources and its need for additional
employee housing units at its resort in west Texas, a company owned by Mr.
Mischer, contracted with the Company for the construction of additional employee
housing. During 1995 and 1994, the Company billed and collected $80,000 and
$204,000, respectively, representing the entire cost of these units from Mr.
Mischer. These units are owned by Mr. Mischer and leased to the Company for
aggregate annual rentals of $25,000.

During 1992 and 1987, Mr. Mischer purchased certain notes receivable held by a
subsidiary of the Company at face amount of $83,000 and $546,000, respectively.
The Company is required at Mr. Mischer's election to repurchase, at par, any
note with a payment more than 90 days delinquent. None of these notes have been
repurchased through December 31, 1995.

In the opinion of the management of the Company, all of the transactions
described above were effected on terms at least as favorable to the Company as
those which could have been obtained from unaffiliated third parties.

35
<PAGE>

(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses included the following:

<TABLE>
<CAPTION>
December 31,
(Thousands of Dollars) 1995
- --------------------------------- ------------
<S> <C>

Trade accounts payable $ 168
Accrued interest payable 1,271
Accrued taxes payable 222
Accrued insurance settlements 263
Other accrued liabilities 543
------
$2,467
======
</TABLE>

36
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

SOUTHERN INVESTORS SERVICE COMPANY, INC.

By: /s/ WALTER M. MISCHER
-------------------------------------
Walter M. Mischer
Chairman of the Board
Chief Executive Officer

Date: March 29, 1996

Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/S/ WALTER M. MISCHER DATE: MARCH 29,1996
- --------------------- --------------------
Walter M. Mischer
Chairman of the Board and
Chief Executive Officer
Director

/s/ WALTER M. MISCHER, JR. DATE: MARCH 29, 1996
- -------------------------- ---------------------
Walter M. Mischer, Jr.
President and Director
Chief Operating Officer

/s/ ERIC SCHUMANN DATE: MARCH 29, 1996
- ----------------- ---------------------
Eric Schumann
Senior Vice President - Finance
Principal Financial and
Accounting Officer

/s/ JOHN D. WEIL DATE: MARCH 29, 1996
- ---------------- --------------------
John D. Weil
Director

37
<PAGE>

INDEX TO EXHIBITS
BY PAGE IN SEQUENTIAL NUMBER COPY

Document or Exhibit Page No.
- -------------------- --------

Exhibit 21 Subsidiaries of the Registrant.................. 39
Exhibit 27 Financial Data Schedule......................... 40

<PAGE>

EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT

Percentage of
Owned by Registrant Voting Securities
- ------------------- -----------------

Mischer Enterprises, Inc. (Texas) 100%

City Pavers, Inc. d/b/a
Mischer Paving & Utility Company,
in the State of Texas (Delaware) 100%

Lajitas Utility Co., Inc. (Texas) 100%

The subsidiaries listed above are included in the Company's consolidated
financial statements.

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<CASH> 317
<SECURITIES> 0
<RECEIVABLES> 197
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,603
<DEPRECIATION> 3,934
<TOTAL-ASSETS> 4,074
<CURRENT-LIABILITIES> 0
<BONDS> 6,134
3,281
0
<COMMON> 0
<OTHER-SE> (8,135)
<TOTAL-LIABILITY-AND-EQUITY> 4,074
<SALES> 0
<TOTAL-REVENUES> 3,764
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 458
<INCOME-PRETAX> 72
<INCOME-TAX> 0
<INCOME-CONTINUING> 72
<DISCONTINUED> 0
<EXTRAORDINARY> 33
<CHANGES> 0
<NET-INCOME> 105
<EPS-PRIMARY> .03
<EPS-DILUTED> .03

</TABLE>