<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,
1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4043
<SECURITIES> 9013
<RECEIVABLES> 939
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13995
<PP&E> 1712
<DEPRECIATION> 538
<TOTAL-ASSETS> 15449
<CURRENT-LIABILITIES> 2908
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0
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<COMMON> 190
<OTHER-SE> 12351
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<TOTAL-REVENUES> 4838
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> 160
<INCOME-TAX> (249)
<INCOME-CONTINUING> 409
<DISCONTINUED> 0
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<NET-INCOME> 409
<EPS-BASIC> .21
<EPS-DILUTED> .21
</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, 1999
[ ] 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, 1999 were
approximately $4.8 million.
At February 29, 2000, there were 1,883,264 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 $3.7 million.
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. ("NASD") 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, 1999, Winston's equity capital was $944,000, 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 $721,000, which was $610,000 in excess of the required
minimum net capital. Winston is exempt from the customer protection provisions
of Rule 15c3-3 (the "Rule") 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 invests through Asset Value Fund Limited Partnership
("AVF"), which was originally founded in February 1991 to provide investment
advisory and management services and was funded at that time with $5 million. As
of December 31, 1999, the equity capital of AVF was approximately $11.8 million.
Currently AVF is a wholly-owned by the Company. AVF primarily invests in a
limited number of portfolio companies, the securities of which are considered
undervalued by AVF's management. As of December 31, 1999, AVF held 19 equity
investments, of which four consisted of owning more than 5% of the investee's
outstanding capital stock. AVF owns more than 38% of Cortech, Inc., a company
supervising the exploitation of its technology by third parties and also seeking
a new business; 26% of General Devices, Inc., a non-operating company seeking a
new business; 19% of Golf Rounds.com, Inc., an internet content provider; and
16% of Gish Biomedical, Inc., a manufacturer of medical devices.
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 lower investment banking revenues as well as losses from
declines in the market value of securities positions. In addition, 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
I-1
<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. Most 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 on-line 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.
In addition to competition from firms traditionally engaged in the
financial services business, there has been increasing competition in recent
years from other sources, such as commercial banks, insurance companies, on-line
financial services providers, sponsors of mutual funds and other companies
offering financial services both in the United States and on a world-wide basis.
The financial services industry has also experienced consolidation and
convergence in recent years, as institutions involved in a broad range of
financial services industries, such as investment banking, brokerage, asset
management, commercial banking and insurance have merged. This convergence trend
is expected to continue, and could result in the Company's competitors gaining
greater capital and other resources, a broader range of products and services
and/or more geographic diversity. In November 1999, the Gramm-Leach Bliley Act
was passed in the United States, effectively repealing certain sections of the
1933 Glass-Steagall Act. Its passage allows commercial banks, securities firms
and insurance firms to affiliate, which may accelerate consolidation and lead to
increasing competition in markets traditionally dominated by investment banks
and retail securities firms.
Employees
- ---------
As of December 31, 1999, 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 $700,000 at
December 31, 1999, bearing interest on that date at the rate of 7.875% per
annum. The mortgage loan is payable to a bank in equal monthly payments of
$5,345 including interest, through November 2024.
I-2
<PAGE>
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
the years ended 1999 and 1998. 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 Legal Matters
- -------------------
Winston Legal Matters
In the normal course of business, Winston at December 31, 1999, had been
named as a respondent in two arbitrations, one of which was settled in January
2000. Although the ultimate outcome of the open action cannot be ascertained at
this time, it is the opinion of management, after consultation with counsel,
that the resolution of such action will not have a material adverse effect on
the financial statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on November 1, 1999.
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 964,454 -
Mathew E. Hoffman 964,454 -
Casey K. Tjang 964,454 -
M. Michael Witte 964,454 -
I-3
<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:
1999
----
First Quarter $ 7 1/2 $ 2 1/4
Second Quarter $ 7 1/2 $ 3
Third Quarter $ 4 7/16 $ 3 3/4
Fourth Quarter $ 4 $ 3 5/8
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
- ---------------
As of February 29, 2000, the Company had approximately 1,813 stockholders
of record of its common stock. The closing price of the common stock was $4 on
February 29, 2000.
The Company did not pay dividends in 1999 or 1998 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, 1999, the Company had consolidated cash and cash
equivalents of approximately $4 million. The cash equivalents were U.S. Treasury
Bills with original maturities of three months or less, with yields ranging from
4.98% to 5.37%. The Company had securities owned valued at approximately $9
million at December 31, 1999. 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 mortgage note payable on its
headquarters facility had a remaining principal amount of approximately
$700,000. The loan currently bears interest at the rate of 7.875% with principal
payments amortized over twenty-five years. The loan matures in November 2024.
The Company believes that its liquidity is adequate for future operations.
II-1
<PAGE>
Net cash of approximately $3.9 million was used in operations in 1999,
compared to net cash provided by operations of approximately $1.6 million in
1998. The principal reason for the decrease was the change in securities owned
in 1999 compared to 1998, partially offset by the change in net receivable from
the clearing broker. In 1999, the change in securities owned and the change in
receivable from the clearing broker used net cash of $4.0 million, compared to
cash generated of $1.4 million in 1998. Cash flows from operating activities
include net income of $409,000 and $532,000 in 1999 and 1998, respectively.
These amounts were offset by the change in unrealized gains on securities owned.
Unrealized gains and losses are included in consolidated operations, but do not
utilize or generate cash flows.
During 1999, the Company repurchased 100,168 shares of its common stock for
an aggregate cost of $395,000. In 1998, the Company repurchased 33,692 shares
for an aggregate cost of approximately $124,000. All shares acquired were
purchased at market prices and have been canceled and returned to the status of
authorized and unissued shares. In 1999, the Company issued 8,000 shares by way
of options being exercised for proceeds of $18,000.
Results of Operations
- ---------------------
The Company had net income in 1999 of $409,000, or $.21 basic and fully
diluted earnings per share, compared to a net income of $532,000, or $.27 basic
and fully diluted earnings per share, in 1998. Total brokerage revenue, which
consisted of commissions and principal trading transactions and underwriting
fees, was approximately $3.4 million in 1999, an increase of $800,000 or 31%
from 1998 total brokerage revenue of $2.6 million. Brokerage expenses (including
all fixed and variable expenses) increased by $451,000, or 25% from $1.8 million
in 1998 to $2.2 million in 1999. Net brokerage income of $1.2 million in 1999
represented an increase of $400,000, or 50%, from net brokerage income of
$800,000 in 1998. The overall increase in the total brokerage revenue, total
brokerage expense and net brokerage income is attributable to improved overall
market conditions in 1999 compared to 1998.
Net investing gains were $234,000 in 1999, a decrease of $1,417,000 from
the net investing gains in 1998 of $1,651,000. The decrease in net investing
gains was due to a decrease in realized gains on the sale of selected
investments in the investment portfolio during 1999 as compared to 1998.
Interest, dividends and other income totaled $1,194,000 in 1999 and
$979,000 in 1998. The increase was primarily the result of an extraordinary
dividend of $427,500 received by AVF from one of its portfolio investments and
lower interest income caused by lower invested balances of cash equivalents.
General and administrative expenses were $2.2 million in 1999, a decrease
of approximately $400,000 or 15% from the $2.6 million recorded in 1998. The
majority of the decrease was a result of the following items: (i) $200,000
provision for start up costs of an investment in 1998 in a company 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 in 1998, and (iii) $75,000 of business development expenses in 1998, not
incurred in 1999.
In the fourth quarter of 1999 management changed its estimate for income
taxes payable previously accrued for open tax years. This resulted in an income
tax benefit of $249,000. See Note 5 of Notes to Consolidated Financial
Statements regarding income taxes.
II-2
<PAGE>
Market Risk
- -----------
Market risk represents the potential loss as a result of absolute and
relative price movements in financial instruments due to changes in interest
rates, foreign exchange rates, equity prices, and other factors. The Company's
exposure to market risk is directly related to securities holdings. Each day,
position and exposure reports are prepared by the operations manager in the
group engaged in trading activities for traders and group management. These
reports are independently reviewed by the Company's corporate accounting group.
The position report is distributed to management throughout the Company,
including the Chief Executive Officer, and it enables senior management to
control inventory levels and monitor results of the trading group. The Company
also reviews and monitors inventory aging, pricing, concentration and securities
ratings. In addition to position and exposure reports the Company produces a
daily revenue report that summarizes the trading, interest, commissions, fees,
underwriting and other revenue items for each of the business groups. Daily
revenue is reviewed for various risk factors and is independently verified by
the corporate accounting group. The daily revenue report is distributed to
various levels of management throughout the Company, including the Chief
Executive Officer, and together with the position and exposure report, enables
senior management to monitor and control overall activity of the trading groups.
Since its inception, neither the Company nor its subsidiaries has traded or
otherwise transacted in derivatives.
The fair value of securities at December 31, 1999 was approximately $9
million as to its long positions and approximately $719,000 as to its short
positions. The potential change in fair value, using a hypothetical 10% decline
in prices, is estimated to be a $900,000 loss as to its long positions and a
$72,000 gain as to its short positions as of December 31, 1999. Two of the
Company's long positions, Cortech, Inc., and Gish Biomedical, Inc., were carried
at $4,112,000 and $1,831,000, respectively. 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.
The fair value of 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.
Sale Of Subsidiary
- ------------------
In July 1998, Winston, its then 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 provided among
other things, for the Third Party to contribute to the capital of Wincap
$800,000 in return for an 80% ownership interest. The balance of equity was
owned 10% by Winston and 10% by an officer of Winston who introduced the Third
Party. The transaction closed in May 1999, after the change in control was
approved by the NASD. The difference of $13,000 between the original book value
of the Company's investment in Wincap and the subsequent value of the 10% equity
interest of Wincap upon completion of the transaction was charged to additional
paid-in capital. No gain or loss was recorded on the transaction. Subsequent to
the sale, Winston has accounted for its 10% investment in Wincap under the
equity method because one of Winston's officers holds an additional 10% of
Wincap.
At December 31, 1999, total assets of Wincap amounted to $531,911, total
liabilities amounted to $8,112, and net income for 1999 was $11,715. In December
1999, Wincap purchased 50% of its Common Stock outstanding which reduced
Winston's investment in Wincap from $102,524 to $52,524.
II-3
<PAGE>
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. From the date of sale of Wincap,
there were no such commissions as defined.
Subsequent Event
- ----------------
In January 2000, Wincap stockholders signed a letter of intent with Direct
Capital Markets.com, Inc. ("DCM") to sell all outstanding shares in exchange for
75,000 unregistered, non-marketable shares of DCM's Series C Convertible
Preferred Stock. Wincap's stockholders are currently negotiating a definitive
agreement for the sale. Until this definitive agreement is executed, neither
Wincap's stockholders nor DCM is legally bound to proceed with the sale.
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 have resulted 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.
The Year 2000 Issue did not pose any operational problems for the Company's
internal computer systems.
The total cost of the Year 2000 plan was not material and was funded
through operating cash flows and expensed as incurred. The costs incurred, which
consisted principally of professional fees, were approximately $14,000 and
$6,000 for 1999 and 1998, respectively.
II-4
<PAGE>
Item 7. FINANCIAL STATEMENTS
--------------------
The financial statements filed herein are listed below:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheet - December 31, 1999
Consolidated Statements of Operations -
Years ended December 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows -
Years ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements -
Years ended December 31, 1999 and 1998
II-5
<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, 1999, 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 financial position of Kent Financial Services, Inc. and
Subsidiaries at December 31, 1999, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 21, 2000
New York, New York
F-1
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
($000 Omitted)
December 31,
1999
------------
Cash and cash equivalents $ 4,043
Securities owned 9,013
Receivable from clearing broker 939
Property and equipment:
Land and building 1,447
Office furniture and equipment 265
-------
1,712
Accumulated depreciation ( 538)
-------
Net property and equipment 1,174
Other assets 280
-------
Total assets $15,449
=======
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
($000 Omitted)
December 31,
1999
------------
Liabilities:
Securities sold, not yet purchased $ 719
Accounts payable 210
Accrued expenses 961
Mortgage payable 700
Accrual for previously discontinued operations 318
-------
Total liabilities 2,908
-------
Contingent liabilities (Notes 3 and 4)
Stockholders' equity:
Preferred stock without par value,
500,000 shares authorized;
none outstanding -
Common stock, $.10 par value,
4,000,000 shares authorized;
1,899,814 shares outstanding 190
Additional paid-in capital 14,615
Accumulated deficit ( 2,264)
-------
Total stockholders' equity 12,541
-------
Total liabilities and stockholders' equity $15,449
=======
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($000 Omitted, except per share data)
Year ended December 31,
1999 1998
-------- --------
Revenues:
Brokerage commissions and fees $ 2,259 $ 1,697
Principal transactions:
Trading 1,151 703
Investing gains 234 1,651
Underwriting and placement fees,
net of related expenses - 153
Interest, dividends and other 1,194 979
------- -------
Total revenues 4,838 5,183
------- -------
Expenses:
Brokerage 2,223 1,772
General, administrative and other 2,153 2,596
Interest 302 280
------- -------
Total expenses 4,678 4,648
------- -------
Earnings before income taxes 160 535
Provision (benefit) for income taxes ( 249) 3
------- -------
Net earnings $ 409 $ 532
======= =======
Basic net earnings per common share $ .21 $ .27
======= =======
Diluted net earnings per common share $ .21 $ .27
======= =======
Weighted average number of common shares
outstanding (in 000's) 1,942 2,003
======= =======
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($000 Omitted)
<TABLE>
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Equity
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
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
Adjustment in connection
with the sale of
a previously
consolidated subsidiary - ( 13) - ( 13)
Issuance of common stock 1 17 - 18
Repurchase and cancellation
of common stock ( 10) ( 385) - ( 395)
Net earnings - - 409 409
------ ------- ------- -------
Balance, December 31, 1999 $ 190 $14,615 ($ 2,264) $12,541
====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 Omitted)
<TABLE>
Year Ended December 31,
------------------------
1999 1998
------- ------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 409 $ 532
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 64 53
Unrealized gains on securities owned ( 326) ( 577)
Change in operating assets and liabilities:
Change in securities owned ( 4,333) 2,633
Change in net receivable from clearing broker 330 ( 1,200)
Change in accounts payable and accrued expenses 266 84
Change in income taxes payable ( 261) 3
Other, net ( 86) 95
------- -------
Net cash provided by (used in) operating
activities ( 3,937) 1,623
------- -------
Cash flows from investing activities:
Purchase of property and equipment ( 24) ( 11)
Net assets other than cash of a previously
consolidated subsidiary 27 -
Net cash related to a previously
consolidated subsidiary ( 85) -
------- -------
Net cash used in investing activities ( 82) ( 11)
------- -------
Cash flows from financing activities:
Repurchase of common stock ( 395) ( 124)
Issuance of common stock 18 -
Payments on loan ( 478) ( 39)
Loan proceeds 700 -
------- -------
Net cash used in financing activities ( 155) ( 163)
------- -------
Net increase (decrease) in cash and cash equivalents ( 4,174) 1,449
Cash and cash equivalents at beginning of period 8,217 6,768
------- -------
Cash and cash equivalents at end of period $ 4,043 $ 8,217
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 302 $ 280
======= =======
Taxes $ 28 $ 31
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<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 2000 and were reinvested for an additional 90 days. All cash and
cash equivalents are on deposit either with a major money center bank or with
the clearing broker.
Securities Owned
- ----------------
Securities owned and securities sold, but not yet purchased are recorded on a
trade date basis and are valued at fair value.
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 from time to time 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 generally ranging from three to thirty-nine years.
Fair Value of Financial Instruments
- -----------------------------------
Substantially all assets and liabilities are stated at fair value or at amounts
which approximate fair value.
F-7
<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. During 1999, the Company had no investment banking activities.
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 Per Common Share
- -------------------------
Earnings per common share is calculated 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. Estimates that are
particularly susceptible to change include assumptions used in determining the
fair value of securities owned and non-readily marketable securities.
F-8
<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 NASD,
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 minimum net
capital, as defined, of $111,000. At December 31, 1999, Winston had net capital,
as defined, of $721,000 which was $610,000 in excess of the required minimum.
Winston is exempt from the customer protection 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. SECURITIES OWNED AND SECURITIES SOLD NOT YET PURCHASED
------------------------------------------------------
Securities owned and securities sold not yet purchased as of December 31, 1999,
consisting of proprietary trading positions held for resale to customers
and portfolio positions (equity securities) held for capital appreciation
consist of the following (in 000's):
Sold,
Not Yet
Owned Purchased
----- ---------
Marketable equity securities
Portfolio Positions of
greater than 5% of
outstanding common stock:
Cortech, Inc. $4,112 $ -
Gish Biomedical, Inc. 1,831 -
Golf Rounds.com, Inc. 525 -
General Devices, Inc. 51 -
All other portfolio positions 2,191 719
Held for resale to customers 233 -
Mutual funds 70 -
------ -----
Aggregate market $9,013 $ 719
====== =====
4. 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 $22,500 for
2000.
F-9
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 1999 and 1998 was approximately $51,000
and $65,000, respectively.
Aggregate net rent expense for the years ended December 31, 1999 and 1998 was
approximately $52,000 and $28,000, respectively.
Legal Matters
- -------------
In the normal course of business, Winston at December 31, 1999, had been named
as a respondent in two arbitrations, one of which was settled in January 2000.
Although the ultimate outcome of the open action cannot be ascertained at this
time, it is the opinion of management, after consultation with counsel, that the
resolution of such action will not have a material adverse effect on the
consolidated financial statements.
5. INCOME TAXES
------------
The components of income tax expense (benefit) are as follows:
($000 Omitted)
Year Ended December 31,
-------------------------
1999 1998
------- -------
Federal-Current ($261) ($ 29)
State-Current 12 32
Deferred - -
---- ----
Total ($249) $ 3
==== ====
Total income tax expense (benefit) for the years ended December 31, 1999 and
1998 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,
------------------------
1999 1998
------ ------
Income tax expense computed at
statutory rates on total earnings
before income taxes $ 54 $ 182
Increase (decrease) in tax from:
Valuation allowance on net operating
loss carryforward ( 62) ( 190)
State income tax, net of Federal benefit 8 21
Change in estimate of income taxes payable ( 249) -
Other, net - ( 10)
----- -----
Total tax expense (benefit) ($ 249) $ 3
===== =====
F-10
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the fourth quarter of 1999 management changed its estimate for income taxes
payable previously accrued for open tax years.
The tax effects of significant items comprising the Company's net deferred tax
asset at December 31, 1999 are as follows:
($000 Omitted)
------------
Deferred tax assets:
Operating loss carryforwards $ 2,845
Alternative minimum tax credit carryforward 958
General business credit carryforwards 990
Mark-to-market reserves 153
Other 208
-------
$ 5,154
=======
Valuation allowance ($ 5,154)
=======
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, 1999, the valuation allowance decreased by approximately $62,000,
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, 1999 are:
($000 Omitted)
-----------------------
Expiration
Amount Years
-------- -----------
Net operating loss $ 6,765 2006-2014
General business tax credit $ 990 2000
Alternative minimum tax credit $ 958 N/A
F-11
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. MORTGAGE PAYABLE
----------------
In November 1999, the Company refinanced its mortgage loan with a financial
institution. The new mortgage loan of $700,000 is collateralized by the
Company's headquarters facility and bears interest at the rate of 7.875%. The
mortgage loan is payable in equal monthly installments of $5,345 including
interest, through November 2024. The mortgage which was in force until the
refinancing in November 1999 bore an interest rate of 7.05%.
7. CAPITAL STOCK
-------------
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, 1999 have been canceled and returned to the
status of authorized but unissued shares. As of December 31, 1999 275,835 shares
have been acquired under this repurchase plan and have been canceled and
returned to the status of authorized but unissued shares. In February 2000 the
Board of Directors approved a new plan to repurchase up to an additional 200,000
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.
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. The options
outstanding at December 31, 1999, were granted in 1995 and will expire at
various times during 2000.
F-12
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes option transactions under this plan for 1999:
Average
Shares Price
------- -------
Options outstanding at December 31, 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
Options granted in 1999 - -
Options exercised in 1999 ( 8,000) 2.25000
Options forfeited in 1999 - -
------ --------
Option outstanding at December 31, 1999 42,000 $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."
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. In September 1999,
the Company entered into an employment agreement with the Company's Executive
Vice President for a three-year term commencing September, 1999 at an annual
salary of $180,000, the terms being identical to that of the Chairman's
agreement. The Company has accrued for the contingent payments under these
Agreements.
F-13
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. PREVIOUSLY 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
1999. 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") performed legal work for the Company and its
affiliates in 1999 and 1998. 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
1999 and 1998 were approximately $47,000 and $120,000, respectively. Mrs.
Koether received $150,000 and $170,000 in 1999 and 1998,respectively, as an
employee. She received no compensation from R&C related to fees charged to the
Company for her time. The payable to R&C at December 31, 1999 was approximately
$2,000.
F-14
<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 1999 and 1998.
The Company reimburses an affiliate for the direct cost of certain group medical
insurance, and office supplies. Such reimbursements were approximately $159,000
and $164,000 during 1999 and 1998, respectively.
Eligible employees can elect to participate in the Company's qualified 401 (k)
Retirement Plan (the "Plan"). Employees may voluntarily contribute up to 15% of
their compensation, not to exceed the Internal Revenue Service limit which was
$10,000 for 1999 and 1998. The employees' contributions are 100% vested and the
Company's contribution, if any, vests over a six-year period in accordance with
the vesting schedule in the Plan. There was no employer matching contribution in
1999 or 1998.
Affiliates of the Company maintain brokerage accounts with Winston, which
received commissions from those affiliates totaling approximately $4,000 and
$41,000 during 1999 and 1998, 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.
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, pursuant to a clearance agreement. At December 31,
1999, 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.
F-15
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. SALE OF SUBSIDIARY
------------------
In July 1998, Winston, its then 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 provided among other
things, for the Third Party to contribute to the capital of Wincap $800,000 in
return for an 80% ownership interest and Winston and an officer of Winston to
each receive a 10% ownership interest. The closing of the Agreement and the
resultant change in control were effected during May 1999, subsequent to
receiving NASD approval. The difference of $13,000 between the original book
value of Winston's investment in Wincap and the resultant 10% investment in the
equity of Wincap upon completion of the transaction was charged to additional
paid-in capital. No gain or loss was recorded on the transaction. Subsequent to
the sale, Winston has accounted for its 10% investment in Wincap under the
equity method because one of Winston's officers holds an additional 10% of
Wincap.
At December 31, 1999, total assets of Wincap amounted to $531,911, total
liabilities amounted to $8,112, and net income for 1999 was $11,715. In December
1999, Wincap purchased 50% of its Common Stock outstanding which reduced
Winston's net investment in Wincap by $50,000. At December 31, 1999, Winston's
investment in Wincap was $52,524, which is included in other assets on the
consolidated balance sheet.
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. From the date of sale of Wincap,
there were no such commissions as defined.
13. SEGMENT REPORTING
-----------------
The Company has determined that it does not have reportable operating segments.
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.
14. SUBSEQUENT EVENT
----------------
In January 2000, Wincap stockholders signed a letter of intent with Direct
Capital Markets.com, Inc. ("DCM") to sell all outstanding shares in exchange for
75,000 unregistered, non-marketable shares of DCM's Series C Convertible
Preferred Stock. Wincap's stockholders are currently negotiating a definitive
agreement for the sale. Until this definitive agreement is executed, neither
Wincap's stockholders nor DCM is legally bound to proceed with the sale.
F-16
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
None.
II-6
<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
1999 Annual Meeting and all will serve until the next Annual Meeting or until
their successors have been elected and 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 29, 2000
were as follows:
Name Age Position Held
---- --- -------------
Paul O. Koether 63 Chairman, Director and
President
Mathew E. Hoffman 46 Director
Casey K. Tjang 61 Director
M. Michael Witte 73 Director
John W. Galuchie, Jr. 47 Executive Vice President
and Treasurer
Mark Koscinski 42 Vice President
- ------------------------------------
Paul O. Koether is principally engaged in the following businesses: (i)
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,
(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 (iii) 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 wholly-owned subsidiary, Pure World Botanicals, Inc. 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. In September 1998, Mr. Koether was elected a director
and Chairman of Cortech, Inc.,("Cortech") a biopharmaceutical company seeking to
redeploy its' assets. Mr. Koether was a director of Golf Rounds.com, Inc.,("Golf
Rounds") an internet content provider from July 1992 to January 2000.
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. His articles have been published in the United States, Europe and
Japan.
III-1
<PAGE>
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, 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., a position he subsequently
relinquished after his election on August 1, 1996 as President and Chief
Executive Officer of South Coast Oil Corporation, a Los Angeles based oil
company founded in 1921. 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 Executive Vice President and Treasurer
since September 1986 and a director from June 1989 to August 1993; (ii) Winston,
as President and Treasurer since January 1990 and a director since September
1989; (iii) Pure World, as Executive Vice President since April 1988 and
director from January 1990 until October 1994; and (iv) Cortech as President and
director since September 1998. Since September 1999, Mr. Galuchie has been a
director of Gish Biomedical, Inc. a medical device manufacturer. In March 2000
Mr. Galuchie was named Chairman. Mr. Galuchie also served as a director of
HealthRite, Inc., a nutritional products company, from December 1998 to June
1999; served as a director of NorthCorp Realty Advisors, Inc., a real estate
asset manager, from June 1992 until August 1996; and served as Vice President,
Treasurer and a director from July 1992 to January 2000 of Golf Rounds.
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. Mr. Koscinski has resigned from the Company effective March 31,
2000.
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.
III-2
<PAGE>
Based solely on the Company's review of the copies of such forms it has
received, the Company believes that all its officers, directors and greater than
ten percent beneficial owners complied with all filing requirements applicable
to them with respect to transactions during fiscal 1999.
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, 1999, 1998 and 1997, for those persons who were, at December 31, 1999 (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>
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 1999 $200,000 $ - $200,471 - -
Chairman, Presi- 1998 $200,000 $20,000 $171,161 - -
dent and Chief 1997 $200,000 $65,000 $124,484 - -
Executive Officer
John W. Galuchie, Jr. 1999 $175,833 $ - $ 412 - -
Executive Vice Presi- 1998 $166,000 $30,000 $ 194 - -
dent and Treasurer 1997 $160,000 $ 8,000 $ 386 - -
</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, 1999, 1998 and 1997 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
III-3
<PAGE>
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.
There were no outstanding options exercised or unexercised of the named
officers of December 31, 1999.
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 1999, 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.
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
III-4
<PAGE>
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.
In September 1999, the Company entered into an Employment Agreement with
the Company's Executive Vice President, John W. Galuchie, Jr., for a three-year
term commencing September, 1999 at an annual salary of $180,000, the terms being
identical to that of the Chairman's Agreement.
III-5
<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 29, 2000 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 928,454(2) 48.22%
211 Pennbrook Road
Far Hills, NJ 07931
Shamrock Associates 834,940 43.37%
211 Pennbrook Road
Far Hills, NJ 07931
Tweedy, Brown Company, LLC 183,836(3) 9.55%
52 Vanderbilt Avenue
8th Floor
New York, NY 10017
M. Michael Witte 14,000 *
1120 Granville Avenue
Suite 102
Los Angeles, CA 90049
Casey K. Tjang 20,000 1.04%
510 Tallwood Lane
Greenbrook, NJ 08812
Mathew E. Hoffman 14,000 *
62 Rosehill Avenue
New Rochelle, NY 10804
John W. Galuchie, Jr. 48,332(4) 2.51%
376 Main Street
Bedminster, NJ 07921
Mark Koscinski 10,000 *
376 Main Street
Bedminster, NJ 07921
All Directors and Officers 1,006,454 52.28%
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); and all directors and
officers as a group (42,000 shares).
III-6
<PAGE>
(2) Includes the 834,940 Shares beneficially owned by Shamrock Associates
("Shamrock"). As a general partner of Shamrock, Mr. Koether may be
deemed to own these shares beneficially. Includes 28,332 shares owned
by Sun Equities Corporation ("Sun"), a private corporation of which Mr.
Koether is the Chairman and a principal stockholder. Includes 10,082
shares held by Mr. Koether's IRA. 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.
(3) According to Schedule 13 D/A filed on July 14, 1999 by Tweedy, Brown
Company, LLC, TBK Partners, L.P. and Vanderbilt Partners, L.P.
(4) 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 1999 and 1998. 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
1999 and 1998 were approximately $47,000 and $120,000, respectively. Mrs.
Koether received $150,000 and $170,000 in 1999 and 1998, respectively, as an
employee. She received no compensation from R&C related to fees charged to the
Company for her time. The accounts payable to R&C at December 31, 1999 was
approximately $2,000.
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 1999 and 1998.
The Company reimburses an affiliate for the direct cost of certain group
medical insurance, and office supplies. Such reimbursements were approximately
$159,000 and $164,000 during 1999 and 1998, respectively.
Eligible employees can elect to participate in the Company's qualified 401
(k) Retirement Plan (the "Plan"). Employees may voluntarily contribute up to 15%
of their compensation, not to exceed the Internal Revenue Service limit which
was $10,000 for 1999. The employees' contributions are 100% vested and the
Company's contribution, if any, vests over a six-year period in accordance with
the vesting schedule in the Plan. There was no employer matching contribution in
1999.
Affiliates of the Company maintain brokerage accounts with Winston, which
received commissions from those affiliates totaling approximately $4,000 and
$41,000 during 1999 and 1998, respectively.
III-7
<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)
10.3 Employment Agreement, dated as of September 1, 1999
by and between Kent Financial Services, Inc., and
John W. Galuchie, Jr. (8)
21 Subsidiaries*
27 Financial Data Schedule*
(b) Reports on Form 8-K.
--------------------
NONE
- -------------------
* 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.
(8) Incorporated by reference to Kent Financial Services, Inc. Form 10-QSB
for the quarter ended September 30, 1999.
IV-1
<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, 2000 BY /s/ Paul O. Koether
-------------------
Paul O. 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, 2000 /s/ Paul O. Koether
-------------------
Paul O. Koether
Chairman of the Board,
President and Director
(Principal Executive Officer)
Dated: March 29, 2000 /s/ Mathew E. Hoffman
---------------------
Mathew E. Hoffman
Director
Dated: March 29, 2000 /s/ M. Michael Witte
--------------------
M. Michael Witte
Director
Dated: March 29, 2000 /s/ Casey K. Tjang
------------------
Casey K. Tjang
Director
IV-2
<PAGE>
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
Kent Advisors, Inc. New Jersey
