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: September 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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common stock: As of October 31, 2000, the issuer had 1,827,672 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)
September 30,
2000
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Assets
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Cash and cash equivalents $ 4,151
Securities owned 8,713
Receivable from clearing broker 1,096
Property and equipment:
Land and building 1,447
Office furniture and equipment 273
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1,720
Accumulated depreciation ( 595)
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Net property and equipment 1,125
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Other assets 220
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Total assets $15,305
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Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased $ 244
Accounts payable and accrued expenses 927
Mortgage payable 693
Accrual for previously discontinued operations 273
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Total liabilities 2,137
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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; 1,834,672 outstanding 183
Additional paid-in capital 14,300
Accumulated deficit ( 1,315)
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Total stockholders' equity 13,168
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Total liabilities and stockholders' equity $15,305
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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
September 30,
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2000 1999
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Revenues:
Brokerage commissions $ 382 $ 350
Principal transactions:
Trading 186 199
Investing losses ( 37) ( 409)
Interest, dividends and other 248 167
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779 307
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Expenses:
Brokerage 387 402
General, administrative and other 396 472
Interest 118 67
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901 941
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Loss before income taxes ( 122) ( 634)
Benefit for income taxes - ( 18)
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Net loss ($ 122) ($ 616)
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Basic and diluted net loss per
common share ($ .07) ($ .32)
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Weighted average number of common
shares outstanding (in 000's) 1,839 1,906
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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)
Nine Months Ended
September 30,
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2000 1999
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Revenues:
Brokerage commissions $ 1,453 $ 1,299
Principal transactions:
Trading 1,951 695
Investing gains 532 85
Interest, dividends and other 765 976
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4,701 3,055
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Expenses:
Brokerage 2,218 1,386
General, administrative and other 1,194 1,687
Interest 332 200
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3,744 3,273
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Earnings (loss) before income taxes 957 ( 218)
Provision for income taxes 9 -
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Net earnings (loss) $ 948 ($ 218)
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Basic and diluted net earnings (loss) per
common share $ .51 ($ .11)
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Weighted average number of common
shares outstanding (in 000's) 1,859 1,940
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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)
Nine Months Ended
September 30,
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2000 1999
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Cash flows from operating activities:
Net earnings (loss) $ 948 ($ 218)
Adjustments:
Depreciation and amortization 57 47
Change in unrealized gains on
securities owned ( 411) ( 237)
Change in securities owned 235 ( 3,502)
Change in receivable from
clearing broker ( 156) 1,147
Change in accounts payable and
accrued expenses ( 288) 195
Other, net 59 ( 150)
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Net cash provided by (used in)
operating activities 444 ( 2,718)
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Cash flows from investing activities:
Purchase of equipment ( 7) ( 18)
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 ( 7) ( 76)
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Cash flows from financing activities:
Purchase of common stock ( 369) ( 377)
Issuance of common stock 47 18
Payments on debt ( 7) ( 9)
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Net cash used in financing
activities ( 329) ( 368)
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Net increase(decrease) in cash
and cash equivalents 108 ( 3,162)
Cash and cash equivalents at
beginning of period 4,043 8,217
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Cash and cash equivalents at end of
period $ 4,151 $5,055
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Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 332 $ 200
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Taxes $ 3 $ 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
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
1. Basis of Presentation
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The accompanying unaudited consolidated financial statements of Kent
Financial Services, Inc. and subsidiaries (the "Company") as of September 30,
2000 and for the three and nine month periods ended September 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 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 nine month periods ended
September 30, 2000 and 1999 are not necessarily indicative of the results to be
expected for the entire year or for any other period.
6
<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 September
30, 2000, Winston had net capital, as defined, of approximately $958,000, which
was approximately $844,000 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 September 30, 2000, AVF held 15 equity investments, of which
four consisted of owning more than 5% of the investee's outstanding capital
stock. AVF owns more than 39% 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 position 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.
7
<PAGE>
Securities owned and securities sold, not yet purchased as of September 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.(725,600 shares) $ 5,261 $ -
Gish Biomedical, Inc.(549,800 shares) 979 -
Golf Rounds.com, Inc.(189,600 shares) 332 -
General Devices, Inc.(2,535,579 shares) 51 -
All other portfolio positions 1,878 244
Held for resale to customers 177 -
Mutual funds 35 -
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Fair value $ 8,713 $ 244
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Securities owned which are not valued at listed market prices at September
30, 2000 amounted to $6,623,000.
4. Income taxes
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The components of income tax expense for the three and nine months ended
September 30, 2000 and 1999 are as follows:
($000 Omitted)
Three Months Nine Months
Ended Ended
2000 1999 2000 1999
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Federal-Current $ - $ - $ - $ -
State-Current - ( 18) 9 -
Deferred - - - -
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Total $ - ($ 18) $ 9 $ -
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8
<PAGE>
Total income tax expense for the three and nine months ended September 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:
<TABLE>
($000 Omitted) ($000 Omitted)
Three Months Ended Nine Months Ended
June 30, June 30,
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Income tax expense computed at
statutory rates on total earnings
before income taxes $ - $ - $325 $ -
Increase (decrease) in tax from:
Valuation allowance on net operating
loss carryforward - - ( 325) -
State income tax, net of Federal
benefit - ( 18) 9 -
---- ---- ---- ----
Total $ - ($ 18) $ 9 $ -
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</TABLE>
5. Contingent liabilities
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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
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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 (the
"Repurchase Plan"). For the nine months ended September 30, 2000 the Company
repurchased 86,142 shares and returned these shares to the status of authorized
and unissued shares. In November 2000, the Board of Directors approved an
amendment to the Repurchase Plan, approving the repurchase of up to an
additional 160,000 shares of the Company's common stock within the same
guidelines as the Repurchase Plan.
Common Stock Options
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During the nine months ended September 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 September 30, 2000 all outstanding
options at December 31, 1999 have either been exercised or have expired. During
the nine months ended September 30, 1999, 8,000 shares of common stock were
issued at $2.25 per share due to the exercise of options which had been granted
in 1994.
9
<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, the Company did not record any
material gain or loss in connection with the sale.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Liquidity and Capital Resources
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Kent Financial Services, Inc. (the "Company") had cash and cash equivalents
(U.S. Treasury bills with maturities at date of purchase of ninety days or less)
of approximately $4.2 million and securities owned of approximately $8.7 million
at September 30, 2000. Substantially all securities are owned by AVF. Securities
carried at fair value of $6,623,000 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 provided by operations was $444,000 in the nine months ended
September 30, 2000 compared to net cash used in operations of approximately $2.7
million in the comparable period of 1999. Net cash provided by operations for
the nine months ended September 30, 2000 increased 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 from the 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 $329,000 and $368,000 in the nine
month periods ended September 30, 2000 and 1999, respectively, was comprised of
the purchase of the Company's common stock, which was subsequently retired, and
payments on the mortgage loan collateralized by the Company's headquarters
building. In the nine months ended September 30, 2000 and 1999 the Company
issued 21,000 shares and 8,000 shares of common stock in connection with the
exercise of options from its non-qualified stock option plan for proceeds of
$47,000 and $18,000, respectively. The Company believes that its liquidity is
sufficient for future operations.
Results of Operations
---------------------
The Company incurred a net loss of $122,000, or $.07 basic and diluted loss
per share, for the three months ended September 30, 2000 compared to a net loss
of $616,000 or $.32 basic and diluted loss per share, for the comparable quarter
in 1999. For the nine months ended September 30, 2000, net income was $948,000
or $.51 basic and diluted earnings per share, compared to a net loss of $218,000
or $.11 basic and diluted loss 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 September 30, 2000 was $568,000, an increase
of $19,000, or 3%, from $549,000 in the comparable 1999 period. Total brokerage
income was $3,404,000 for the nine months ended September 30, 2000, an increase
of $1,410,000 or 71% from $1,994,000 for the nine month period ended September
30, 1999. Brokerage expenses (including all fixed and variable expenses)
decreased by $15,000, or 4%, from $402,000 in the quarter ended September 30,
1999, to $387,000 for the quarter ended September 30, 2000. For the nine months
ended September 30, 2000, brokerage expenses were $2,218,000 compared to
$1,386,000 for the comparable period in the prior year, an increase of $832,000
or 60%. Net brokerage income of $181,000 for the three months ended September
30, 2000 increased from $147,000 from the same period in 1999, an increase of
$34,000 or 23%. For the nine month period ended September 30, 2000, net
brokerage income was $1,186,000, compared to $608,000 for the nine months ended
September 30, 1999, an increase of $578,000 or 95%.
The increase in total brokerage income, total brokerage expense and net
brokerage income for the quarter and nine months ended September 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. During the quarter ended
September 30, 2000 brokerage expense decreased slightly as compared to the
quarter ended September 30, 1999 do to a decrease in clearing fees and other
fees associated with brokerage operations.
Net investing gains (losses) were ($37,000) and $532,000 for the three and
nine months ended September 30, 2000, respectively, compared to net investing
gains (losses) of ($409,000) and $85,000 for the comparable periods in 1999.The
net investing loss for the 3 months ended September 30, 2000 related primarily
to realized losses in other securities of approximately $120,000 and 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
$14,000 was offset by an increase in market value of other securities holdings
of $97,000.
The increase of the net investing gains for the nine months ended September
30, 2000 related to an increase of approximately $65,000 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 $386,000 and realized gains on the
sale of securities held of approximately $81,000 accounted for the nine 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.
Interest, dividends and other income was $248,000 and $765,000 for the
three and nine months ended September 30, 2000, respectively, compared to
$167,000 and $976,000 for the three and nine months ended September 30, 1999,
respectively. The decrease from the nine months ended September 30, 1999 was a
result of an extraordinary dividend received by AVF from one of its investments
during 1999, offset by an increase in interest earned due to higher invested
balances and higher available rates.
12
<PAGE>
General and administrative expenses were $396,000 and $472,000 for the
quarters ended September 30, 2000 and 1999, respectively, a decrease of $76,000
or 16%. The decrease in general and administrative expense for the quarter ended
September 30, 2000 versus the quarter ended September 30, 1999 was due
principally to a decrease in compensation accruals and various other
administrative expenses.
For the nine month periods ended September 30, 2000 and 1999, general and
administrative expenses were $1,194,000 and $1,687,000, respectively, a decrease
of $493,000 or 29%. This decrease for the nine months ended September 30, 2000
compared to the same period in 1999 is also principally due to a decrease in
compensation accruals and various other administrative expenses.
13
<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 held a 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 supervisor who was not properly registered as an equity
trader. The proposed charges also include alleged failures to report, accept, or
decline certain trades within specified time periods, update certain quotes for
limit orders, and to maintain records for certain principal transactions.
Winston and the two officers filed a brief with the NASDR setting forth reasons
that the proposed charges should not be filed. No assurance can be given that
despite the brief filed with the NASDR, Winston and the officers will not be
charged, or as to the outcome of the matter if charges are filed.
Item 4. - Submission of Matters to a Vote of Security Holders
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The Company held its Annual Meeting of Stockholders on November 6, 2000.
Management's nominees, Messrs. Paul O. Koether, Mathew E. Hoffman, Casey K.
Tjang, M. Michael Witte, and Qun Yi Zheng, Ph.D., were elected to the Board of
Directors.
The following is a tabulation for all nominees:
For Withheld
Paul O. Koether 975,454 -
Mathew E. Hoffman 975,454 -
Casey K. Tjang 975,454 -
M. Michael Witte 975,454 -
Qun Yi Zheng, Ph.D. 975,454 -
14
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K
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(a) Exhibits
--------
(27) Financial Data Schedule for the nine months ended September
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.
15
<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: November 8, 2000 By: /s/ John W. Galuchie, Jr.
-------------------------
John W. Galuchie, Jr.
Executive Vice President
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