<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,
1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,768
<SECURITIES> 5,691
<RECEIVABLES> 216
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,675
<PP&E> 1,677
<DEPRECIATION> 422
<TOTAL-ASSETS> 14,203
<CURRENT-LIABILITIES> 2,089
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 12,013
<TOTAL-LIABILITY-AND-EQUITY> 14,203
<SALES> 0
<TOTAL-REVENUES> 3,187
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> (1,253)
<INCOME-TAX> (103)
<INCOME-CONTINUING> (1,150)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,150)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</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, 1997
[ ] 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, 1997 were
approximately $3,200,000.
At February 28, 1998, there were 1,010,760 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 $2,770,000.
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, 1997, Winston's equity
capital was $1,026,000, all of which was advanced by Kent or generated by
Winston's earnings. Winston had regulatory net capital at that same date,
pursuant to the provisions of Rule 15c3-1 under the Securities Exchange Act of
1934, of $668,000 which was $568,000 in excess of the required net capital.
The Company also provides, through Asset Value Fund Limited Partnership
("AVF"), investment advisory and management services. AVF is an investment
partnership whose primary purpose is to make investments in a limited number of
portfolio companies, whose securities are considered undervalued by the
partnership's management. To date, fees from investment advisory services have
not been material. AVF was funded with an initial capital contribution of $5.0
million in February 1991. At December 31, 1997, the combined equity capital of
the subsidiaries was approximately $11.5 million. AVF has no debt.
The securities business is, by its nature, subject to various risks,
particularly in volatile or illiquid markets, including the risk of losses
resulting from the underwriting or ownership of securities, customer fraud,
employee errors and misconduct, failures in connection with the processing of
securities transactions and litigation. The Company's business and its
profitability are affected by many factors, including the volatility and price
level of the securities markets, the volume, size and timing of securities
transactions, the demand for investment banking services, the level and
volatility of interest rates, the availability of credit, legislation affecting
the business and financial communities, and the economy in general. Markets
characterized by low trading volumes and depressed prices generally result in
reduced commissions and investment banking revenues as well as losses from
declines in the market value of securities positions. Moreover, Kent is likely
to be adversely affected by negative economic developments in New Jersey, the
mid-Atlantic region or the financial services industry in general. Reduced
volume and prices generally result in lower investment banking revenues and
commissions and may result in losses from declines in the market value of
securities held in trading, investment and underwriting positions. In periods of
relatively low business activity for the Company, profitability will likely be
adversely affected because a significant portion of the Company's expenses are
fixed.
<PAGE>
Competition
- -----------
The Company is engaged in an extremely competitive business. Competitors
include, with respect to one or more aspects of its business, all of the member
organizations of the New York Stock Exchange and other registered securities
exchanges, all members of the NASD, commercial banks, thrift institutions and
financial consultants. Many of these organizations have substantially more
employees and greater financial resources than the Company. The Company also
competes for investment funds with banks, insurance companies and investment
companies. Discount brokerage firms oriented to the retail market, including
firms affiliated with commercial banks and thrift institutions, are devoting
substantial funds to advertising and direct solicitation of customers in order
to increase their share of commission dollars and other securities-related
income. The Company typically has not engaged in extensive advertising programs
for this type of business.
The securities industry has become considerably more concentrated and more
competitive in recent years as numerous securities firms have either ceased
operation or have been acquired by or merged into other firms. In addition,
companies not engaging primarily in the securities business, but having
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than those of the Company. Furthermore, many commercial banks offer
various securities related activities and investment vehicles. While it is
presently not possible to predict the type and extent of competitive services
which other financial institutions may offer or the extent to which
administrative or legal barriers are repealed or modified, ultimately these
developments may lead to the creation of integrated financial services firms
that may be able to compete more effectively than the Company for investment
funds by offering a greater range of financial services.
Employees
- ---------
As of December 31, 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 $518,000 at
December 31, 1997, bearing interest on that date at the rate of 7.05% per annum.
The loan matures in May, 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 1997 and
1996. Winston leases space for its Los Angeles office from Bear Stearns
Securities Corporation, its clearing broker-dealer.
<PAGE>
Idle Refinery Properties
- ------------------------
A discontinued crude oil refinery site comprised of 79 acres is owned by
Texas American Petrochemicals, Inc. ("TAPI"), a wholly-owned inactive subsidiary
of the Company, and 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 October 20, 1997.
Management's nominees, Messrs. Paul O. Koether, Mathew E. Hoffman, Casey K.
Tjang and M. Michael Witte, were elected to the Board of Directors.
The following is a vote tabulation for all nominees:
<TABLE>
FOR WITHHELD
-------- ----------
<S> <C> <C>
Paul O. Koether 700,489 21,155
Mathew E. Hoffman 703,210 18,434
Casey K. Tjang 703,210 18,434
M. Michael Witte 703,187 18,457
</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>
1997
First Quarter $ 8 1/2 $ 7
Second Quarter $ 6 1/2 $ 6
Third Quarter $ 5 3/4 $ 5 1/2
Fourth Quarter $ 6 $ 5 3/8
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
- ---------------
</TABLE>
As of February 28, 1998, the Company had approximately 5,500 stockholders
of record of its common stock. The closing price of the common stock was $5 3/4
on February 28, 1998.
The Company did not pay dividends in 1997 or 1996 and does not anticipate
paying dividends in the foreseeable future.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997, the Company had consolidated cash and cash
equivalents of approximately $6.8 million. The cash equivalents were U.S.
Treasury bills with maturities of three months or less, with yields ranging from
5.06% to 5.32%. The Company had securities owned with values of $5.7 million at
December 31, 1997. 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 $518,000. The loan currently bears interest at the rate of 7.05%
with principal payments amortized over twenty years. The loan matures in May,
1999. The Company believes that its liquidity is adequate for future operations.
<PAGE>
Net cash of approximately $62,000 was used by operations in 1997, compared
to net cash used by operations of approximately $1.2 million in 1996. The
principal reason for the decrease was the change in securities owned in 1997
compared to 1996. In 1997, the change in securities owned generated cash of
$680,000, compared to cash used in operations of $2.1 million in 1996. Operating
cash flow impact of the net loss of $1,150,000 in 1997 was offset in part by the
change in unrealized gains (losses) on securities owned. Unrealized gains
(losses) are included in consolidated operations, but do not utilize or generate
cash flows. Depreciation and amortization expense was $45,000 in 1997, a
decrease of $82,000 from 1996. This decrease was due to the closing of the New
York office of Winston in early 1996.
During 1997, the Company repurchased 33,686 shares of its common stock for
an aggregate cost of $219,000. In 1996, the Company repurchased 6,342 shares for
an aggregate cost of approximately $40,925. All shares acquired were purchased
at market prices and have been canceled and returned to the status of authorized
and unissued shares.
Results of Operations
- ---------------------
The Company had a net loss in 1997 of $1,150,000, or $1.12 per share (basic
earnings per share), compared to net earnings of $671,000, or $.64 per share, in
1996. Total brokerage revenue, which consisted of commissions, fees, and
principal trading transactions, was approximately $3.3 million in 1997, a
decrease of $1.7 million or 34% from 1996 total brokerage revenue of $5.0
million. Brokerage expenses (including all fixed and variable expenses)
decreased by $1.3 million, or 37% from $3.5 million in 1996 to $2.2 million in
1997. Net brokerage income of $1.1 million in 1997 represented a decrease of
$400,000, or 27%, from net brokerage income of $1.5 million in 1996. 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 and an overall decrease in the number of brokers
employed at other offices of Winston in 1997 compared to 1996.
Net investing losses were approximately $987,000 in 1997, a decrease of
approximately $1,759,000 from the net gains recorded in 1996 of $772,000. The
decrease in net investing gains was due to the decline in valuation of selected
investments in the investment portfolio. See Notes 1 and 3 of Notes to
Consolidated Financial Statements for additional information on the valuation
and composition of securities owned. Subsequent to December 31, 1997, the
Company sold investments with a carrying value of $2,463,000 resulting in a net
gain of approximately $700,000 from where the securities were valued at December
31, 1997.
Interest, dividends and other income totaled $876,000 in 1997 and
$1,314,000 in 1996. The decrease was primarily the result of lower interest
income on balances at the clearing broker in 1997 compared to 1996 and the sale
of Winston's Pacific Stock Exchange seat in 1996, which resulted in a gain of
$100,000.
General and administrative expenses were $2.2 million in 1997, a decrease
of approximately $200,000 or 8.3% from the $2.4 million recorded in 1996. The
decrease was a direct result of decreased administrative costs related to the
closing of Winston's New York office, as well as lower overall transaction
levels. Personnel, occupancy and all other expenses decreased in 1997 compared
to 1996.
<PAGE>
New Accounting Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be effective for the Company
beginning January 1, 1998. SFAS No. 131 redefines how operating segments are
determined and requires expanded quantitative and qualitative disclosures
relating to a company's operating segments. The Company is still evaluating the
disclosure requirements, if any, upon implementation of SFAS No. 131.
Year 2000 Matters
- -----------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
Management has determined that the year 2000 issue will not pose
significant operational problems for its internal computer systems. All costs
associated with this conversion are being expensed as incurred. Due to the
critical relationship with the Company's clearing broker, the Company will
develop a plan to test the transaction and other data provided by the clearing
broker after any required revisions to its software. However, there can be no
guarantee that the systems of the clearing broker and other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.
The Company will utilize external resources to reprogram, or replace, and
test the software for Year 2000 modifications. The Company anticipates
completing the Year 2000 project not later than October 31, 1999, which is prior
to any anticipated impact on its operating systems. The total cost of the Year
2000 project is not expected to be material and will be funded through operating
cash flows, which will be expensed as incurred.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimate,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modifications plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
<PAGE>
Item 7. FINANCIAL STATEMENTS
The financial statements filed herein are listed below:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheet - December 31, 1997
Consolidated Statements of Operations -
Years ended December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows -
Years ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements
Years ended December 31, 1997 and 1996
<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, 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the two years in the period 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 audits.
We conducted our audits 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 audits provide 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, 1997, and the consolidated results of their
operations and their cash flows for each of the two years in the period then
ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
March 17, 1998
New York, New York
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
($000 Omitted)
<TABLE>
<CAPTION>
December 31,
1997
-------------
<S> <C>
Cash and cash equivalents $ 6,768
Securities owned 5,691
Receivable from clearing broker 216
Property and equipment:
Land and building 1,440
Office furniture and equipment 237
-------
1,677
Accumulated depreciation ( 422)
-------
Net property and equipment 1,255
Other assets 273
-------
Total assets $14,203
=======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
($000 Omitted)
<TABLE>
<CAPTION>
December 31,
1997
-------------
<S> <C>
Liabilities:
Accounts payable $ 118
Income taxes payable 258
Accrued expenses 787
Long-term debt 518
Discontinued operations 408
-------
Total liabilities 2,089
-------
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;
1,012,837 outstanding 101
Additional paid-in capital 15,218
Accumulated deficit ( 3,205)
-------
Total stockholders' equity 12,114
-------
Total liabilities and stockholders' equity $14,203
=======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
($000 Omitted, except per
share data)
Year ended December 31,
---------------------------
1997 1996
------- -------
<S>
Revenues: <C> <C>
Brokerage commissions and fees $ 1,688 $ 2,953
Principal transactions:
Trading 1,610 2,086
Investing gains (losses) ( 987) 772
Interest, dividends and other 876 1,314
------- -------
Total revenues 3,187 7,125
------- -------
Expenses:
Brokerage 2,242 3,484
General, administrative and other 2,153 2,437
Interest 45 198
------- -------
Total expenses 4,440 6,119
------- -------
Earnings (loss) before income taxes ( 1,253) 1,006
Income taxes (benefit) ( 103) 335
------- -------
Net earnings (loss) ($ 1,150) $ 671
======= =======
Basic net earnings (loss) per common share ( 1.12) $ .64
======= =======
Diluted earnings (loss) per common share ($ 1.12) $ .64
======= =======
Weighted average number of common shares
outstanding (in 000's) 1,029 1,050
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
KENT FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($000 Omitted)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Equity
------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
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
Repurchase and cancellation
of common stock ( 4) ( 215) - ( 219)
Net loss - - ( 1,150) ( 1,150)
------ ------- ------- -------
Balance, December 31, 1997 $ 101 $15,218 ($ 3,205) $12,114
====== ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 Omitted)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ($ 1,150) $ 671
Adjustments:
Depreciation and amortization 45 127
Unrealized (gains) losses on securities owned 1,269 ( 364)
Change in securities owned 680 ( 2,116)
Change in net receivable from clearing broker 163 819
Change in accounts payable and accrued expenses ( 711) ( 404)
Change in income taxes payable ( 200) ( 130)
Other, net ( 158) 212
------- -------
Net cash used in operating
activities ( 62) ( 1,185)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ( 29) ( 3)
Sale of property and equipment - 32
Loans to employees - 50
Other, net ( -) 47
------- -------
Net cash provided by (used in)
investing activities ( 29) 126
------- -------
Cash flows from financing activities:
Repurchase of common stock ( 219) ( 41)
Payments on debt ( 31) ( 50)
------- -------
Net cash used in financing activities ( 250) ( 91)
------- -------
Net decrease in cash and cash equivalents ( 341) ( 1,150)
Cash and cash equivalents at beginning of period 7,109 8,259
------- -------
Cash and cash equivalents at end of period $ 6,768 $ 7,109
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense $ 45 $ 198
======= ========
Taxes $ 109 $ 419
======= ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
KENT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. All material
intercompany balances and transactions have been eliminated in consolidation.
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, 1997 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 Company takes proprietary trading securities positions to satisfy
customer demand for Nasdaq market and over-the-counter securities. Realized and
unrealized gains and losses from holding proprietary trading positions for
resale to customers are included in principal transaction trading revenues. The
Company also holds principal investment securities which are recorded at quoted
market prices or at fair value as determined by management based on other
relevant factors. The net change in market or fair value of investment
securities owned is included in principal transactions investing revenues.
The estimated fair value of 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-nine years. Gains or losses on
dispositions of property and equipment are included in operating results.
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.
<PAGE>
KENT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Income and Expenses
----------------------------
Winston receives interest income on its credit balances at the clearing
broker and is charged interest expense on its debit balance at the clearing
broker.
Income Taxes (Benefit)
----------------------
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.
Earnings (Loss) Per Common Share
--------------------------------
Earnings (loss) per common share is calculated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
and is based on the weighted average number of shares outstanding. Diluted
earnings per share includes the assumed conversion of shares issuable upon
exercise of options where appropriate. Prior years' earnings per share
information has been restated to comply with the requirements of SFAS No. 128.
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. 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 ("1934 Act"), Winston is required to maintain a minimum net
capital, as defined, of $100,000. At December 31, 1997, Winston had net capital,
as defined, of $668,000 which was $568,000 in excess of the required minimum.
Winston is exempt from the provisions of Rule 15c3-3 under the 1934 Act as
its activities are limited to those set forth in the conditions appearing in
paragraphs (k)(2)(ii).
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AVF is an investment partnership whose primary purpose is to make
investments in a limited number of portfolio companies, whose securities are
considered undervalued by the partnership's management.
3. SECURITIES OWNED
----------------
Securities owned consist of the following ($000's omitted):
<TABLE>
<CAPTION>
Marketable, at Marketable, at
Market Value Fair Value Total
---------------- --------------- -------
<S> <C> <C> <C>
Equity securities $3,653 $1,923 $5,576
Mutual funds 115 - 115
------ ------ ------
Total $3,768 $1,923 $5,691
====== ====== ======
</TABLE>
Subsequent to year-end, the Company sold securities owned with a market
value of $675,000 and a fair value of $1,788,000 at December 31, 1997 for a gain
of approximately $700,000.
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 1997 and 1996 was
approximately $110,000 and $91,000, respectively.
Future minimum rental requirements under terms of the Company's
noncancellable leases are approximately:
<TABLE>
<S> <C>
1998 $ 97,000
1999 6,000
--------
Total $103,000
========
</TABLE>
Aggregate net rent expense for the years ended December 31, 1997 and 1996
was approximately $10,000 and $138,000, respectively.
5. INCOME TAXES
------------
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
($000 Omitted)
Year Ended December 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Federal-current ($ 97) $259
State-current ( 6) 76
Deferred - -
---- ----
Total ($103) $335
==== ====
</TABLE>
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total income tax expense (benefit) for the years ended December 31, 1997
and 1996 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>
($000 Omitted)
Year Ended December 31,
--------------------------
1997 1996
------ -------
<S> <C> <C>
Income tax expense (benefit) computed at the
statutory federal rate on earnings
before income taxes ($ 426) $ 342
Increase (decrease) in tax from:
Valuation allowance on net operating
loss carryforward 430 ( 314)
State income tax, net of federal benefit ( 4) 50
Alternative minimum tax
carryback benefit ( 52) 259
Other, net ( 51) ( 2)
------ ------
Total income tax expense (benefit) ($ 103) $ 335
====== ======
</TABLE>
The tax effects of significant items comprising the Company's net deferred
tax asset as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
($000
Omitted)
-----------
<S> <C>
Deferred tax assets:
Operating loss carryforwards $2,153
Alternative minimum tax credit
carryforward 906
General business credit
carryforwards 990
State, net operating loss
carryforwards, net of federal benefit 905
Other 356
------
$5,310
======
Valuation allowance ($5,310)
======
Net deferred tax asset $ -
======
</TABLE>
Deferred tax assets 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, 1997, the valuation allowance increased by approximately
$430,000.
<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, 1997 are as follows:
<TABLE>
<CAPTION>
Expiration
($000 Omitted) Years
---------------- ------------
<S> <C> <C>
Net operating loss (Federal) $6,333 2006-2009
General business tax credit $ 990 1997-2000
Alternative minimum tax credit $ 906 -
</TABLE>
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
May 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, 1997 have been
canceled and returned to the status of authorized but unissued shares. As of
December 31, 1997 40,028 shares have been acquired under this repurchase plan.
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.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes option transactions under this plan for
1997:
<TABLE>
<CAPTION>
Average
Shares Price
-------- ---------
<S> <C> <C>
Options outstanding at December 31, 1995
and 1996 30,000 $4.1625
Options granted in 1997 - -
Options exercised in 1997 - -
------ -------
Options outstanding at December 31, 1997 30,000 $4.1625
====== =======
</TABLE>
The Company does not accrue compensation expense for the issuance of stock
options under its accounting policy, which is based on Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." If
compensation expense for granted stock options had been determined based on the
fair value at grant date, the effect on basic and diluted earnings per share in
1997 and 1996 would be immaterial.
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 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. DISCONTINUED OPERATIONS
-----------------------
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.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 through
1997. 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.
10. TRANSACTIONS WITH RELATED PARTIES
---------------------------------
Rosenman & Colin LLP ("R&C") has performed legal work for the Company and
its affiliates in 1997 and 1996. 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
1997 and 1996 were approximately $128,000 and $194,000, respectively. Mrs.
Koether received $150,000 and $142,500 in 1997 and 1996, respectively, as an
employee. She received no compensation from R&C related to fees charged to the
Company for her time.
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 1997 and 1996.
The Company reimburses an affiliate for the direct cost of certain group
medical insurance, 401(k) benefits and office supplies. Such reimbursements were
approximately $171,000 and $170,000 during 1997 and 1996, respectively.
Affiliates of the Company maintain brokerage accounts with Winston, which
received commissions from those affiliates totaling approximately $129,000 and
$121,000 during 1997 and 1996, 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.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 consumations of such transactions.
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, 1997, substantially all of 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.
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
---------------------------------------------
None.
<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
1997 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, 1998
are as follows:
<TABLE>
<CAPTION>
Name Age Position Held
-------- ------- -------------------
<S> <C> <C>
Paul O. Koether 61 Chairman, Director and
President
Mathew E. Hoffman 44 Director
Casey K. Tjang 59 Director
M. Michael Witte 72 Director
John W. Galuchie, Jr. 45 Vice President and
Treasurer
Mark Koscinski 40 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., ("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.
Mathew E. Hoffman. Since January 1997, he has been head of the litigation
department of Todtman, 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. His articles
have been published in the United States, Europe and Japan.
<PAGE>
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.
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, Senior 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.
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.
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 1997.
<PAGE>
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, 1997, 1996 and 1995, for those persons who were, at December 31, 1997 (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
Name and Principal Annual Compensation<F1><F2> Compensation Other
---------------------------------------- -------------- -------
Officer Year Salary Bonus Other<F3> Options(#)
- -------- ---- ------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Paul O. Koether 1997 $200,000 $ - $124,484
Chairman, Presi- 1996 $200,000 $65,000 $142,366 - -
dent and Chief 1995 $200,000 $90,000 $141,956 - -
Executive Officer
John W. Galuchie, Jr. 1997 $160,000 $ 8,000 $ 386
Vice President 1996 $160,000 $15,000 $ 892 - -
and Treasurer 1995 $160,000 $21,000 $ 259 - -
- ----------------------------------------------------
<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, 1997, 1996 and 1995 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 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.
<PAGE>
The table below contains information concerning the exercise of options by
the Named Officers during 1997 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, 1997 at December 31, 1997
------------------ ------------ ------------------------------ ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paul O.
Koether - - - - $ - -
John W.
Galuchie, Jr. - - 5,000 - $11,875 -
</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 1997, the Company paid directors' fees in the aggregate amount of
approximately $37,000.
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 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.
<PAGE>
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, 1998 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> 44.98%
211 Pennbrook Road
Far Hills, NJ 07931
Shamrock Associates 417,470 40.11%
211 Pennbrook Road
Far Hills, NJ 07931
M. Michael Witte 12,000 1.15%
1120 Granville Avenue
Suite 102
Los Angeles, CA 90049
Casey K. Tjang 10,000 *
56 Hall Drive
Clark, NJ 07066
Mathew E. Hoffman 7,000 *
62 Rosehill Avenue
New Rochelle, NY 10804
John W. Galuchie, Jr. 24,166<F3> 2.32%
376 Main Street
Bedminster, NJ 07921
Mark Koscinski 5,000 *
376 Main Street
Bedminster, NJ 07921
All Directors and Officers 512,177 49.21%
as a Group (6 persons)
- -----------------------------------------
*Less than 1 percent.
<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.
</FN>
</TABLE>
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Rosenman & Colin LLP ("R&C") performed legal work for the Company and its
affiliates in 1997 and 1996. 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
1997 and 1996 were approximately $128,000 and $194,000, respectively. Mrs.
Koether received $150,000 and $142,500 in 1997 and 1996, respectively, as an
employee. She received no compensation from R&C related to her fees charged to
the Company for her time.
The Company reimburses an affiliate for the direct cost of certain group
medical insurance, 401(k) benefits and office supplies. Such reimbursements were
approximately $171,000 and $170,000 during 1997 and 1996, respectively.
Affiliates of the Company maintain brokerage accounts with Winston,
which received commissions from these affiliates totaling approximately $129,000
and $121,000 during 1997 and 1996, 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>
21 Subsidiaries<F8>
27 Financial Data Schedule<F8>
(b) Reports on Form 8-K.
--------------------
There were no reports filed on Form 8-K for the year ended December
31,1997.
- -------------------
<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.
<F5> Intentionally left blank.
<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> 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 30, 1998 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 30, 1998 /s/ Paul O. Koether
----------------------
Paul 0. Koether
Chairman of the Board,
President and Director
(Principal Executive Officer)
Dated: March 30, 1998 /s/ Mathew E. Hoffman
---------------------
Mathew E. Hoffman
Director
Dated: March 30, 1998 /s/ M. Michael Witte
--------------------
M. Michael Witte
Director
Dated: March 30, 1998 /s/ Casey K. Tjang
------------------
Casey K. Tjang
Director
KENT FINANCIAL SERVICES, INC.
SUBSIDIARIES
<TABLE>
<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>
