<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 30, 1996 COMMISSION FILE NO. 1-7949
----------------- ------
REGENCY AFFILIATES, INC.
------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 72-0888772
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
10 Winged Foot Drive, Novato, CA 94949
-------------------------------- -----
(Address of principal executive offices) (Zip Code)
10842 Old Mill Road #5, Omaha, Nebraska 68154
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(Address of administrative offices) (Zip Code)
Registrant's Telephone Number (executive office) including Area Code:
(415) 883-8046
- --------------
Registrant's Telephone Number (administrative office), including Area Code:
(402) 330-8750
- --------------
Registrant's Principal Executive Office has changed since the last Form
10-Q. The address of the Registrant's Principal Executive Office was formerly:
381 Robinwood Lane, Wheaton, IL 60187.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the Issuer's
classes of common stock, as of the latest practicable date.
$.40 Par Value Common Stock- 11,422,331 shares as of October 31, 1996.
1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements...........................................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................15
Item 2. Changes in Securities..........................................................................15
Item 3. Defaults Upon Senior Securities................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................15
Item 5. Other Information..............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
</TABLE>
2
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REGENCY AFFILIATES, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following pages contain the information required by Part I, Item 1.
3
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,521,300 $ 39,700
Accounts receivable 2,200 2,700
Prepaid expenses 14,700 - - -
----------- ----------
2,538,200 42,400
----------- ----------
OTHER ASSETS
Investment in partnership 6,676,000 4,068,100
Rental property 51,000 - - -
Inventory 850,000 850,000
Debt issuance costs and other assets 454,400 19,700
----------- ----------
8,031,400 4,937,800
----------- ----------
Total Assets $10,569,600 $4,980,200
=========== ==========
</TABLE>
4
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<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
CURRENT LIABILITIES
<S> <C> <C>
Notes payable - related party $ 80,000 $ 80,000
Accounts payable 73,400 96,000
Accrued expenses 14,400 79,800
----------- -----------
Total current liabilities 167,800 255,800
----------- -----------
LONG-TERM DEBT 4,032,300 323,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 103,000 106,400
SERIAL PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION 392,300 368,300
SHAREHOLDERS' EQUITY
Serial preferred stock not subject to mandatory redemption
(maximum liquidation preference, $24,885,382) 1,053,000 1,053,000
Common stock, par value $.40, authorized 25,000,000 shares issued and
outstanding 11,422,331 and 11,188,997 shares (net of
22,460 treasury shares) 4,549,600 4,456,300
Paid in capital 140,000 140,000
Readjustment resulting from quasi-reorganization at December
31, 1987 (1,670,600) (1,670,600)
Accumulated earnings (deficit) 1,802,200 (52,000)
----------- -----------
Total shareholders' equity 5,874,200 3,926,700
----------- -----------
Total Liabilities and Shareholders' Equity $10,569,600 $ 4,980,200
=========== ===========
</TABLE>
5
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 1,200 $ 500 $ 1,200 $ 500
---------- ----------- ---------- ----------
OPERATING EXPENSES
General and administrative expenses 146,700 141,600 413,900 272,700
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (145,500) (141,100) (412,700) (272,200)
--------- --------- ---------- ---------
INCOME FROM EQUITY INVESTMENT
IN PARTNERSHIP 1,001,600 220,000 2,711,200 907,000
INTEREST EXPENSE, NET OF
INTEREST INCOME 169,600 12,400 199,900 30,600
--------- --------- ---------- ---------
INCOME BEFORE INCOME TAX
EXPENSE AND MINORITY INTEREST 686,500 66,500 2,098,600 604,200
INCOME TAX EXPENSE ( 16,900) (13,000) (176,500) (103,000)
MINORITY INTEREST 1,100 1,100 3,500 3,500
--------- ---------- ---------- ---------
NET INCOME $670,700 $ 54,600 $1,925,600 $504,700
========= ========== ========== =========
NET INCOME APPLICABLE TO
COMMON STOCK (after accrued preferred
stock dividends of $15,800, $15,800,
$47,400, and $44,200, respectively and
preferred stock accretion of $10,000 and
$24,000 in 1996.) $644,900 $ 38,800 $1,854,200 $460,500
========= ======== ========== ========
NET INCOME PER SHARE
Primary $.06 $.00 $.16 $.04
Fully diluted $.05 $.00 $.13 $.03
</TABLE>
6
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
-------- ------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income (loss) $1,925,600 $504,700
Adjustments to reconcile net income to net cash used by operating
activities:
Minority interest (3,500) (3,500)
Stock issued for salaries and benefits 93,300 ---
Income from equity investment in partnership (2,711,200) (907,000)
Distribution of equity earnings from partnership 103,200 100,000
Interest amortization on long-term debt 227,200 18,000
Changes in operating assets and liabilities:
Prepaid expenses (14,100) (27,200)
Other assets 5,400 1,900
Accounts payable (22,600) 37,000
Accrued liabilities (81,200) 102,800
---------- ------------
Net cash used by operating activities (477,900) (173,300)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of rental property (51,000) -
Net cash used in investing activities (51,000) -
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings (payments) --- (325,800)
Proceeds from issuance of long-term debt 3,500,000 ---
Proceeds from issuance of common stock --- 352,800
Proceeds from issuance of preferred stock --- 167,200
Preferred stock dividends paid (31,600) (28,400)
Debt issuance and offering costs (457,900) (44,200)
---------- ------------
Net cash provided by financing activities 3,010,500 121,600
---------- ------------
INCREASE (DECREASE) IN CASH 2,481,600 (51,700)
CASH-BEGINNING 39,700 150,000
---------- ------------
CASH-ENDING $2,521,300 $ 98,300
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results
for the nine-month period ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant
Company and Subsidiaries' annual report on Form 10-K for the year ended
December 31, 1995.
B. Principles of Consolidation - The consolidated financial statements
include the accounts of Regency Affiliates, Inc. (the "Company") and
its 80% owned subsidiaries National Resource Development Corporation
("NRDC"), Transcontinental Drilling Company ("Drilling") and
RegTransco, Inc. ("RTI"). All significant intercompany balances and
transactions have been eliminated in consolidation.
C. Earnings Per Share - Primary earnings per share are computed by
dividing net income attributable to common shareholders (net income
less preferred stock dividend requirements and periodic accretion) by
the weighted average number of common and dilutive equivalent shares
outstanding during the year. Fully diluted earnings per share
computations assume the conversion of Series E, Series B, and Junior
Series D preferred stock during the period that the preferred stock
issues were outstanding. If the result of these assumed conversions is
dilutive, the dividend requirements and periodic accretion for the
preferred stock issues are reduced.
D. Inventory - Inventory, which consists of aggregate, is stated at lower
of cost or market. Liens have been attached to the aggregate inventory
by the note payable to the related party and the holders of the zero
coupon bonds. The Company is also subject to a royalty agreement which
requires the payment of certain royalties to a previous owner of the
aggregate inventory upon sales of the aggregate.
8
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E. Income Taxes - Effective January 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. The difference
between the financial statement and tax basis of assets and liabilities
is determined annually. Deferred income tax assets and liabilities are
computed for those temporary differences that have future tax
consequences using the current enacted tax laws and rates that apply to
the periods in which they are expected to affect taxable income. In
some situations SFAS 109 permits the recognition of expected benefits
of utilizing net operating loss and tax credit carryforwards. Valuation
allowances are established, if necessary, to reduce the deferred tax
asset to the amount that will, more likely than not, be realized.
Income tax expense is the current tax payable or refundable for the
period plus or minus the net change in the deferred tax assets and
liabilities.
F. In March 1995, the Financial Accounting Standards Board issued a new
standard (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 requires
that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. SFAS 121 is effective for financial statements
for fiscal years beginning after December 15, 1995. The Company adopted
SFAS 121 in the first quarter of 1996 which has not had an effect on
its financial position or results of operations.
9
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENT IN PARTNERSHIP
The Company has invested $350,000 for a limited partnership interest in
Security Land and Development Company Limited Partnership ("Security"),
which owns and operates an office complex (the "Property"). The Company
has limited voting rights and is entitled to be allocated 95% of the
profit and loss of the partnership until October 31, 2003 (the lease
termination date of the sole tenant of the Property) and 50%
thereafter. The Company is to receive certain limited cash flow after
debt service during the lease term and will receive proceeds from the
sale or refinancing of the Property, if any. The Company is also
entitled to receive certain management fees relating to the
partnership.
Security was organized to own and operate a building of approximately
717,000 square feet consisting of a two-story office building, a
connected six-story office tower and approximately 34.3 acres of land.
The Property was purchased by Security in 1986. The Property has been
occupied by the United States Social Security Administration's Office
of Disability and International Operations for more than 24 years under
leases between the United States of America, acting by and through the
General Services Administration ("GSA"). Effective November 1, 1994,
Security and the GSA entered into a nine-year lease (the "Lease") for
100% of the Property. Security has received an opinion of the Assistant
General Counsel to the GSA that lease payments are not subject to
annual appropriation by the United States Congress and the obligations
to make such payments are unconditional general obligations of the
United States Government.
The Company accounts for the investment in the partnership on the
equity method, whereby the carrying value of the investment is
increased or decreased by the Company's allocable share of income or
loss. The investment in the partnership included in the Consolidated
Balance Sheet at September 30, 1996 was $6,676,000. The income from the
Company's equity investment in the partnership for the nine months
ended September 30, 1996 was $2,711,200.
10
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REGENCY AFFILIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized operating data for Security for the three months and nine
months ended September 30, 1996 is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
<S> <C> <C>
Revenues $3,040,600 $8,673,100
Operating Expenses ( 754,600) (2,310,600)
Depreciation and Amortization ( 541,100) (1,486,300)
Interest Expense, Net ( 690,500) (2,022,300)
---------- ----------
Net Income $1,054,400 $2,853,900
========== ==========
</TABLE>
NOTE 3. LONG-TERM DEBT
The Company entered into a $3,500,000 Loan Agreement on June 21, 1996,
with Southern Indiana Properties, Inc. ("SIPI"). The loan specifies a
regular interest rate of 14% per annum, and also requires payment of an
additional amount ("contingent interest") which effectively raises the
interest rate to 20% per annum. The loan does not generally require any
payments of principal or interest until the maturity date of December
31, 2005. The Company has the right to make voluntary prepayments, but
these generally require a prepayment penalty of between 1% and 6%,
depending when made. The Company is given the right to prepay up to
$750,000 of the loan during the first 30 months of the loan term
without prepayment penalty. In the event of such prepayment, no
contingent interest would be payable with regard to the prepaid amount.
The loan is secured by a security interest in substantially all of the
property and property rights of the Company. The lender is given a
first security interest in any unspent proceeds of the loan, and a
first security interest in the Company's limited partnership interest
in Security Land Development Company ("the Partnership Interest").
However, the lender has agreed to subordinate its position in other
collateral of the Company, if requested to do so by the Company. If the
Company prepays $750,000 during the first 30 months of the loan term,
the lender is obligated to release its security interest in all
collateral except the Partnership Interest.
The Company is permitted to use the loan proceeds for acquisitions or
general corporate purposes but payments to redeem shares or pay accrued
but unpaid dividends are limited to $750,000 except with the lender's
consent.
11
<PAGE> 12
NOTE 4. INCOME TAXES
As referred to in Note 1, the Company adopted SFAS 109, "Accounting for
Income Taxes," effective January 1, 1993. The deferred taxes are the
result of long-term temporary differences between financial reporting
and tax reporting for earnings from the Company's partnership
investment in Security Land and Development Company Limited Partnership
related to depreciation and amortization and the recognition of income
tax carryforward items.
At September 30, 1996 and December 31, 1995, the Company's net deferred
tax asset, utilizing a 34% effective tax rate, consists of:
<TABLE>
<CAPTION>
Sept. 30, 1996 Dec. 31, 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Investment partnership earnings $ 2,183,000 $ 1,020,000
Net operating loss carryforwards 14,310,000 15,060,000
----------- -----------
Total deferred tax assets before valuation
allowance 16,493,000 16,080,000
Valuation allowance ( 16,493,000) (16,080,000)
----------- ----------
Net deferred tax asset $ -0- $ -0-
============= ============
</TABLE>
The valuation allowance was established to reduce the net deferred tax
asset to the amount that will more likely than not be realized. This
reduction is necessary due to uncertainty of the Company's ability to
utilize the net operating loss and tax credit carryforwards before they
expire.
For regular federal income tax purposes, the Company has remaining net
operating loss carryforwards of approximately $42,000,000. These losses
can be carried forward to offset future taxable income and, if not
utilized, will expire in varying amounts beginning in the year 2000.
For the three months and nine months ended September 30,1996, the tax
effect of net operating loss carryforwards reduced the current
provision for federal income taxes by approximately $400,000 and
$674,000, respectively. The provision for income taxes for the three
months and nine months ended September 30, 1996, includes amounts for
the alternative minimum tax.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources.
The investment in Security Land And Development Company Limited
Partnership should provide the Company with management fees of at least $100,000
per annum until 2003. In the nine months ending September 30, 1996, the
Company's income from its equity investment in Security was $2,711,200.
On June 21, 1996, the Company closed a loan transaction with Southern
Indiana Properties, Inc. ("SIPI"), as lender, for a $3.5 million zero coupon
loan. The loan has a term of approximately 9 1/2 years, with a final maturity
date of December 31, 2005. Except for certain rights of the Company to make
voluntary prepayments or of the lender to require prepayments in certain limited
circumstances, principal and accrued interest on the loan become due at the
maturity date. The Company intends to use the proceeds of the loan for
acquisitions and/or general corporate purposes. The loan transaction provides
for the loan to be secured by a pledge of the shares of stock of the Company's
subsidiaries, a lien on the loan's proceeds, and a security interest in the
Company's limited partnership interest in Security. SIPI is also given a
security interest in all of the other property of the Company. However, SIPI has
agreed to subordinate its position in other collateral of the Company, if
requested to do so by the Company. Furthermore, if the Company prepays at least
$750,000 of the loan by December 21, 1998, SIPI is obligated to release its
security interest in all collateral except the Company's Limited Partnership
Interest in Security.
During the quarter, the Company acquired a real estate investment in
Stuart, Florida, consisting of a one-story commercial building located on a
one-eighth acre parcel of land. The property was purchased for approximately
$51,000, and is leased to a single tenant. The Company is continuing to explore
opportunities for the acquisition of real estate investments or operating
companies that will provide additional liquidity and cash flow. The Company
anticipates that such acquisitions would be financed by borrowings secured by
the assets acquired and by the proceeds of the SIPI loan. The Company is also
continuing to explore transactions which would utilize the Company's uncommitted
and remaining net operating losses. There can be no assurances that any such
acquisitions or transactions will be made.
As part of the 1993 Transaction with NRDC, the Company received a
working capital loan of $100,000 from Statesman Group, Inc., which loan matured
on July 7, 1995 and carries a 10% interest obligation payable quarterly in
arrears. As of September 30, 1996, the Company had a principal balance
outstanding on notes payable to Statesman of $80,000.
Results of Operations.
Operations of Regency Affiliates, Inc. and its subsidiaries in the
reporting period ending September 30, 1996 were limited to the Company's
ongoing effort to secure acquisitions and/or business combinations to provide
the Company with material operations and cash flow. General and administration
expense includes an expense of $93,300 resulting from the issuance of common
stock to Mr. Nuttall as part of his compensation arrangement with the Company.
13
<PAGE> 14
The statement of operations reflects the income from investment in
Security of $1,001,600 and $2,711,200 for the three months and nine months
ended September 30, 1996, respectively, which represents 95% of the net income
of Security Land and Development Company Limited Partnership.
Interest expense consists primarily of the interest on the loan from
SIPI (see note 3). Such interest expense of $191,330 for the three months and
nine months ended September 30, 1996, is accreted to long-term debt as no
principal or interest payments are due until maturity. The interest on the SIPI
loan also includes $17,905 due to the amortization of issuance costs incurred
in connection with securing the loan.
Income tax expense for the nine months ended September 30, 1996,
includes provisions related to alternative minimum tax for 1996.
14
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company or any of its
subsidiaries.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults in the payment of principal or interest with respect
to any senior indebtedness of Regency Affiliates, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the vote of security holders during the reporting
period ending September 30, 1996.
ITEM 5. OTHER INFORMATION.
As reported on a Form 8-K dated September 25, 1996, Gary K. Nuttall resigned
from the Company's Board of Directors. On August 26, 1996, Pamlyn Kelly, Ph.D.,
a director of the Company, was appointed interim President of the Company and a
search is underway for a new President.
SUBSEQUENT EVENT. On October 22, 1996, the Company repaid its $80,000 (principal
amount) debt to Statesman Group, Inc. The payment totaled $89,955.56, including
accrued interest.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K dated September 25, 1996
Exhibit 27 - Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
__________REGENCY AFFILIATES, INC.__________
(Registrant)
November 18, 1996 By: /s/ Pamlyn Kelly, Ph.D.
-------------------------- ---------------------------
Date Pamlyn Kelly, Ph.D.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000099249
<NAME> REGENCY AFFILIATES,INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,521,300
<SECURITIES> 0
<RECEIVABLES> 2,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,538,200
<PP&E> 51,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,569,000
<CURRENT-LIABILITIES> 167,800
<BONDS> 4,032,300
<COMMON> 4,549,600
392,300
1,053,000
<OTHER-SE> 271,600
<TOTAL-LIABILITY-AND-EQUITY> 10,569,600
<SALES> 1,200
<TOTAL-REVENUES> 1,200
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 413,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,900
<INCOME-PRETAX> 2,098,600
<INCOME-TAX> (176,500)
<INCOME-CONTINUING> 1,925,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,854,200
<EPS-PRIMARY> .16
<EPS-DILUTED> .13
</TABLE>
