<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,
1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,217
<SECURITIES> 5,064
<RECEIVABLES> 1,269
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,550
<PP&E> 1,688
<DEPRECIATION> 474
<TOTAL-ASSETS> 15,958
<CURRENT-LIABILITIES> 3,073
<BONDS> 0
0
0
<COMMON> 199
<OTHER-SE> 12,323
<TOTAL-LIABILITY-AND-EQUITY> 15,958
<SALES> 0
<TOTAL-REVENUES> 5,183
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280
<INCOME-PRETAX> 535
<INCOME-TAX> 3
<INCOME-CONTINUING> 532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 532
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</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, 1998
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 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, 1998 were
approximately $5,200,000.
At February 28, 1999, there were 1,991,658 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 $4,529,000.
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 the District of Columbia. 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 Bear Stearns Securities Corporation, 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 three offices in New Jersey,
and one office in each of California, Texas and New Hampshire. As of December
31, 1998, Winston's equity capital was $979,000, 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 $574,000 which was $474,000 in excess of the required
net capital. 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) of the rule.
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
million in February 1991. At December 31, 1998, the equity capital of AVF was
approximately $11.8 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
<PAGE>
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.
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 and online Internet 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, 1998, the Company and its subsidiaries employed 24
people of whom 18 are registered securities brokers.
<PAGE>
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 $478,000 at
December 31, 1998, bearing interest on that date at the rate of 7.05% per annum.
The loan matures in May 1999.
Effective February 1, 1999, an affiliate entered into an extension of 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
1998 and 1997. Winston leases space for its Los Angeles office from its clearing
broker-dealer.
Item 3. LEGAL PROCEEDINGS
-----------------
Environmental Matters - Texas American Petrochemicals, Inc. ("TAPI")
- --------------------------------------------------------------------
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.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on November 2, 1998.
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:
FOR WITHHELD
--- --------
Paul O. Koether 749,160 23,706
Mathew E. Hoffman 749,290 23,576
Casey K. Tjang 749,389 23,477
M. Michael Witte 749,378 23,488
<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, adjusted for the two-for-one stock
split distributed on November 9, 1998. These prices represent quotations between
dealers and do not include retail markups, markdowns or commissions, and may not
represent actual transactions.
High Low
---- ---
Calendar Quarter:
1998
First Quarter $ 2 13/16 $ 2 11/16
Second Quarter $ 3 3/8 $ 2 15/16
Third Quarter $ 3 3/4 $ 3
Fourth Quarter $ 5 13/16 $ 3 1/8
1997
First Quarter $ 4 1/4 $ 3 1/2
Second Quarter $ 3 1/4 $ 3
Third Quarter $ 2 7/8 $ 2 3/4
Fourth Quarter $ 3 $ 2 11/16
- ---------------
As of February 28, 1999, the Company had approximately 1,898 stockholders
of record of its common stock. The closing price of the common stock was $4.375
on February 26, 1999.
The Company did not pay dividends in 1998 or 1997 and does not anticipate
paying dividends in the foreseeable future.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Liquidity and Capital Resources
- -------------------------------
At December 31, 1998, the Company had consolidated cash and cash
equivalents of approximately $8.2 million. The cash equivalents were U.S.
Treasury Bills with original maturities of three months or less, with yields
ranging from 3.70% to 4.64%. The Company had securities owned valued at $5.1
million at December 31, 1998. See Note 1 of Notes to Consolidated Financial
Statements for additional information on the valuation of securities owned. At
that same date, the Company's mortgage note payable on its headquarters facility
had a remaining principal amount of approximately $478,000. 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 is evaluating its
options to either refinance or pay the mortgage in its entirety. The Company
believes that its liquidity is adequate for future operations.
<PAGE>
Net cash of approximately $1.6 million was provided by operations in 1998,
compared to net cash used in operations of approximately $62,000 in 1997. A
principal reason for the increase was the change in securities owned in 1998
compared to 1997 partially offset by the change in net receivable from the
clearing broker. In 1998, the change in securities owned and the change in
receivable from the clearing broker generated net cash of $1.4 million, compared
to $843,000 in 1997. The operating cash flow impact of the net income of
$532,000 in 1998 and the net loss of $1.2 million in 1997 were offset 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. The change in accounts payable and income taxes payable generated
cash of $87,000 in 1998 compared to a use of cash of $911,000 in 1997.
During 1998, the Company repurchased 33,692 shares of its common stock for
an aggregate cost of $124,000. In 1997, the Company repurchased 67,372 shares
for an aggregate cost of approximately $219,000. 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 net income in 1998 of $532,000, or $.27 basic and fully
diluted earnings per share, compared to a net loss of $1,150,000, or $.56 basic
and fully diluted earnings per share, in 1997. Total brokerage revenue, which
consisted of commissions, underwriting fees, and principal trading transactions,
was approximately $2.6 million in 1998, a decrease of $700,000 or 21% from 1997
total brokerage revenue of $3.3 million. Brokerage expenses (including all fixed
and variable expenses) decreased by $400,000, or 18% from $2.2 million in 1997
to $1.8 million in 1998. Net brokerage income of $800,000 in 1998 represented a
decrease of $300,000, or 27%, from net brokerage income of $1.1 million in 1997.
The overall decrease in the total brokerage revenue, total brokerage expense and
net brokerage income is attributable to a change in the composition of producing
brokers employed at Winston in 1998 compared to 1997.
Net investing gains were approximately $1.7 million in 1998, an increase of
approximately $2.6 million from the net investing losses in 1997 of $987,000.
The increase in net investing gains was due to realized gains on the sale of
selected investments in the investment portfolio.
Interest, dividends and other income totaled $979,000 in 1998 and $876,000
in 1997. The increase was primarily the result of higher invested balances of
cash equivalents.
General and administrative expenses were $2.6 million in 1998, an increase
of approximately $700,000 or 37% from the $1.9 million recorded in 1997. The
majority of the increase was a result of the following items: (i) $200,000
provision for start up costs of a subsidiary that will provide telephone
services in the New England region, (ii) $130,000 in expenses incurred in
connection with a proxy solicitation for one of the securities owned by AVF,
(iii) $160,000 increase in employee bonus accruals, and (iv) $75,000 increase in
business development expenses.
Market Risk
- -----------
On January 28, 1997, the SEC adopted new rules (Securities Act Release No.
7386) that require disclosures about the policies used to account for
derivatives, and certain quantitative and qualitative information about market
risk exposures. Since its inception, neither the Company nor its subsidiaries
has traded or otherwise transacted in derivatives. In the normal course of its
securities business, the Company maintains inventories of marketable securities.
<PAGE>
The fair value of these securities at December 31, 1998 was $5.1 million as to
its long positions and $1.4 million as to its short positions. The potential
change in fair value, using a hypothetical 10% decline in prices, is estimated
to be a $510,000 loss as to its long positions and a $140,000 gain as to its
short positions as of December 31, 1998. For working capital purposes, the
Company invests in U.S. Treasury Bills or maintains interest bearing balances in
its trading accounts with its clearing broker, which are classified as cash
equivalents and receivable from clearing broker, respectively, in the
consolidated financial statements.
Pending Sale Of Subsidiary
- --------------------------
On July 30, 1998, Winston, its wholly-owned subsidiary T. R. Winston
Capital, Inc. ("Wincap"), and an unrelated third party ("Third Party"), entered
into a stock purchase agreement ("Agreement"). The Agreement provides among
other things, for the Third Party to contribute to the capital of Wincap,
$800,000 in return for an 80% ownership interest and an officer of Wincap and
Winston to receive a 10% ownership interest. The closing of the Agreement and
the resultant change in control are subject to NASD approval which has not yet
been received.
A condition of the Agreement is that the Third Party and two officers of
Winston enter into an investment advisory agreement ("Advisory Agreement").
Under the Advisory Agreement, the Third Party has committed to provide no less
than $4.7 million of assets to be managed by the two officers as long as certain
performance criteria are met.
Certain fees and commissions generated in managing these assets will
ultimately be remitted to Winston and one of its officers.
If the Agreement is closed, Winston has agreed to provide management
services to Wincap. These services will consist of all services necessary for
the operation of Wincap's securities business. Winston will receive as
compensation for the services, 60% of Wincap's gross commissions as defined in
the Agreement.
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. Management's
Year 2000 Plan addresses aspects of Assessment which was completed during 1998;
Implementation which will be completed during the 3rd Quarter of 1999; Staffing;
Testing; and Contingency Planning. To date the Company is on schedule with its
Year 2000 Project with the anticipated completion date of October 31, 1999,
which is prior to any anticipated effect on its operating systems. The Company
has replaced certain systems that were not Year 2000 compliant and is in the
process of converting others to properly recognize the Year 2000. The Company
will utilize external resources to reprogram, or replace, and test the software
for Year 2000 modifications. Due to the critical relationship with the Company's
clearing broker, the Company has developed 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
<PAGE>
converted and will not have an adverse effect on the Company's systems. The
total cost of the Year 2000 project is not expected to be material and will be
funded through operating cash flows and 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 estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification 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, 1998
Consolidated Statements of Operations -
Years ended December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows -
Years ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements -
Years ended December 31, 1998 and 1997
<PAGE>
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281-1414
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 (the "Company") as of December 31, 1998, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the two years in the period then ended. 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 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Kent Financial
Services, Inc. and Subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 17, 1999
New York, New York
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
($000 Omitted)
December 31,
1998
------------
Cash and cash equivalents $ 8,217
Securities owned 5,064
Receivable from clearing broker 1,269
Property and equipment:
Land and building 1,440
Office furniture and equipment 248
-------
1,688
Accumulated depreciation ( 474)
-------
Net property and equipment 1,214
Other assets 194
-------
Total assets $15,958
=======
See accompanying notes to consolidated financial statements.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
($000 Omitted)
December 31,
1998
------------
Liabilities:
Securities sold, not yet purchased $ 1,429
Accounts payable 109
Income taxes payable 261
Accrued expenses 796
Mortgage payable 478
Discontinued operations 363
-------
Total liabilities 3,436
-------
Contingent liabilities (Notes 3 and 7)
Stockholders' equity:
Preferred stock without par value,
500,000 shares authorized;
none outstanding -
Common stock, $.10 par value,
4,000,000 shares authorized;
1,991,982 outstanding 199
Additional paid-in capital 14,996
Accumulated deficit ( 2,673)
-------
Total stockholders' equity 12,522
-------
Total liabilities and stockholders' equity $15,958
=======
See accompanying notes to consolidated financial statements.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($000 Omitted, except per share data)
Year ended December 31,
----------------------
1998 1997
---- ----
Revenues:
Brokerage commissions and fees $ 1,697 $ 1,688
Principal transactions:
Trading 703 1,610
Investing gains (losses) 1,651 ( 987)
Underwriting and placement fees,
net of related expenses 153 -
Interest, dividends and other 979 876
------- -------
Total revenues 5,183 3,187
------- -------
Expenses:
Brokerage 1,772 2,242
General, administrative and other 2,596 1,911
Interest 280 287
------- -------
Total expenses 4,648 4,440
------- -------
Earnings (loss) before income taxes 535 ( 1,253)
Income taxes (benefit) 3 ( 103)
------- -------
Net earnings (loss) $ 532 ($ 1,150)
======= =======
Basic net earnings (loss) per common share $ .27 ($ .56)
======= =======
Diluted net earnings (loss) per common share $ .27 ($ .56)
======= =======
Weighted average number of common shares
outstanding (in 000's) 2,003 2,058
======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
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, 1996 $ 210 $15,328 ($ 2,055) $13,483
Repurchase and cancellation
of common stock ( 8) ( 211) - ( 219)
Net loss - - ( 1,150) ( 1,150)
----- ------- ------- -------
Balance, December 31, 1997 202 15,117 ( 3,205) 12,114
Repurchase and cancellation
of common stock ( 3) ( 121) - ( 124)
Net earnings - - 532 532
----- ------- ------- -------
Balance, December 31, 1998 $ 199 $14,996 ($ 2,673) $12,522
===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 Omitted)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 532 ($ 1,150)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 53 45
Unrealized (gains) losses on securities owned ( 577) 1,269
Change in securities owned 2,633 680
Change in net receivable from clearing broker ( 1,200) 163
Change in accounts payable and accrued expenses 84 ( 711)
Change in income taxes payable 3 ( 200)
Other, net 95 ( 158)
------- -------
Net cash provided by (used in) operating
activities 1,623 ( 62)
------- -------
Cash flows from investing activities-
Purchase of property and equipment ( 11) ( 29)
------- -------
Cash flows from financing activities:
Repurchase of common stock ( 124) ( 219)
Payments on debt ( 39) ( 31)
------- -------
Net cash used in financing activities ( 163) ( 250)
------- -------
Net increase (decrease) in cash and cash equivalents 1,449 ( 341)
Cash and cash equivalents at beginning of period 6,768 7,109
------- -------
Cash and cash equivalents at end of period $ 8,217 $ 6,768
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 280 $ 287
======= =======
Taxes $ 31 $ 109
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
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 which are
highly liquid and readily exchangeable for cash at amounts equal to their stated
value. Cash equivalents consist entirely of U. S. Treasury Bills that matured
through March 1999 and were rolled over for 90 days.
Securities Owned
- ----------------
Securities owned and securities sold, but not yet purchased are recorded on a
trade date basis and are valued at fair value. Fair value is based on quoted
market prices with the resulting net unrealized gains and losses reflected in
earnings.
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.
Substantially all securities are owned by AVF and consist of equity securities
valued at market value.
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 three to thirty-nine years. Gains or losses on dispositions
of property and equipment are included in operating results.
Fair Value of Financial Instruments
- -----------------------------------
Substantially all assets and liabilities are stated at fair value or at amounts
which approximate fair value.
<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 the settlement date, and underwriting fees
at the time the underwriting is completed and the income is reasonably
determined.
Interest Income and Expenses
- ----------------------------
Winston receives interest income on its credit balances at the clearing broker
and is charged interest expense on its debit balances 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.
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.
Reclassification
- ----------------
Prior years financial statements have been reclassified to conform to the
current years' presentation.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the District of Columbia 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, pursuant to 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, 1998, Winston had net capital,
as defined, of $574,000 which was $474,000 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) of the rule.
AVF is an investment partnership whose primary purpose is to make investments in
a limited number of companies, whose securities are considered undervalued by
the partnership's management.
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases
- ------
The Company leases certain office space for a monthly rental of approximately
$7,500, however this lease is cancellable with 90 days notice. Future minimum
rental requirements under the terms of this lease are approximately $22,600 for
1999.
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 1998 and 1997 was approximately $65,000
and $110,000, respectively.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate net rent expense for the years ended December 31, 1998 and 1997 was
approximately $28,000 and $10,000, respectively.
Legal Matters
- -------------
In the normal course of business, Winston has been named as a respondent in two
arbitrations. Although the ultimate outcome of these actions cannot be
ascertained at this time, it is the opinion of Management, after consultation
with counsel, that the resolution of such actions will not have a material
adverse effect on the consolidated financial statements.
4. INCOME TAXES
------------
The components of income tax expense (benefit) are as follows:
($000 Omitted)
Year Ended December 31,
-----------------------------
1998 1997
---------- ----------
Federal-Current ($ 29) ($ 97)
State-Current 32 ( 6)
Deferred - -
--- ---
Total $ 3 ($103)
==== ====
Total income tax expense (benefit) for the years ended December 31, 1998 and
1997 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:
($000 Omitted)
Year Ended December 31,
-----------------------
1998 1997
---- ----
Income tax expense (benefit) computed at
statutory rates on total earnings
(loss) before income taxes $ 182 ($ 426)
Increase (decrease) in tax from:
Valuation allowance on net operating
loss carryforward ( 190) 430
State income tax, net of Federal benefit 21 ( 4)
Benefit from carryback of alternative
minimum tax net operating loss - ( 52)
Other, net ( 10) ( 51)
----- -----
Total tax expense (benefit) $ 3 ($ 103)
===== =====
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of significant items comprising the Company's net deferred tax
asset at December 31, 1998 are as follows:
($000 Omitted)
--------------
Deferred tax assets:
Operating loss carryforwards $ 2,645
Alternative minimum tax credit carryforward 958
General business credit carryforwards 990
Mark-to-market reserves 207
Other 297
-------
$ 5,097
Valuation allowance ($ 5,097)
=======
Net deferred tax asset $ -
=======
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, 1998, the valuation allowance decreased by approximately $213,000,
principally as a result of the expiration of state net operating loss
carryforwards and the generation of new deferred tax liabilities.
Significant carryforward balances for Federal income tax purposes as of December
31, 1998 are:
($000 Omitted)
--------------------------
Expiration
Amount Years
----------- ----------
Net operating loss $ 6,543 2006-2013
General business tax credit $ 990 1999-2000
Alternative minimum tax credit $ 958 N/A
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. MORTGAGE PAYABLE
----------------
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 of $463,000 is due. The Company is
evaluating its options to either refinance or pay the mortgage payable in its
entirety.
6. CAPITAL STOCK
-------------
Stock Split
- -----------
On October 15, 1998, the Company announced it would split its stock two for one
to be effected in the form of a stock dividend. The record date for the stock
split was October 26, 1998 and the distribution date was November 9, 1998. All
common stock information in the consolidated financial statements has been
adjusted for the effects of this stock split.
Common Stock Repurchases
- ------------------------
On March 26, 1996, the Board of Directors approved a plan to repurchase up to
300,000 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, 1998 have been canceled and returned to the
status of authorized but unissued shares. As of December 31, 1998 123,748 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 133,332 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 1998:
Average
Shares Price
------ -------
Options outstanding at December 31, 1996
and 1997 60,000 $2.15625
Options granted in 1998 - -
Options exercised in 1998 (10,000) 1.68750
Options forfeited in 1998 - -
------ -------
Options outstanding at December 31, 1998 50,000 $2.25000
====== --------
The Company does not accrue compensation expense for the issuance of stock
options granted in accordance with 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 1998 and 1997 would be immaterial.
7. 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.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. 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.
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
1998. 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.
9. TRANSACTIONS WITH RELATED PARTIES
---------------------------------
Rosenman & Colin LLP ("R&C") has performed legal work for the Company and its
affiliates in 1998 and 1997. 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
1998 and 1997 were approximately $120,000 and $128,000, respectively. Mrs.
Koether received $170,000 and $150,000 in 1998 and 1997, respectively, as an
employee. She received no compensation from R&C related to fees charged to the
Company for her time.
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 1998 and 1997.
The Company reimburses an affiliate for the direct cost of certain group medical
insurance, 401(k) benefits and office supplies. Such reimbursements were
approximately $164,000 and $171,000 during 1998 and 1997, respectively.
Affiliates of the Company maintain brokerage accounts with Winston, which
received commissions from those affiliates totaling approximately $41,000 and
$36,000 during 1998 and 1997, respectively.
10. 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.
Securities sold, not yet purchased represent obligations of the Company to
deliver securities, at contracted prices, thereby creating a liability to
purchase these securities in the market at prevailing prices. Accordingly, these
transactions result in off-balance sheet risk, as the Company's ultimate
obligation to satisfy the sale of securities sold but not yet purchased may
exceed the amount recognized in the consolidated financial statements.
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
consummation 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, 1998, 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.
11. PENDING SALE OF SUBSIDIARY
--------------------------
On July 30, 1998, Winston, its wholly-owned subsidiary T.R. Winston Capital,
Inc.("Wincap"), and an unrelated third party ("Third Party"), entered into a
stock purchase agreement ("Agreement"). The Agreement provides among other
things, for the Third Party to contribute to the capital of Wincap, $800,000 in
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
return for an 80% ownership interest and an officer of Wincap and Winston to
receive a 10% ownership interest. The closing of the agreement and the resultant
change in control are subject to NASD approval which has not yet been received.
A condition of the Agreement is that the Third Party and two officers of Winston
enter into an investment advisory agreement ("Advisory Agreement"). Under the
Advisory Agreement, the Third Party has committed to provide no less than $4.7
million of assets to be managed by the two officers as long as certain
performance criteria are met.
Certain fees and commissions generated in managing these assets will ultimately
be remitted to Winston and one of its officers.
If the Agreement is closed, Winston has agreed to provide management services to
Wincap. These services will consist of all services necessary for the operation
of Wincap's securities business. Winston will receive as compensation for the
services, 60% of Wincap's gross commissions as defined in the Agreement.
12. SEGMENT REPORTING
-----------------
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") became effective for
fiscal years beginning after December 31, 1997. SFAS No. 131 establishes
standards for the way public companies report information about operating
segments in annual and quarterly reports. The Company has evaluated the
requirements of SFAS No. 131 and has determined that it does not have reportable
operating segments as defined. The Company conducts stock brokerage and
investment banking activities through its wholly-owned subsidiaries Winston and
AVF, as described in Note 2 of Notes to the Consolidated Financial Statements.
These wholly-owned subsidiaries do not have individual segment managers or
discrete financial data used to allocate resources as defined by SFAS No. 131.
<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
1998 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, 1999
are as follows:
Name Age Position Held
---- --- -------------
Paul O. Koether 62 Chairman, Director and
President
Mathew E. Hoffman 45 Director
Casey K. Tjang 60 Director
M. Michael Witte 72 Director
John W. Galuchie, Jr. 46 Vice President and
Treasurer
Mark Koscinski 41 Vice President
- ------------------------------------
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, Pure World Botanicals, Inc., ("PWBI") 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. In September 1998 Mr. Koether was elected a director and
Chairman of Cortech, Inc.("Cortech")a Denver-based biopharmaceutical company.
<PAGE>
Mathew E. Hoffman. Since January 1997, he has been head of the litigation
department of Todtman, Nachamie, Spizz, & Johns, P.C. From May 1994 until
January 1997 Mr. Hoffman was head of the litigation department 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.
Casey K. Tjang. Since December 1995, he has been with Leading Edge
Packaging, Inc., a marketing, wholesaler and distribution company of consumer
product packagings in the following capacities: director and secretary since
December 1995; Chief Financial Officer since September 1996 and President since
September 1998. 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. In September 1998, Mr. Galuchie
was elected a director and President of Cortech. Since December 1998 Mr.
Galuchie has been a director of HealthRite, Inc.
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, Pure World Botanicals, Inc., as director, Senior Vice President, Secretary
and Treasurer.
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 1998.
<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, 1998, 1997 and 1996, for those persons who were, at December 31, 1998 (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(1)(2) Compensation Other
--------------------------------- -------------- ---------
Officer Year Salary Bonus Other(3) Options(#)
<S> <C> <C> <C> <C> <C> <C>
Paul O. Koether 1998 $200,000 $20,000 $171,161
Chairman, Presi- 1997 $200,000 $65,000 $124,484 - -
dent and Chief 1996 $200,000 $65,000 $142,366 - -
Executive Officer
John W. Galuchie, Jr. 1998 $166,000 $30,000 $ 194
Vice President 1997 $160,000 $ 8,000 $ 386 - -
and Treasurer 1996 $160,000 $15,000 $ 892 - -
</TABLE>
- ----------------------------------------------------
(1) The Company has no bonus or deferred compensation plans and pays bonuses at
the discretion of the Board based on performance.
(2) 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.
(3) Represents commissions paid by Winston to these individuals in their
capacity as registered representatives for securities trades made for their
respective customers.
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, 1998, 1997 and 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 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 1998 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, 1998 at December 31, 1998
--------------- -------- ---------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul O. Koether - - - - - -
John W. Galuchie, Jr. 10,000 $16,875 - - - -
</TABLE>
Remuneration of Directors
- -------------------------
Directors who are not employees of the Company receive a monthly fee of
$1,000 plus $200 for each day of attendance at board and committee meetings.
During 1998, the Company paid directors' fees in the aggregate amount of
approximately $32,000.
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, 1999 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.
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership(1) Class
- ------------------- ----------------- -----------
Paul O. Koether 923,454(2) 45.23%
211 Pennbrook Road
Far Hills, NJ 07931
Shamrock Associates 834,940 40.90%
211 Pennbrook Road
Far Hills, NJ 07931
M. Michael Witte 19,000 *
1120 Granville Avenue
Suite 102
Los Angeles, CA 90049
Casey K. Tjang 20,000 *
510 Tallwood Lane
Greenbrook, NJ 08812
Mathew E. Hoffman 14,000 *
62 Rosehill Avenue
New Rochelle, NY 10804
John W. Galuchie, Jr. 48,332(3) 2.37%
376 Main Street
Bedminster, NJ 07921
Mark Koscinski 10,000 *
376 Main Street
Bedminster, NJ 07921
All Directors and Officers 1,006,454 49.30%
as a Group (6 persons)
- -----------------------------------------
*Less than 1 percent.
(1) 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 (14,000 shares); Mr. Tjang (14,000 shares);
Mr. Hoffman (14,000 shares); Mr. Koscinski (8,000 shares); and all
directors and officers as a group (50,000 shares).
(2) Includes the 834,940 Shares beneficially owned by Shamrock. As a general
partner of Shamrock, Mr. Koether may be deemed to own these shares
beneficially. Includes 28,332 shares owned by Sun, a private corporation of
which Mr. Koether is the Chairman and a principal stockholder. Includes
3,332 shares held by Mr. Koether's Keogh Plan and 1,750 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.
<PAGE>
(3) Includes 28,332 Shares owned by Sun, a private corporation of which Mr.
Galuchie is a director and officer. Mr. Galuchie disclaims beneficial
ownership of such shares.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Rosenman & Colin LLP ("R&C") performed legal work for the Company and its
affiliates in 1998 and 1997. 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
1998 and 1997 were approximately $120,000 and $128,000, respectively. Mrs.
Koether received $170,000 and $150,000 in 1998 and 1997, 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 $164,000 and $171,000 during 1998 and 1997, respectively.
<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
The following exhibits are filed as part of this report:
(a) Exhibits
--------
3.1 Bylaws of the Registrant, as amended. (l)
3.2(a) Articles of Incorporation of Registrant, as
amended (including certificate of stock
designation for $2.575 Cumulative Convertible
Exchangeable Preferred Stock). (2)
3.2(b) Certificate of Amendment to Certificate of
Incorporation. (3)
3.2(c) Certificate of Amendment to Certificate of
Incorporation dated September 26, 1991. (4)
10.1 1987 Non-Qualified Executive Stock Option Plan.
(6)
10.2 Employment Agreement, dated as of April 6, 1990
by and between Texas American Energy Corporation
and Paul 0. Koether. (7)
21 Subsidiaries*
27 Financial Data Schedule*
(b) Reports on Form 8-K.
On October 15, 1998, the Company announced it would split its
stock two for one to be effected in the form of a stock
dividend. The record date for the stock split was on
October 26, 1998 and the distribution date was
November 9, 1998.
- -------------------
* Filed herewith.
(1) Incorporated by reference to Texas American Energy Corporation Registration
Statement, as amended, on Form S-l, No. 33-11109.
(2) Incorporated by reference to Texas American Energy Corporation Form 10-K,
for the fiscal year ended December 31, 1984.
(3) Incorporated by reference to Texas American Energy Corporation Form 10-K
for the fiscal year ended December 31, 1987.
(4) Incorporated by reference to Kent Financial Services, Inc. Form 10-Q for
the quarter ended September 30, 1991.
(5) Intentionally left blank.
(6) Incorporated by reference to Texas American Energy Corporation Proxy
Statement dated November 11, 1987.
(7) Incorporated by reference to Kent Financial Services, Inc. Form 10-Q for
the quarter ended June 30, 1990.
<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 29, 1999 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 29, 1999 /s/ Paul O. Koether
------------------------------
Paul 0. Koether
Chairman of the Board,
President and Director
(Principal Executive Officer)
Dated: March 29, 1999 /s/ Mathew E. Hoffman
------------------------------
Mathew E. Hoffman
Director
Dated: March 29, 1999 /s/ M. Michael Witte
------------------------------
M. Michael Witte
Director
Dated: March 29, 1999 /s/ Casey K. Tjang
------------------------------
Casey K. Tjang
Director
EXHIBIT 21
KENT FINANCIAL SERVICES, INC.
SUBSIDIARIES
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
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
