U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 1-7986
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Kent Financial Services, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 75-1695953
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(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
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(Address of principal executive offices)
(908) 234-0078
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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
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State the number of shares outstanding of each of the issuer's classes of
common stock: As of July 31, 2000, the issuer had 1,843,310 shares of its common
stock, par value $.10 per share, outstanding.
Transitional Small Business Disclosure Format (check one).
Yes No X
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<PAGE>
PART I - FINANCIAL INFORMATION
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Item 1. - Financial Statements
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KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
($000 Omitted)
June 30,
2000
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Assets
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Cash and cash equivalents $ 3,051
Securities owned 10,123
Receivable from clearing broker 677
Property and equipment:
Land and building 1,447
Office furniture and equipment 270
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1,717
Accumulated depreciation ( 576)
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Net property and equipment 1,141
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Other assets 277
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Total assets $ 15,269
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Liabilities and Stockholders'Equity
-----------------------------------
Liabilities:
Securities sold, not yet purchased $ 1
Accounts payable and accrued expenses 930
Mortgage payable 695
Accrual for previously discontinued
operations 318
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Total liabilities 1,944
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Contingent liabilities (Note 5)
Stockholders' equity:
Preferred stock without par value, 500,000
shares authorized; none outstanding -
Common stock, $.10 par value, 4,000,000
shares authorized; 1,843,310 outstanding 184
Additional paid-in capital 14,335
Accumulated deficit ( 1,194)
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Total stockholders' equity 13,325
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Total liabilities and stockholders' equity $ 15,269
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See accompanying notes to consolidated financial statements.
2
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($000 Omitted, except per share data)
Three Months Ended
June 30,
--------------------
2000 1999
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Revenues:
Brokerage commissions $ 479 $ 450
Principal transactions:
Trading 256 227
Investing gains (losses) ( 271) 39
Interest, dividends and other 269 613
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733 1,329
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Expenses:
Brokerage 531 468
General, administrative and other 370 638
Interest 115 69
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1,016 1,175
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Earnings (loss) before income taxes ( 283) 154
Provision for income taxes 6 4
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Net earnings (loss) ($ 289) $ 150
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Basic net earnings (loss) per
common share ($ .16) $ .08
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Diluted net earnings (loss) per
common share ($ .16) $ .08
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Weighted average number of common
shares outstanding (in 000's) 1,850 1,967
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See accompanying notes to consolidated financial statements.
3
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
($000 Omitted, except per share data)
Six Months Ended
June 30,
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2000 1999
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Revenues:
Brokerage commissions $ 1,071 $ 949
Principal transactions:
Trading 1,765 496
Investing gains 569 494
Interest, dividends and other 517 809
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3,922 2,748
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Expenses:
Brokerage 1,831 984
General, administrative and other 798 1,215
Interest 214 133
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2,843 2,332
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Earnings before income taxes 1,079 416
Provision for income taxes 9 18
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Net earnings $ 1,070 $ 398
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Basic net earnings per
common share $ .57 $ .20
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Diluted net earnings per
common share $ .57 $ .20
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Weighted average number of common
shares outstanding (in 000's) 1,869 1,969
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See accompanying notes to consolidated financial statements.
4
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($000 Omitted)
Six Months Ended
June 30,
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2000 1999
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Cash flows from operating activities:
Net earnings $1,070 $ 398
Adjustments:
Depreciation and amortization 37 27
Change in unrealized gains and
losses on securities owned ( 341) ( 456)
Change in securities owned ( 1,488) ( 3,069)
Change in receivable from
clearing broker 263 865
Change in accounts payable and
accrued expenses ( 242) 183
Other, net 4 ( 153)
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Net cash used in
operating activities ( 697) ( 2,205)
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Cash flows from investing activities:
Purchase of property and equipment ( 5) ( 14)
Net noncash assets of a
previously consolidated
subsidiary - 27
Net cash related to a previously
consolidated subsidiary - ( 85)
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Net cash used in investing
activities ( 5) ( 72)
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Cash flows from financing activities:
Purchase of common stock ( 332) ( 193)
Issuance of common stock 47 -
Payments on debt ( 5) ( 9)
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Net cash used in financing
activities ( 290) ( 202)
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Net decrease in cash and
cash equivalents ( 992) ( 2,479)
Cash and cash equivalents at
beginning of period 4,043 8,217
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Cash and cash equivalents at end of
period $3,051 $5,738
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Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 214 $ 133
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Taxes $ 1 $ 28
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See accompanying notes to consolidated financial statements.
5
<PAGE>
KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of Kent
Financial Services, Inc. and subsidiaries (the "Company") as of June 30, 2000
and for the three and six month periods ended June 30, 2000 and 1999, reflect
all material adjustments consisting of only normal recurring adjustments, which,
in the opinion of management, are necessary for a fair presentation of results
for the interim periods. Certain information and footnote disclosures required
under generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. These consolidated financial statements
should be read in conjunction with the year-end consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999 as filed with the Securities and
Exchange Commission.
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.
On May 7, 1999, T. R. Winston Capital, Inc., ("Wincap") a previously
consolidated subsidiary of the Company, issued stock to an unrelated third
party, resulting in a change of control. The financial statements presented
prior to that date include the accounts of Wincap which was consolidated into
the Company. Subsequently, the Company accounts for Wincap using the equity
method to reflect its new ownership percentage.
The results of operations for the three and six month periods ended June
30, 2000 and 1999 are not necessarily indicative of the results to be expected
for the entire year or for any other period.
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<PAGE>
2. Business
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The Company's business is comprised principally of the operation of T.R.
Winston & Company, Inc. ("Winston"), a wholly-owned subsidiary. Winston is a
licensed securities broker-dealer and is a member of the National Association of
Securities Dealers, Inc., and the Securities Investor Protection Corporation.
All safekeeping, cashiering, and customer account maintenance activities are
provided by an unrelated broker-dealer pursuant to a clearing agreement.
Pursuant to the net capital provisions of Rule 15c3-1 of the Securities Exchange
Act of 1934, Winston is required to maintain minimum net capital. At June 30,
2000, Winston had net capital, as defined, of approximately $1.1 million, which
was approximately $1.0 million in excess of the required minimum.
The Company also invests through its wholly-owned subsidiary, Asset Value
Fund Limited Partnership ("AVF"). AVF primarily invests in a limited number of
portfolio companies, the securities of which are considered undervalued by AVF's
management. As of June 30, 2000, AVF held 16 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; 16% of
Gish Biomedical, Inc., a manufacturer of medical devices; and 6% of Golf
Rounds.com, Inc., an internet content provider.
3. Securities owned and securities sold, not yet purchased
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Securities owned consist of proprietary trading positions held for resale
to customers and portfolio positions held for capital appreciation some of which
are valued at fair value. The fair values of the portfolio positions generally
are based on listed market prices. If listed market prices are not indicative of
fair value or if liquidating the Company's positions would reasonably be
expected to impact market prices, fair value is determined based on other
relevant factors. Among the factors considered by management in determining fair
value of the portfolio positions are the financial condition, asset composition
and operating results of the issuer, the long-term business potential of the
issuer and other factors generally pertinent to the valuation of investments.
The fair value of these investments are subject to a high degree of volatility
and may be susceptible to significant fluctuation in the near term.
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<PAGE>
Securities owned and securities sold, not yet purchased as of June 30,
2000, consist of the following (in 000's):
Sold,
Not Yet
Owned Purchased
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Marketable equity securities:
Portfolio positions of
greater than 5% of
outstanding common stock:
Cortech, Inc.(701,200 shares) $ 5,140 $ -
Gish Biomedical, Inc.(549,800 shares) 1,100 -
Golf Rounds.com, Inc.(189,600 shares) 356 -
General Devices, Inc.(2,535,579 shares) 51 -
All other portfolio positions 3,295 -
Held for resale to customers 146 1
Mutual funds 35 -
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Fair value $10,123 $ 1
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Securities owned which are not valued at listed market prices at June 30,
2000 amounted to $6,596,000.
4. Income taxes
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The components of income tax expense for the three and six months ended
June 30, 2000 and 1999 are as follows:
($000 Omitted)
Three Months Six Months
Ended Ended
2000 1999 2000 1999
---- ---- ---- ----
Federal-Current $ - $ - $ - $ -
State-Current 6 4 9 18
Deferred - - - -
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Total $ 6 $ 4 $ 9 $ 18
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8
<PAGE>
Total income tax expense for the three and six months ended June 30, 2000
and 1999 is different from the amounts 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) ($000 Omitted)
Three Months Ended Six Months Ended
June 30, June 30,
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2000 1999 2000 1999
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Income tax expense computed at
statutory rates on total earnings
before income taxes $ - $ 52 $367 $141
Increase (decrease) in tax from:
Valuation allowance on net operating
loss carryforward - ( 52) ( 367) ( 141)
State income tax, net of Federal
benefit 6 4 9 18
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Total $ 6 $ 4 $ 9 $ 18
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5. Contingent liabilities
----------------------
From time to time, in the normal course of business, Winston could be named
as a respondent in various arbitration matters. In January 2000 and May 2000,
Winston settled the two arbitrations which were open at December 31, 1999. These
settlements did not have material adverse effect on the consolidated financial
statements of the Company. Currently, there are no pending arbitrations.
6. Capital Stock Activity
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Common Stock Repurchases
------------------------
In February 2000 the Board of Directors approved a plan to repurchase up to
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. For the
six months ended June 30, 2000 the Company repurchased 77,504 shares and
returned these shares to the status of authorized and unissued shares.
Common Stock Options
--------------------
During the six months ended June 30, 2000, 21,000 shares of common stock
were issued at $2.25 per share due to the exercise of options which had been
granted in 1995. As of the period ended June 30, 2000 all outstanding options at
December 31, 1999 have either been exercised or have expired.
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<PAGE>
7. Sale of Investment in T.R. Winston Capital, Inc.
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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 ("DCM Shares"). In April 2000, Wincap's stockholders negotiated
a definitive agreement for the sale. On July 19,2000 regulatory approval for the
sale was obtained and the closing of the sale was completed on July 28, 2000.
The Company received for its proportionate ownership in Wincap 25,000 DCM
Shares and approximately $52,000 in cash. Because the Company's investment in
Wincap approximated the amount of cash received, no significant gain or loss was
recorded upon the sale. The Company has not assigned a value to the DSM Shares
due to their non-marketability.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial
------ Condition and Results of Operations
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Liquidity and Capital Resources
-------------------------------
Kent Financial Services, Inc. (the "Company") had cash and cash equivalents
(U.S. Treasury bills with original maturities of ninety days or less) of
approximately $3.1 million and securities owned of approximately $10.1 million
at June 30, 2000. Substantially all securities are owned by AVF. Securities
carried at fair value of $6,596,000 were valued based on management's estimates.
These securities are subject to a high degree of volatility and may be
susceptible to significant fluctuation in the near term. The remainder of the
securities owned are valued at quoted market prices.
Net cash used in operations was $697,000 in the six months ended June 30,
2000 compared to net cash used in operations of approximately $2.2 million in
the comparable period of 1999. Net cash used in operations for the six months
ended June 30, 2000 decreased from the comparable period in 1999 principally
from the increase in net income and the change in securities owned offset by the
change in the receivable for clearing broker and the change in accounts payable
and accrued expenses. Unrealized gains on securities owned are included in the
results of operations but do not generate cash flows from operations.
Net cash used in investing activities decreased during 2000 due to a
decrease in the purchase of property and equipment and the discontinued
consolidation of a former subsidiary in 1999 as stated in Note 1 of Notes to
Consolidated Financial Statements.
Net cash used in financing activities of $290,000 and $202,000 in the six
month periods ended June 30, 2000 and 1999, respectively, was comprised of the
purchase of Company common stock, which was subsequently retired, and payments
on the mortgage loan collateralized by the Company's headquarters building. In
the six months ended June 30, 2000 the Company issued 21,000 shares of common
stock in connection with the exercise of options from its non-qualified stock
option plan for proceeds of $47,000. The Company believes that its liquidity is
sufficient for future operations.
Results of Operations
---------------------
The Company incurred a net loss of $289,000, or $.16 basic and diluted loss
per share, for the three months ended June 30, 2000 compared to net income of
$150,000 or $.08 basic and diluted earnings per share, for the comparable
quarter in 1999. For the six months ended June 30, 2000, net income was
$1,070,000 or $.57 basic and diluted earnings per share, compared to net income
of $398,000 or $.20 basic and diluted earnings per share, for the comparable
period in 1999.
11
<PAGE>
Total brokerage income (consisting of brokerage commissions and trading
gains) for the three months ended June 30, 2000 was $735,000, an increase of
$58,000, or 8.6%, from $677,000 in the comparable 1999 period. Total brokerage
income was $2,836,000 for the six months ended June 30, 2000, an increase of
$1,391,000 or 96.3% from $1,445,000 for the six month period ended June 30,
1999. Brokerage expenses (including all fixed and variable expenses) increased
by $63,000, or 13.5%, from $468,000 in the quarter ended June 30, 1999, to
$531,000 for the three months ended June 30, 2000. For the six months ended June
30, 2000, brokerage expenses were $1,831,000 compared to $984,000 for the
comparable period in the prior year, an increase of $847,000 or 86.1%. Net
brokerage income of $204,000 for the three months ended June 30, 2000 decreased
from $209,000 for the same period in 1999, a decrease of $5,000 or 2.4%. For the
six month period ended June 30, 2000, net brokerage income was $1,005,000,
compared to $461,000 for the six months ended June 30, 1999, an increase of
$544,000 or 118%.
The increase in total brokerage income, total brokerage expense and net
brokerage income for the quarter and six months ended June 30, 2000 compared to
the comparable periods of 1999 was due to increased activity by the brokers
employed at T. R. Winston & Company, Inc., which was consistent with increased
activity in the equity markets in general.
Net investing gains (losses) were ($271,000) and $569,000 for the three and
six months ended June 30, 2000, respectively, compared to net investing gains of
$39,000 and $494,000 for the comparable periods in 1999.The net investing loss
for the 3 months ended June 30, 2000 related to declines in the fair value of
portfolio positions in which the Company owns greater than five percent of the
common stock outstanding. This decline of approximately $475,000 was offset by
realized gains in other securities of approximately $200,000.
The majority of the net investing gains for the six months ended June 30,
2000 related to an increase of approximately $300,000 in the fair value of
portfolio positions in which the Company owns greater than five percent of the
common stock outstanding. This increase along with increases in the market value
of other securities held of approximately $65,000 and realized gains in the
securities held of approximately $200,000 accounted for the six month investing
gains.
The fair value of the Company's investments are and continue to be subject
to a high degree of volatility and may be susceptible to significant fluctuation
in the near term. See Note 3 of Notes to Consolidated Financial Statements.
12
<PAGE>
Interest, dividends and other income was $269,000 and $517,000 for the
three and six months ended June 30, 2000, respectively, compared to $613,000 and
$809,000 for the three and six months ended June 30, 1999, respectively. This
decrease was a result of an extraordinary dividend received by AVF from one of
its portfolio investments in 1999 partially offset by an increase in interest
income earned due to higher available interest rates on the Company's cash
equivalents.
General and administrative expenses were $370,000 and $638,000 for the
quarters ended June 30, 2000 and 1999, respectively, a decrease of $268,000 or
42%. The decrease in general and administrative expense for the quarter ended
June 30, 2000 versus the quarter ended June 30, 1999 was due principally to a
decrease in compensation accruals and various other administrative expenses.
For the six month periods ended June 30, 2000 and 1999, general and
administrative expenses were $798,000 and $1,215,000 respectively, a decrease of
$417,000 or 34%. This decrease for the six months ended June 30, 2000 compared
to the same period in 1999 is also principally due to a decrease in compensation
accruals and various other administrative expenses.
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<PAGE>
PART II - OTHER INFORMATION
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Item 1. - Legal Proceedings
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Environmental Matters - Texas American Petrochemicals, Inc. ("TAPI")
--------------------------------------------------------------------
In January 1988, pursuant to Section 13 of the Texas Solid Waste Disposal
Act, the Texas Water Commission, subsequently renamed the Texas Natural Resource
Conservation Commission ("TNRCC"), listed on the Texas Register a site
identified by the TNRCC 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 former wholly-owned subsidiary of the Company, prior
to ownership being transferred to TAPI. TAPI has been notified by the TNRCC that
TAPI is a potentially responsible party ("PRP") for the site. Early in 1990,
TAPI declined a request by the TNRCC to perform a remedial investigation at the
site and advised the TNRCC that it had no resources. The TNRCC has not issued an
Administrative Order or instituted a formal proceeding. The TNRCC has published
notice that it will hold a public meeting to discuss the proposed remedial
action on July 31, 2000. Results of the meeting are unknown.
NASD Regulation, Inc. ("NASDR") - T. R. Winston & Company, Inc.
---------------------------------------------------------------
In July 2000, Winston and two officers were notified that NASDR, District 9
will recommend that the NASDR authorize a disciplinary proceeding against
Winston for alleged failure to establish, maintain and enforce adequate written
supervisory procedures regarding trading and market-making, and against the two
officers for having a superviosr who was not properly registered as an equity
trader. The proposed charges also include alleged failutes to report, accept, or
decline certain trades within specified time periods, update certain quotes for
limit orders, and ot maintain records for certain principal transactions.
Winston and the two officers intend to file a breief with the NASDR setting
forth reasons that the proposed charges should not be filed. No assurance can be
given that despite the brief to be filed with the NASDR Winston and the officers
will not be charges, or as to the outcome of the matter if charges are filed.
Item 6. - Exhibits and Reports on Form 8-K
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(a) Exhibits
--------
(27). Financial Data Schedule for the six months ended June 30,
2000.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which this
report is being filed.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KENT FINANCIAL SERVICES, INC.
Dated: August 14, 2000 By: /s/ John W. Galuchie, Jr.
-------------------------
John W. Galuchie, Jr.
Executive Vice President
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