<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Form 10-KSB of Kent Financial Services, Inc. for the year ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000316028
<NAME> KENT FINANCIAL SERVICES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,109
<SECURITIES> 7,639
<RECEIVABLES> 379
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,127
<PP&E> 1,846
<DEPRECIATION> 576
<TOTAL-ASSETS> 16,514
<CURRENT-LIABILITIES> 3,031
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 13,378
<TOTAL-LIABILITY-AND-EQUITY> 16,514
<SALES> 0
<TOTAL-REVENUES> 7,125
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198
<INCOME-PRETAX> 1,006
<INCOME-TAX> 335
<INCOME-CONTINUING> 671
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 671
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
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, 1996
[ ] 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 1-7986
KENT FINANCIAL SERVICES, INC.
(Name of small business issuer in its charter)
Delaware 75-1695953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
376 Main Street, P.O. Box 74, Bedminster, New Jersey 07921
(Address of principal executive offices with Zip Code)
Issuer's telephone number, including area code (908) 234-0078
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.10 per share
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 issuer 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 there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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 ]
Issuer's revenues for the fiscal year ended December 31, 1996 were
approximately $7,125,000.
At February 28, 1997, there were 1,041,908 shares of common stock
outstanding. The aggregate market value of the voting shares held by
non-affiliates of the registrant, based on the closing bid price of such stock
on such date as reported by NASDAQ, was approximately $4,760,000.
Transitional Small Business Disclosure Format Yes______ No X
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
-----------------------
General
- -------
The principal business of Kent Financial Services, Inc. (the "Company" or
"Kent") is the operation of its wholly-owned subsidiary, T.R. Winston & Company,
Inc. ("Winston"), a securities broker-dealer licensed in all states (except
Alaska) and Washington D.C. Winston is a member of the National Association of
Securities Dealers, Inc. and the Securities Investor Protection Corporation. All
clearing arrangements for Winston are conducted pursuant to an agreement with an
unrelated major broker-dealer which is a member of the New York Stock Exchange,
Inc. Winston conducts various activities customary for broker-dealers of
comparable size including buying and selling securities for customer accounts,
trading securities in the over-the-counter market and providing various
corporate finance services including underwritings, private placements, mergers,
acquisitions and similar transactions. Winston has offices in New Jersey,
California, Texas and New Hampshire. As of December 31, 1996, Winston's equity
capital was $980,000, all of which was advanced by Kent or generated by
Winston's earnings.
The Company also provides, through its direct and indirect subsidiaries,
investment advisory and management services. To date, fees from investment
advisory services have not been material. The subsidiaries were funded with an
initial capital contribution of $5.0 million in February 1991. At December 31,
1996, the combined equity capital of the subsidiaries was approximately $13.2
million. These subsidiaries have no debt.
Employees
- ---------
As of February 28, 1997, the Company and its subsidiaries employed 24
people of whom 18 are registered securities brokers.
Item 2. DESCRIPTION OF PROPERTY
-----------------------
Corporate and Branch Offices
- ----------------------------
The Company and certain of its affiliates occupy the Company's corporate
office building and share direct occupancy costs. The office building is
collateral for a mortgage loan with a balance of approximately $549,000 at
December 31, 1996, bearing interest on that date at the rate of 7.05% per annum.
The loan matures in March, 1999.
Effective February 1, 1994, an affiliate entered into a lease agreement
with the Company for office space for a five-year period. The Company's
aggregate rental income from this arrangement was $43,000 in each of 1996 and
1995. Winston leases space for its Los Angeles office from Bear Stearns
Securities Corporation, its clearing broker-dealer.
Idle Refinery Properties
- ------------------------
A discontinued crude oil refinery site comprised of 79 acres is owned by
Texas American Petrochemicals, Inc. ("TAPI"), a wholly-owned subsidiary of the
Company, and
<PAGE>
is located near West Branch, Michigan. The site has been idle since 1983 and
substantially all of the processing units and equipment have been sold. TAPI
also owns approximately 9 acres near Midlothian, Texas, that was, until 1976,
the site of a waste oil recycling facility. The value of these locations is
negligible.
Item 3. LEGAL PROCEEDINGS
-----------------
Environmental Matters - Texas American Petrochemicals, Inc.
- -----------------------------------------------------------
Texas Water Commission
- ----------------------
In January 1988, pursuant to Section 13 of the Texas Solid Waste Disposal
Act, the Texas Water Commission ("TWC") listed on the TEXAS REGISTER a site
identified by the TWC as the "Texas American Oil Site" located in Midlothian,
Ellis County, Texas as a hazardous waste facility. The site was owned by Texas
American Oil Corporation, a formerly wholly-owned subsidiary of the Company,
prior to ownership being transferred to TAPI. TAPI has been notified by the TWC
that TAPI is a potentially responsible party ("PRP") for the site. Early in
1990, TAPI declined a request by the TWC to perform a remedial investigation at
the site. The TWC has not issued an Administrative Order or instituted a formal
proceeding. TAPI has notified the TWC that TAPI has limited financial resources.
Other Environmental Matters
- ---------------------------
TAPI has been identified as a PRP at another waste disposal site operated
by an unrelated party. In the past, TAPI had participated in the PRP group
investigating the site, but is not doing so at the current time.
The Company believes that it should have no liability in connection with
TAPI's environmental matters.
Other
- -----
The Company may be involved from time to time in various lawsuits which
arise in the ordinary course of business and the outcome of which, if adverse,
would not have a material impact on the business of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on November 4, 1996.
Management's nominees, Messrs. Paul O. Koether, Mathew E. Hoffman, Casey K.
Tjang and M. Michael Witte, were elected to the Board of Directors.
<TABLE>
<CAPTION>
The following is a vote tabulation for all nominees:
FOR WITHHELD
------- --------
<S> <C> <C>
Paul O. Koether 819,579 7,993
Mathew E. Hoffman 819,440 8,132
Casey K. Tjang 819,634 7,938
M. Michael Witte 819,588 7,984
</TABLE>
<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
The Company's common stock trades on the National Association of Securities
Dealers, Inc. Automated Quotations System ("NASDAQ") Small Cap Market under the
symbol "KENT".
The table below lists the high and low bid prices for the common stock as
reported by NASDAQ for the periods indicated. These prices represent quotations
between dealers and do not include retail markups, markdowns or commissions, and
may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
-------- -------
Calendar Quarter:
<S> <C> <C>
1996
First Quarter $ 6 1/2 $ 4 3/4
Second Quarter $ 7 1/2 $ 6 5/8
Third Quarter $ 8 $ 7 1/8
Fourth Quarter $ 7 7/8 $ 7 1/2
1995
First Quarter $ 4 1/2 $ 3 1/2
Second Quarter $ 6 $ 3 1/2
Third Quarter $ 7 $ 5 1/4
Fourth Quarter $ 7 1/2 $ 5 5/8
- ---------------
</TABLE>
As of February 28, 1997, the Company had approximately 1,500 stockholders
of record of its common stock. The closing price of the common stock was $8 1/2
on February 28, 1997.
The Company did not pay dividends in 1996 or 1995 and does not anticipate
paying dividends in the foreseeable future.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Liquidity and Capital Resources
- -------------------------------
At December 31, 1996, the Company had consolidated cash and cash
equivalents of approximately $7.1 million. The cash equivalents were U.S.
Treasury bills with maturities of three months or less, with yields ranging from
4.96% to 5.18%. The Company had securities owned with values of $7.6 million at
December 31, 1996. See Notes 1 and 3 of Notes to Consolidated Financial
Statements for additional information on the valuation of securities owned. At
that same date the Company's long-term debt consisted of a mortgage note on the
Company's headquarters facility with a remaining principal amount of
approximately $549,000. The loan currently bears interest at the rate of 7.05%
with principal payments amortized over twenty years. The loan matures in March,
1999. A principal reduction of $146,000 was made in March 1995 in connection
with a refinancing of the mortgage note in 1994 to obtain the current terms. See
Note 6 of Notes to Consolidated Financial Statements. The Company believes that
its liquidity is adequate for future operations.
Net cash of approximately $1.2 million was used by operations in 1996,
compared to net cash provided by operations of approximately $5.0 million in
1995. There were three major reasons for the change in cash flows from
operations in 1996 as compared to 1995. The principal reason for the decrease
was the change in securities owned in 1996 compared to 1995. In 1996, the change
in securities owned used cash of $2.1 million, compared to cash provided from
operations of $2.9 million in 1995. Secondly, net earnings were approximately
$671,000 in 1996, compared to $1.8 million in 1995. Finally, the settlement of
the Internal Revenue Service ("IRS") examination described below resulted in a
payment of alternative minimum taxes and interest of approximately $347,000 in
1996.
During 1996, the Company repurchased 6,342 shares of its common stock for
an aggregate cost of $40,925. In 1995, the Company repurchased 24,468 shares for
an aggregate cost of approximately $165,000. All shares acquired were purchased
at market prices and have been canceled and returned to the status of authorized
and unissued shares.
Environmental Matters
- ---------------------
In January 1988, pursuant to Section 13 of the Texas Solid Waste Disposal
Act, the Texas Water Commission ("TWC") listed on the Texas Register a site
identified by the TWC as the "Texas American Oil Site" located in Midlothian,
Ellis County, Texas as a hazardous waste facility. The site was owned by Texas
American Oil Corporation, a formerly wholly-owned subsidiary of the Company,
prior to ownership being transferred to TAPI. TAPI was notified by the TWC that
TAPI was a potentially responsible party ("PRP") for the site. Early in 1990,
TAPI declined a request by the TWC to perform a remedial investigation at the
site. The TWC has not issued an Administrative Order or instituted a formal
proceeding. TAPI has notified the TWC that TAPI has limited financial resources.
In April 1989, TAPI was formally notified that the Michigan Department of
Natural Resources deemed TAPI a responsible party in connection with alleged
environmental problems at a site owned by TAPI. In the fourth quarter of 1994
TAPI entered into a consent judgment with the State of Michigan. The consent
judgment provided for the payment by TAPI of approximately $450,000 to satisfy
TAPI's alleged liability for past
<PAGE>
and future costs incurred and to be incurred by the State of Michigan in
undertaking remedial environmental activities at TAPI's former refinery site in
Michigan. Under the terms of the settlement, TAPI paid $90,000 in the fourth
quarter of 1994 and $45,000 per year in 1995 and 1996. The Company is required
to pay $45,000 in annual installments through the year 2002 without interest.
The Company joined the consent judgment for the sole purpose of assuring
payments by TAPI. Neither TAPI nor the Company admitted any liability. The
remaining liability for this settlement has been accrued as a part of
discontinued operations in the consolidated balance sheet.
TAPI has been identified as a PRP at another waste disposal site operated
by an unrelated party. The Company believes that it should have no liability in
connection with TAPI's environmental matters.
Results of Operations
- ---------------------
The Company had net earnings in 1996 of $671,000, or $.64 per share,
compared to net earnings of $1,841,000, or $1.73 per share, in 1995. Total
brokerage revenue, which consisted of commissions, fees, and principal trading
transactions, was approximately $5.0 million in 1996, a decrease of $3.6 million
or 42% from 1995 total brokerage revenue of $8.6 million. Brokerage expenses
(including all fixed and variable expenses) decreased by $2.3 million, or 40%
from $5.8 million in 1995 to $3.5 million in 1996. Net brokerage income of $1.5
million in 1996 represented a decrease of $1.3 million, or 46%, from net
brokerage income of $2.8 million in 1995. The overall decrease in the total
brokerage revenue, total brokerage expense and net brokerage income is
attributable to the closing of the New York office of Winston on March 31, 1996.
The Company expects brokerage revenue and net brokerage income to decrease in
the future as it has de-emphasized its retail brokerage business.
Net investing gains were approximately $772,000 in 1996, a decrease of
approximately $1.6 million from the net gains recorded in 1995 of $2.4 million.
The decrease in net investing gains reflect variations in investment portfolio
composition.
Interest, dividends and other income totaled $1.3 million in each of 1996
and 1995. Net investment banking revenue of $195,000 and a gain on the sale of
Winston's Pacific Stock Exchange Seat of $100,000 in 1996 was offset by
decreased interest income on customer account balances at Winston's clearing
broker-dealer.
General and administrative expenses were $2.4 million in 1996, a decrease
of approximately $1.6 million or 40% from the $4.0 million recorded in 1995. The
decrease was a direct result of decreased administrative costs related to the
closing of Winston's New York office, as well as a reduction in operating
expense due to a lower headcount, which reduced personnel expense.
Income Taxes
- ------------
The Company reached an agreement in 1996 with the IRS which concluded the
tax examinations for the years 1988 through 1991. The agreement required the
Company to make a final payment of $346,693, including interest of $217,357. As
a consequence of the agreement, the Company was required to pay alternative
minimum tax ("AMT") for 1995 of approximately $200,000. The Company's net
operating loss carryforwards for federal income tax purposes were also reduced
by approximately $5.8 million as a result of the examination. For additional
information on the IRS examination, see Note 5 of Notes to Consolidated
Financial Statements. The AMT expense will be a credit against future regular
federal income tax.
<PAGE>
Item 7. FINANCIAL STATEMENTS
--------------------
The financial statements filed herein are listed below:
Independent Auditors' Reports
Financial Statements:
Consolidated Balance Sheet - December 31, 1996
Consolidated Statements of Operations -
Years ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows -
Years ended December 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements
Years ended December 31, 1996 and 1995
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Kent Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of Kent Financial
Services, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. 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, such financial statements present fairly, in all material
respects, the consolidated financial position of Kent Financial Services, Inc.
and Subsidiaries at December 31, 1996, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
March 17, 1997
New York, New York
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kent Financial Services, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Kent Financial Services, Inc. and
Subsidiaries for the year ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated results of operations and cash flows of
Kent Financial Services, Inc. and Subsidiaries for the year ended December 31,
1995 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
March 26, 1996
Princeton, New Jersey
<PAGE>
<TABLE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
($000 Omitted)
<CAPTION>
December 31,
1996
------------
<S> <C>
Cash and cash equivalents $ 7,109
Securities owned 7,639
Receivable from clearing broker 379
Property and equipment:
Land and building 1,440
Office furniture and equipment 406
--------
1,846
Accumulated depreciation ( 576)
--------
Net property and equipment 1,270
--------
Other assets 117
--------
Total assets $16,514
========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
($000 Omitted)
<CAPTION>
December 31,
1996
------------
<S> <C>
Liabilities:
Accounts payable $ 126
Income taxes payable 458
Accrued expenses 1,543
Long-term debt 549
Discontinued operations 355
-------
Total liabilities 3,031
-------
Contingent liabilities (Note 9) -
Stockholders' equity:
Preferred stock without par value,
500,000 shares authorized;
none outstanding -
Common stock, $.10 par value,
4,000,000 shares authorized;
1,046,523 outstanding 105
Additional paid-in capital 15,433
Accumulated deficit ( 2,055)
-------
Total stockholders' equity 13,483
-------
Total liabilities and stockholders' equity $16,514
=======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
($000 Omitted, except per
share data)
Year ended December 31,
-------------------------
1996 1995
------ ------
<S> <C> <C>
Revenues:
Brokerage commissions and fees $ 2,953 $ 4,008
Principal transactions:
Trading 2,086 4,586
Investing 772 2,408
Interest, dividends and other 1,314 1,343
------- -------
Total revenues 7,125 12,345
------- -------
Expenses:
Brokerage 3,484 5,770
General, administrative and other 2,437 4,020
Interest 198 406
------- -------
Total expenses 6,119 10,196
------- -------
Earnings before income taxes 1,006 2,149
Income taxes 335 308
------- -------
Net earnings $ 671 $ 1,841
======= =======
Net earnings per common share $ .64 $ 1.73
======= =======
Weighted average number of common shares
outstanding (in 000's) 1,050 1,064
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 Omitted)
<CAPTION>
Year Ended December 31,
------------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 671 $ 1,841
Adjustments:
Depreciation and amortization 127 200
Unrealized gains on securities owned ( 364) ( 233)
Change in securities owned ( 2,116) 2,853
Change in net receivable from clearing broker 819 ( 347)
Change in interest receivable 62 ( 1)
Change in accounts payable and accrued expenses ( 404) 317
Change in income taxes payable ( 130) 229
Other, net 150 91
-------- --------
Net cash provided by (used in) operating
activities ( 1,185) 4,950
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ( 3) ( 31)
Sale of property and equipment 32 -
Loans to employees 50 ( 103)
Other, net 47 1
-------- --------
Net cash provided by (used in)
investing activities 126 ( 133)
-------- --------
Cash flows from financing activities:
Purchase of common stock and stock options ( 41) ( 165)
Payments on debt ( 50) ( 184)
-------- --------
Net cash used in financing activities ( 91) ( 349)
-------- --------
Net (decrease) increase in cash and cash equivalents ( 1,150) 4,468
Cash and cash equivalents at beginning of period 8,259 3,791
-------- --------
Cash and cash equivalents at end of period $ 7,109 $ 8,259
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense $ 198 $ 406
======== ========
Taxes $ 419 $ 38
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($000 Omitted)
<CAPTION>
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Equity
------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 108 $15,636 ($ 4,567) $11,177
Repurchase and cancellation of
common stock and stock options ( 3) ( 162) - ( 165)
Net earnings - - 1,841 1,841
----- ------- ------- -------
Balance, December 31, 1995 105 15,474 ( 2,726) 12,853
Repurchase and cancellation
of common stock - ( 41) - ( 41)
Net earnings - - 671 671
----- ------- ------- -------
Balance, December 31, 1996 $ 105 $15,433 ($ 2,055) $13,483
===== ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Kent
Financial Services, Inc. (the "Company" or "Kent") and its wholly-owned
subsidiaries, T.R. Winston & Company, Inc. ("Winston"), Texas American
Petrochemicals, Inc. ("TAPI") and Asset Value Management, Inc. and its
respective subsidiaries, Asset Value Fund Limited Partnership ("AVF"), a limited
partnership, and Asset Value Holdings, Inc. TAPI is inactive.
Cash Equivalents
----------------
The Company considers as cash equivalents all short-term investments with a
maturity of three months or less when purchased, which are highly liquid and are
readily exchangeable for cash at amounts equal to their stated value. Cash
equivalents at December 31, 1996 consisted of U.S. Treasury Bills.
Securities Owned
----------------
All securities transactions and the related revenues and expenses are
accounted for on a trade-date basis. The effect of all unsettled transactions
for the period is accrued in the consolidated financial statements.
The estimated fair value of non-marketable securities owned has been
determined in good faith under consistently applied principles by the management
of the Company, using available market information and other valuation
considerations. Considerable judgment is required to develop the estimates of
fair value, thus, the estimates provided herein are not necessarily indicative
of the amounts that could be realized in a current market exchange.
Property and Equipment
----------------------
The Company records all property and equipment at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
individual assets ranging from five to thirty-four years. Gains or losses on
dispositions of property and equipment are included in operating results.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Banking Revenues
---------------------------
Investment banking revenues include gains, losses, and fees net of
syndicate expenses arising from securities offerings in which the Company acts
as an underwriter or agent. Investment banking management fees are recorded on
the offering date, sales concessions on settlement date, and underwriting fees
at the time the underwriting is completed and the income is reasonably
determinable.
Income Tax
----------
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The Company and its subsidiaries file a consolidated federal
income tax return.
Net Earnings Per Common Share
-----------------------------
Net earnings per common share is based on the weighted average number of
shares outstanding adjusted for the assumed conversion of shares issuable upon
exercise of options where appropriate.
Estimates
---------
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 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.
2. SECURITIES BROKERAGE BUSINESS
-----------------------------
The Company's business is comprised principally of the operation of
Winston, and the management of AVF, an investment partnership. Winston is a
licensed securities broker-dealer in all states (except Alaska) and Washington
D.C. and is a member of the National Association of Securities Dealers, Inc.,
and the Securities Investor Protection Corporation. Winston conducts retail
securities brokerage, trading and investment banking activities. All
safekeeping, cashiering, and customer account maintenance activities are
provided by an unrelated broker-dealer, Bear Stearns Securities Corporation,
under a clearing agreement.
Pursuant to the net capital provisions of Rule 15c3-1 under the Securities
Exchange Act of 1934, Winston is required to maintain a minimum net capital, as
defined, of $129,000. At December 31, 1996, Winston had net capital, as defined,
of $651,297 which was $522,297 in excess of the required minimum. Winston's
ratio of aggregate indebtedness to net capital, as defined, was .81 to 1.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SECURITIES OWNED
----------------
Securities owned consist of the following ($000's omitted):
<TABLE>
<CAPTION>
Non-
Marketable, at Marketable, at
Market Value Fair Value Total
-------------- -------------- ---------
<S> <C> <C> <C>
Equity Securities $5,807 $1,706 $7,513
Mutual funds 126 - 126
------ ------ ------
Total $5,933 $1,706 $7,639
====== ====== ======
</TABLE>
4. LEASE COMMITMENTS
-----------------
Winston subleases part of its premises at one location to several
subtenants under sublease terms substantially equivalent to Winston's lease
agreement. Rental income under these agreements in 1996 and 1995 was
approximately $91,000 and $61,000, respectively.
Future minimum rental requirements under terms of the Company's
noncancellable leases are approximately:
<TABLE>
<S> <C>
1997 $120,000
1998 30,000
--------
Total $150,000
========
</TABLE>
Aggregate net rent expense for the years ended December 31, 1996 and 1995
was approximately $138,000 and $195,000, respectively.
5. INCOME TAXES
------------
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
($000 Omitted)
Year Ended December 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Federal-current $259 $132
State-current 76 176
Deferred - -
---- ----
Total $335 $308
==== ====
</TABLE>
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total income tax expense for the years ended December 31, 1996 and 1995 is
different from the amount computed by multiplying total earnings before income
taxes by the statutory Federal income tax rate of 34%. The reasons for these
differences and the related tax effects are:
<TABLE>
<CAPTION>
($000 Omitted)
Year Ended December 31,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
Income tax expense computed at the
statutory federal rate on earnings
before income taxes $ 342 $ 731
Increase (decrease) in tax from:
Net operating loss carryforward ( 314) ( 73)
Utilization of capital loss carryforward - ( 595)
State income tax, net of Federal benefit 50 116
Alternative minimum tax 259 132
Other, net ( 2) ( 3)
-------- --------
Total income tax expense $ 335 $ 308
======== ========
</TABLE>
The tax effects of significant items comprising the Company's net deferred
tax asset as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
($000
Omitted)
-------
<S> <C>
Deferred tax assets:
Operating loss carryforwards $2,034
Alternative minimum tax credit
carryforward 972
General business credit
carryforwards 921
State, net of federal benefit 795
Other 200
------
$4,922
======
Valuation allowance ($4,922)
======
Net deferred tax asset $ -
======
</TABLE>
Deferred income taxes reflect the net effects of operating loss and tax
credit carryforwards and the temporary differences between the carrying amounts
of assets and liabilities for financial statement purposes and the amounts used
for income tax purposes. Due to the uncertainty of realizing its deferred tax
asset, a valuation allowance of an equal amount is maintained. For the year
ended December 31, 1996, the valuation allowance decreased by approximately
$2,663,000.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant carryforward balances for Federal income tax purposes as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Expiration
($000 Omitted) Years
-------------- ----------
<S> <C> <C>
Net operating loss $ 5,984 2006-2009
General business tax credit $ 921 1997-2000
Alternative minimum tax credit $ 972 -
</TABLE>
An examination of the Company's consolidated federal income tax returns for
the years 1988 through 1991 was completed by the Internal Revenue Service
("IRS") in 1994. In the written examination report dated January 10, 1994, which
was enclosed with a thirty-day letter dated January 13, 1994, the IRS proposed
tax deficiencies and penalties for the years under audit of approximately $8.2
million. The Company filed a written protest of the IRS examination report with
the Appeals Office within the IRS on March 18, 1994. After the protest was
filed, the Appeals Office sent the case back to the Examining Agent for a
further review of certain of the issues involved. On January 30, 1995, a request
was made by the Company to move the case back to the IRS Appeals Office. On or
about September 26, 1995, the Company received a revised examination report
which increased the proposed tax deficiencies and penalties for the years under
audit to $10.7 million. The Company reached an agreement with the IRS in 1996
which concluded the examination. The Company made a final payment to the IRS of
$346,693 including interest of $217,357. As a consequence of the Agreement, the
Company was required to pay alternative minimum tax and interest for 1995 of
approximately $200,000. The Company's net operating loss carryforwards for
federal income tax purposes were also reduced by approximately $5.8 million as a
result of the examination.
6. LONG-TERM DEBT
--------------
The mortgage loan collateralized by the Company's headquarters facility
bears interest at the rate of 7.05%. Under the terms of the loan, the Company
will make monthly payments of approximately $6,000, including interest, through
March 1999, at which time the remaining balance is due.
7. CAPITAL STOCK
-------------
Common Stock Repurchases
------------------------
From time to time since April 1988, the Company's Board of Directors has
authorized the repurchase of the Company's common stock in the open market or in
privately negotiated transactions. On March 26, 1996, the Board of Directors
approved a plan to repurchase up to 150,000 shares of the Company's common stock
at prices deemed favorable in the open market or in privately negotiated
transactions subject to market conditions, the Company's financial position and
other considerations. All shares acquired through December 31, 1996 have been
canceled and returned to the status of authorized but unissued shares.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock Options
--------------------
The Non-Qualified Stock Option Plan adopted by the stockholders of the
Company in 1987 provides for a maximum of 66,666 shares of common stock of the
Company to be issued to key executives, including officers and directors of the
Company, at the discretion of the Board of Directors. Options under this plan
expire five years from the date of grant and are exercisable as to one-half of
the shares on the date of grant and, as to the other half, after the first
anniversary of the date of grant, or at such other time, or in such other
installments as may be determined by the Board of Directors at the time of
grant.
The following table summarizes option transactions under this plan for 1996
and 1995:
<TABLE>
<CAPTION>
Average
Shares Price
------- ---------
<S> <C> <C>
Options outstanding at December 31, 1994 9,000 $3.875
Options granted in 1995 21,000 $4.50
Options exercised in 1995 - -
------ -------
Options outstanding at December 31, 1995
and 1996 30,000 $4.3125
====== =======
</TABLE>
In August 1993, pursuant to a litigation settlement the Company granted to
a stockholder a non-qualified stock option to purchase up to 15,000 shares of
the common stock of the Company at $4.50 per share. This option was exercisable
in whole or in part for a period of five years. In connection with the grant of
the option, the Company recorded a charge to earnings in 1993 of $37,500 and
increased additional paid-in capital accordingly. On December 5, 1995, the
Company bought back the options for $54,900, and charged paid-in capital for
$37,500 and miscellaneous expense for $17,400.
Pursuant to terms of employment with the Company, an executive officer was
granted a non-statutory stock option to purchase an aggregate of 5,000 shares of
the Company's stock in 1994. These options were not issued pursuant to the 1987
Non-Qualified Stock Option Plan. At December 31, 1996, 4,000 options with an
exercise price of $4.50 remain outstanding.
The Company does not accrue compensation expense for the issuance of stock
options. If it had, pro-forma net earnings and net earnings per share would have
been $667,000 and $.63, respectively in 1996 and $1,840,000 and $1.73,
respectively in 1995.
8. COMPENSATION ARRANGEMENTS
-------------------------
In April 1990, the Company entered into an employment agreement (the
"Agreement") with the Company's Chairman for a three-year term commencing April,
1990 (the "Effective Date") at an annual salary of $175,000 (adjusted to
$200,000 in December 1993), which may be increased but not decreased at the
discretion of the Board of Directors. The
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
term is to be automatically extended one day for each day elapsed after the
Effective Date. The Chairman may terminate his employment under the Agreement
under certain conditions specified in the Agreement and the Company may
terminate the Chairman's employment under the Agreement for cause. In the event
of the Chairman's death during the term of the Agreement, his beneficiary shall
be paid a death benefit equal to $200,000 per year for three years payable in
equal monthly installments. Should the Chairman become "disabled" (as such term
is defined in the Agreement) during the term of the Agreement he shall be paid
an annual disability payment equal to 80% of his base salary in effect at the
time of the disability. The Company has accrued for the contingent payments
under this Agreement.
9. CONTINGENCIES
-------------
Environmental Matters
---------------------
In January 1988, pursuant to Section 13 of the Texas Solid Waste Disposal
Act, the Texas Water Commission ("TWC") listed on the Texas Register a site
identified by the TWC as the "Texas American Oil site" located in Midlothian,
Ellis County, Texas as a hazardous waste facility. The site was owned by Texas
American Oil Corporation, a formerly wholly-owned subsidiary of the Company,
prior to ownership being transferred to TAPI. TAPI has been notified by the TWC
that TAPI is a potentially responsible party ("PRP") for the site. Early in 1990
the TWC requested that TAPI perform a remedial investigation at the site, which
TAPI has declined. The TWC has not issued an Administrative Order or instituted
a formal proceeding. TAPI has notified the TWC that TAPI has limited financial
resources.
In April 1989, TAPI was formally notified that the Michigan Department of
Natural Resources deemed TAPI a responsible party in connection with alleged
environmental problems at a site owned by TAPI. In the fourth quarter of 1994,
TAPI entered into a consent judgment with the State of Michigan. The consent
judgment provides for the payment by TAPI of approximately $450,000 to satisfy
TAPI's alleged liability for past and future costs incurred and to be incurred
by the State of Michigan in undertaking remedial environmental activities at
TAPI's former refinery site in Michigan. Under the terms of the settlement, TAPI
paid $90,000 in the fourth quarter of 1994 and $45,000 per year in 1995 and
1996. The Company is required to pay $45,000 in annual installments through the
year 2002 without interest. The Company joined the consent judgment for the sole
purpose of assuring payments by TAPI. Neither TAPI nor the Company admitted any
liability. The liability had been accrued for in prior years as part of
discontinued operations.
TAPI has been identified as a PRP at another Texas waste disposal site
operated by an unrelated party. The Company believes that it should have no
liability in connection with TAPI's environmental matters.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Receivable from Clearing Broker
-------------------------------
Winston conducts its business on a fully disclosed basis with one clearing
broker, Bear Stearns Securities Corporation, on behalf of its customers and for
its own proprietary accounts. The clearing operations for Winston's customer
accounts and proprietary transactions are performed by its clearing broker
pursuant to a clearance agreement.
At December 31, 1996, substantially all the securities owned and the total
receivable from clearing broker are positions with and amounts due from this
clearing broker. The Company is subject to credit risk should the clearing
broker be unable to pay this balance.
10. TRANSACTIONS WITH RELATED PARTIES
----------------------------------
Rosenman & Colin LLP ("R&C") has performed legal work for the Company and
its affiliates in 1996 and 1995. Natalie I. Koether, wife of the Chairman and
President of the Company is of counsel to R&C and also employed by the Company.
Aggregate fees and expenses billed by R&C to the Company and its subsidiaries in
1996 and 1995 were approximately $194,000 and $273,000, respectively. Mrs.
Koether received $142,500 and $60,000 in 1996 and 1995, respectively, as an
employee.
Since March 1990 certain non-subsidiary affiliates have rented office space
from the Company. The Company's aggregate rental income from these arrangements
was approximately $43,000 in 1996 and 1995.
The Company reimburses an affiliate for the direct cost of certain group
medical insurance, 401(k) benefits and office supplies. Such reimbursements were
approximately $170,000 and $225,000 during 1996 and 1995, respectively.
Affiliates of the Company maintain brokerage accounts with Winston, which
received commissions from those affiliates totaling approximately $121,000 and
$152,000 during 1996 and 1995, respectively.
11. OFF-BALANCE SHEET RISK
----------------------
The Company is engaged in various trading and brokerage activities, on an
agency and principal basis. The Company's exposure to off-balance sheet credit
risk occurs in the event a customer, clearing agent or counterparty does not
fulfill their obligations arising from a transaction.
The Company is also engaged in various investment banking activities in
which counterparties include broker-dealers, banks, and other institutional
customers. In the event counterparties do not fulfill their obligations, the
Company may be exposed to risk. The risk of default depends on the
creditworthiness of the counterparty or issuer of the instrument. It is the
Company's policy to review, as necessary, the credit standing of each
counterparty or issuer prior to consumation of such transactions.
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
---------------------------------------------
On December 9, 1996, the Company engaged Deloitte & Touche LLP as its
certified public accountant for the 1996 fiscal year, thereby replacing Coopers
& Lybrand L.L.P. ("C&L"). The change was approved by the Company's Board of
Directors.
No report on the financial statements of the Company issued by C&L during
the last two fiscal years contained an adverse opinion or disclaimer of opinion,
or was qualified or modified as to uncertainty, audit scope or accounting
principles, nor were there any disagreements during the last two fiscal years
and through December 9, 1996, between C&L and the Company concerning any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved would have
required C&L to make reference to the subject matter thereof in connection with
its report. During the last two fiscal years and through December 9, 1996, none
of the events listed in items (1) through (3) of Item 304(a)(1)(iv)(B) of
Regulation S-B have occurred; during such period the Company has not consulted
with Deloitte & Touche LLP regarding any matter referred to under paragraphs (i)
and (ii) of Item 304(a)(2) of Regulation S-B.
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
-------------------------------------------------------------
All of the members of the current Board of Directors were elected at the
1996 Annual Meeting and all will serve until the next Annual Meeting or until
their successors have been elected and shall qualify. The Company's officers are
elected by and serve at the leave of the Board.
None of the executive officers of the Company is related to any other.
There is no arrangement or understanding between any executive officer and any
other person pursuant to which such officer was selected.
The directors and executive officers of the Company at February 28, 1997
are as follows:
<TABLE>
<CAPTION>
Name Age Position Held
-------- -------- ------------------
<S> <C> <C>
Paul O. Koether 60 Chairman, Director and
President
Mathew E. Hoffman 43 Director
Casey K. Tjang 58 Director
M. Michael Witte 71 Director
John W. Galuchie, Jr. 44 Vice President and
Treasurer
Mark Koscinski 39 Vice President
- ------------------------------------
</TABLE>
Paul O. Koether is principally engaged in the following businesses: (i) as
Chairman and director since July 1987 and President since October 1990 of the
Company and the general partner since 1990 of Shamrock Associates, ("Shamrock")
an investment partnership which is the principal stockholder of the Company and
(ii) various positions with affiliates of the Company, including Chairman since
1990 and a registered representative since 1989 of T. R. Winston & Company, Inc.
("Winston") and since July 1992, a director of American Metals Service, Inc.,
("AMS") which was an indirect, majority-owned subsidiary of the Company before
its shares were distributed to the Company's shareholders. AMS currently is
seeking to acquire an operating business. Mr. Koether also has been Chairman
since April 1988, President from April 1989 to February 1997 and director since
March 1988 of Pure World, Inc., formerly American Holdings, Inc., ("Pure World")
and since December 1994 has been a director and since January 1995 has been
Chairman of Pure World's majority-owned subsidiary, Madis Botanicals, Inc.,
("Madis") a manufacturer and distributor of natural products. He is also
Chairman and a director of Pure World's principal stockholder, Sun Equities
Corporation, ("Sun") a private company. Mr. Koether served as Chairman and a
director of NorthCorp Realty Advisors, Inc., an asset management company,
("NorthCorp") from June 1992 when it was acquired by Pure World until August,
1994 when it was merged and renamed Crown NorthCorp, Inc.
<PAGE>
Mathew E. Hoffman. Since January 1997, he has been head of the litigation
department of Todtman, Young, Nachamie, Hendler & Spizz P.C. From May 1994 until
January, 1997 Mr. Hoffman was a partner of the law firm of Rosen & Reade. From
February 1989 to May 1994, he was a partner of Keck, Mahin & Cate.
Casey K. Tjang. Since December 1995, he has been a director and secretary
and since September 1996, Chief Financial Officer of Leading Edge Packaging,
Inc., a marketing, wholesaler and distribution company of consumer product
packagings. From 1991 to 1995, Mr. Tjang served as President and Chief Executive
Officer of First Merchant Bankers, Inc., a privately-owned investment company,
whose business is focused in the Asia Pacific rim, and from 1993 to 1995, he was
an Executive Director of Starlite Holdings Limited, a printer and manufacturer
of packaging materials. From March 1991 until February 1995, Mr. Tjang was a
director of Concord Camera Corp., which manufactures and distributes camera
equipment. Prior to March 1991, he was managing director and Vice President of
the Trade and Merchant Banking Group of Midlantic National Bank where he was
employed for twelve years.
M. Michael Witte. Since August 1980, he has been President of M. M. Witte &
Associates, Inc., a private corporation which is engaged in oil and gas
consulting and investment management. In November, 1995 Mr. Witte was elected
Co-Chairman of The American Drilling Company, L.L.C. and on August 1, 1996 he
was elected President and Chief Executive Officer of South Coast Oil
Corporation, positions he still holds. From April 1991 to June 1995 Mr. Witte
was a director of Search Exploration, Inc., a publicly held corporation until it
was acquired by Harken Energy Corporation, which, through its wholly-owned
subsidiary, McCulloch Energy, Inc. ("McCulloch") was engaged in the acquisition,
exploration, development and production of oil and natural gas properties in the
United States. Mr. Witte was Chairman of McCulloch from April 1991 through June
1995.
John W. Galuchie, Jr., a certified public accountant, is engaged in the
following businesses: (i) the Company, as Vice President and Treasurer since
September 1986 and a director from June 1989 to August 1993; (ii) Winston, as
President and Treasurer since September 1989; (iii) Pure World, as Executive
Vice President since April 1988 and director from January 1990 until October
1994; and (iv) NorthCorp as a director from June 1992 until August 1996 and as
Secretary, from November 1992 to August 1994.
Mark Koscinski, a certified public accountant, is principally engaged in
the following businesses: since August 1993 (i) the Company and Winston as Vice
President; (ii) Pure World, as Senior Vice President; and (iii) since December
1994, Madis, as director, Vice President, Secretary and Treasurer. Previously,
Mr. Koscinski had served as Vice President of Accounting Operations with
Chemical Bank of New York from October 1992 to August 1993. From February 1986
to October 1992, Mr. Koscinski was employed by the Howard Savings Bank (the
"Howard") in New Jersey in various positions, concluding as its Corporate
Controller. The Howard was placed into receivership by the Federal Deposit
Insurance Corporation on October 2, 1992.
Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors and persons who own more than ten percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission ("SEC") and the National Association of Securities Dealers ("NASD").
Officers and directors and greater than ten percent stockholders are required by
SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 which
they file.
<PAGE>
Based solely on the Company's review of the copies of such forms it has
received, the Company believes that all its officers, directors and greater than
ten percent beneficial owners complied with all filing requirements applicable
to them with respect to transactions during fiscal 1995.
Item 10. EXECUTIVE COMPENSATION
----------------------
There is shown below information concerning the annual compensation for
services in all capacities to the Company for the fiscal years ended December
31, 1996, 1995 and 1994, for those persons who were, at December 31, 1996 (i)
the chief executive officer and (ii) the other most highly compensated officers
of the Company, whose annual compensation exceeds $100,000 (the "Named
Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
---------------------------
Long-Term
Annual Compensation<F1><F2> Compensation Other
Name and Principal ---------------------------------------- ----------------- ---------
Officer Year Salary Bonus Other<F3> Options(#)
<S> <C> <C> <C> <C> <C> <C>
Paul O. Koether 1996 $200,000 $65,000 $142,366
Chairman, Presi- 1995 $200,000 $90,000 $141,956 - -
dent and Chief 1994 $200,000 $ - $132,917 - -
Executive Officer
John W. Galuchie, Jr. 1996 $160,000 $15,000 $ 892
Vice President 1995 $160,000 $21,000 $ 259 - -
and Treasurer 1994 $160,000 $ - $ 62 - -
- ----------------------------------------------------
<FN>
<F1> The Company has no bonus or deferred compensation plans and pays bonuses at
the discretion of the Board based on performance.
<F2> The individuals named in the table above received incidental personal
benefits during the fiscal years covered by the table. The value of these
incidental benefits did not exceed the lesser of either $50,000 or 10% of the
total annual salary and bonus reported for any of the Named Officers. Such
amounts are excluded from the table.
<F3> Represents commissions paid by Winston to these individuals in their
capacity as registered representatives for securities trades made for their
respective customers.
</FN>
</TABLE>
There were no stock options granted pursuant to the Company's 1987
Non-Qualified Stock Option Plan (the "Plan") during the fiscal years ended
December 31, 1995 or 1996 to the Named Officers.
Options may be granted by the Board of Directors to officers, directors and
employees of the Company or its subsidiaries. The exercise price for the shares
shall not be less than the fair market value of the Common Stock on the date of
grant. Options will expire five years from date of grant and will be exercisable
as to one-half of the shares on the date of grant and as to the other half,
after the first anniversary of the date of grant, or at such other time, or in
such other installments as may be determined by the Board of Directors or a
committee thereof at the time of grant. The
<PAGE>
options are non-transferable (other than by will or by operation of the laws of
descent) and are exercisable generally only while the holder is employed by the
Company or by a subsidiary of the Company or, in the event of the holder's death
or permanent disability while employed by the Company, within one year after
such death or disability.
The table below contains information concerning the exercise of options by
the Named Officers during 1996 and the fiscal year-end value of unexercised
options held by the Named Officers.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of Value of Unexercised
Shares Acquired Value Number of Unexercised In-the-Money Options
on Exercise Realized Options at December 31, 1996 at December 31, 1996
----------------- ---------- ------------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul O.
Koether - $ - - - $ - -
John W.
Galuchie, Jr. - $ - 5,000 - $25,625 -
</TABLE>
Remuneration of Directors
- -------------------------
Directors who are not employees of the Company receive a monthly fee of
$750 plus $200 for each day of attendance at board and committee meetings.
During 1996, the Company paid directors' fees in the aggregate amount of
approximately $30,000.
Compensation Arrangements
- -------------------------
In April, 1990, the Company and Paul O. Koether entered into an employment
agreement ("Agreement") pursuant to which Mr. Koether serves as the Company's
Chairman for an initial three-year term ("Commencement Date") at an annual
salary of $175,000 (changed to $200,000 in December 1993) ("Base Salary"), which
may be increased but not decreased at the discretion of the Board of Directors.
The term is to be automatically extended one day for each day elapsed after the
Commencement Date.
Mr. Koether may terminate his employment under the Agreement at any time
for "good reason" (defined below) within 36 months after the date of a Change in
Control (defined below) of the Company. Upon his termination, he shall be paid
the greater of the (i) Base Salary and any bonuses payable under the Agreement
through the expiration date of the Agreement or (ii) an amount equal to three
times the average annual Base Salary and bonuses paid to him during the
preceding five years.
Change in Control is deemed to have occurred if (i) any individual or
entity, other than individuals beneficially owning, directly or indirectly,
common stock of the Company representing 30% or more of the Company's stock
outstanding as of April, 1990, is or becomes the beneficial owner, directly or
indirectly, of 30% or more of the Company's outstanding stock or (ii)
individuals constituting the Board of Directors on April, 1990 ("Incumbent
Board"), including any person subsequently elected to the Board whose election
or nomination for election was approved by a vote of at least a majority of the
Directors comprising the Incumbent Board, cease to constitute at least a
majority
<PAGE>
of the Board. "Good reason" means a determination made solely by Mr. Koether, in
good faith, that as a result of a Change in Control he may be adversely affected
(i) in carrying out his duties and powers in the fashion he previously enjoyed
or (ii) in his future prospects with the Company.
Mr. Koether may also terminate his employment if the Company fails to
perform its obligations under the Agreement (including any material change in
Mr. Koether's duties, responsibilities and powers or the removal of his office
to a location more than five miles from its current location) which failure is
not cured within specified time periods.
The Company may terminate Mr. Koether's employment under the Agreement for
"cause" which is defined as (i) Mr. Koether's continued failure to substantially
perform his duties under the Agreement (other than by reason of his mental or
physical incapacity or the removal of his office to a location more than five
miles from its current location) which is not cured within specified time
periods, or (ii) Mr. Koether's conviction of any criminal act or fraud with
respect to the Company. The Company may not terminate Mr. Koether's employment
except by a vote of not less than 75 percent of the entire Board of Directors at
a meeting at which Mr. Koether is given the opportunity to be heard.
In the event of Mr. Koether's death during the term of the Agreement, his
beneficiary shall be paid a death benefit equal to $200,000 per year for three
years payable in equal monthly installments. Should Mr. Koether become
"disabled" (as such term is defined in the Agreement) during the term of the
Agreement and either long-term disability insurance is not provided by the
Company or such policy does not provide an annual benefit to age 70 equal to 80%
or more of Mr. Koether's base salary, he shall be paid an annual disability
payment equal to 80% of his base salary in effect at the time of the disability.
Such payments shall continue until Mr. Koether attains the age of 70.
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table provides information with respect to the Company's
common stock beneficially owned as of February 28, 1997 by each director of the
Company, by each person having beneficial ownership of five percent or more of
the Company's common stock and by all directors and officers of the Company as a
group.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership<F1> Class
- ------------------- ------------------- --------------
<S> <C> <C>
Paul O. Koether 468,177<F2> 43.68%
211 Pennbrook Road
Far Hills, NJ 07931
Shamrock Associates 417,470 38.95%
211 Pennbrook Road
Far Hills, NJ 07931
M. Michael Witte 12,000 1.12%
1120 Granville Avenue
Suite 102
Los Angeles, CA 90049
Casey K. Tjang 10,000 <F4>
56 Hall Drive
Clark, NJ 07066
Mathew E. Hoffman 7,000 <F4>
62 Rosehill Avenue
New Rochelle, NY 10804
John W. Galuchie, Jr. 24,166<F3> 2.25%
376 Main Street
Bedminster, NJ 07921
Mark Koscinski 5,000 <F4>
376 Main Street
Bedminster, NJ 07921
All Directors and Officers 512,177 47.88%
as a Group (6 persons)
- -----------------------------------------
<FN>
<F1> The beneficial owner has both sole voting and sole investment powers with
respect to these shares except as set forth in this footnote or in other
footnotes below. Included in such number of Shares beneficially owned are
shares subject to options currently exercisable or becoming exercisable
within sixty days: Mr. Witte (7,000 shares); Mr. Tjang (7,000 shares); Mr.
Hoffman (7,000 shares); Mr. Galuchie (5,000 shares); Mr. Koscinski (4,000
shares); and all directors and officers as a group (30,000 shares).
<PAGE>
<F2> Includes the 417,470 Shares beneficially owned by Shamrock. As a general
partner of Shamrock, Mr. Koether may be deemed to own these shares
beneficially. Includes 14,166 shares owned by Sun, a private corporation of
which Mr. Koether is the Chairman and a principal stockholder. Includes
1,666 shares held by Mr. Koether's Keogh Plan and 875 shares held in a
trust for the benefit of Mr. Koether's daughter for which Mr. Koether acts
as the sole trustee. Mr. Koether is also a limited partner of Shamrock and
may be deemed to own beneficially that percentage of the shares owned by
Shamrock represented by his partnership percentage. Mr. Koether disclaims
beneficial ownership of such shares.
<F3> Includes 14,166 Shares owned by Sun, a private corporation of which Mr.
Galuchie is a director and officer. Mr. Galuchie disclaims beneficial
ownership of such shares.
<F4> Less than 1 percent.
</FN>
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Rosenman & Colin LLP ("R&C") performed legal work for the Company and its
affiliates in 1996 and 1995. Natalie I. Koether, wife of the Chairman and
President of the Company, is of counsel to R&C and also employed by the Company.
Aggregate fees and expenses billed by R&C to the Company and its subsidiaries in
1996 and 1995 were approximately $194,000 and $273,000, respectively. Mrs.
Koether received $142,500 and $60,000 in 1996 and 1995, respectively, as an
employee.
The Company reimburses an affiliate for the direct cost of certain group
medical insurance, 401(k) benefits and office supplies. Such reimbursements were
approximately $170,000 and $225,000 during 1996 and 1995, respectively.
Affiliates of the Company maintain brokerage accounts with Winston, which
received commissions from these affiliates totaling approximately $121,000 and
$152,000 during 1996 and 1995, respectively.
<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
(a) Exhibits
--------
<S> <C>
3.1 Bylaws of the Registrant, as amended. <F1>
3.2(a) Articles of Incorporation of Registrant, as amended (including
certificate of stock designation for $2.575 Cumulative
Convertible Exchangeable Preferred Stock). <F2>
3.2(b) Certificate of Amendment to Certificate of Incorporation.<F3>
3.2(c) Certificate of Amendment to Certificate of Incorporation dated
September 26, 1991. <F4>
10.1 1987 Non-Qualified Executive Stock Option Plan. <F6>
10.2 Employment Agreement, dated as of April 6, 1990 by and between
Texas American Energy Corporation and Paul 0. Koether. <F7>
10.3 Notice of Proposed Settlement. <F8>
10.4 Consent Judgment referred to in "Part I - Item 3 - LEGAL
PROCEEDINGS." <F9>
21 Subsidiaries<F10>
27 Financial Data Schedule<F10>
(b) Reports on Form 8-K.
--------------------
On December 9, 1996 the Company filed an 8-K reporting a
change in accountants from Coopers & Lybrand L.L.P. to
Deloitte & Touche LLP.
- -------------------
<PAGE>
<FN>
<F1> Incorporated by reference to Texas American Energy Corporation Registration
Statement, as amended, on Form S-l, No. 33-11109.
<F2> Incorporated by reference to Texas American Energy Corporation Form 10-K,
for the fiscal year ended December 31, 1984.
<F3> Incorporated by reference to Texas American Energy Corporation Form 10-K
for the fiscal year ended December 31, 1987.
<F4> Incorporated by reference to Kent Financial Services, Inc. Form 10-Q
for the quarter ended September 30, 1991.
<F6> Incorporated by reference to Texas American Energy Corporation Proxy
Statement dated November 11, 1987.
<F7> Incorporated by reference to Kent Financial Services, Inc. Form 10-Q for
the quarter ended June 30, 1990.
<F8> Incorporated by reference to Kent Financial Services, Inc. Form 10-QSB for
the quarter ended June 30, 1993.
<F9> Incorporated by reference to Kent Financial Services, Inc. Form 10-QSB for
the quarter ended September 30, 1994.
<F10>Filed herewith.
</FN>
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KENT FINANCIAL SERVICES, INC.
Dated: March 26, 1997 BY /s/ Paul O. Koether
-------------------
Paul 0. Koether
Chairman of the Board, President
and Director
(Principal Executive Officer)
BY /s/ Mark Koscinski
-------------------
Mark Koscinski
Vice President
(Principal Financial and
Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Dated: March 26, 1997 /s/ Paul O. Koether
-------------------
Paul 0. Koether
Chairman of the Board,
President and Director
(Principal Executive Officer)
Dated: March 26, 1997 /s/ Mathew E. Hoffman
---------------------
Mathew E. Hoffman
Director
Dated: March 26, 1997 /s/ M. Michael Witte
--------------------
M. Michael Witte
Director
Dated: March 26, 1997 /s/ Casey K. Tjang
------------------
Casey K. Tjang
Director
<TABLE>
KENT FINANCIAL SERVICES, INC.
SUBSIDIARIES
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
Asset Value Holdings, Inc. Delaware
Asset Value Management, Inc. Delaware
Texas American Petrochemicals, Inc. Texas
T. R. Winston & Company, Inc. New Jersey
T. R. Winston Capital, Inc. Delaware
Kent Advisors, Inc. New Jersey
</TABLE>
