<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _________.
Commission file number ______________
KAYE KOTTS ASSOCIATES INC.
(Exact name of small business issuer as specified in its charter)
Delaware 95-4248310
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15490 VENTURA BOULEVARD
SHERMAN OAKS, CALIFORNIA 91403
(Address of principal executive offices, zip code)
(818) 382-6300
(Issuer's telephone number)
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 registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No ____
As of March 31, 1996, the Registrant had 2,387,400 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (Check One): Yes ____ No X
<PAGE> 2
KAYE KOTTS ASSOCIATES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ $217,694 $ 18,643
Short-term investments 2,986,783 -
Accounts receivable, net of allowance
for doubtful accounts of
$233,572 and $275,000 at March 31, 1996 and
December 31, 1995 respectively 1,042,278 1,131,206
Prepaid expenses 226,624 160,863
Deferred offering costs - 315,619
Other current assets 68,926 54,156
----------- -----------
TOTAL CURRENT ASSETS 4,542,304 1,680,485
----------- -----------
Property and Equipment- Net of accumulated
depreciation of $216,964
and $195,434 at March 31, 1996
and December 31, 1995 respectively 155,543 159,041
Deferred Financing Costs - 75,000
----------- -----------
$ 4,697,847 $ 1,914,525
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade $ 44,716 $ 217,773
Accrued payroll and payroll taxes 186,289 273,466
Loans payable 59,945 1,062,313
Other accrued liabilities 86,660 145,065
Deferred revenues 188,117 226,979
----------- -----------
TOTAL CURRENT LIABILITIES 565,727 1,925,597
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock $0.01 par value; 1,000,000 shares authorized,
none issued and outstanding - -
Common Stock, $0.01 par value; 10,000,000 shares authorized:
2,387,400 and 1,237,400 shares issued and outstanding
at March 31, 1996 and December 31, 1995, respectively. 23,874 12,374
Additional paid-in-capital - common stock 4,772,025 168,455
Retained earnings (663,778) (191,910)
----------- -----------
$ 4,697,847 $ 1,914,525
=========== ===========
</TABLE>
<PAGE> 3
KAYE, KOTTS ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------
1996 1995
----------------------------
(UNAUDITED)
<S> <C> <C>
Fee Income $ 1,442,951 $ 1,298,976
Selling, General And Administrative
Expenses 1,799,490 1,316,787
----------------------------
Operating (Loss) (356,539) (17,811)
Interest Expense 10,741 13,930
Amortization of Debt Discount 14,247 29,748
Other Income 8,201 (61,483)
----------------------------
(Loss) Before Income Taxes And Extraordinary Item (373,326) (61,489)
----------------------------
Extraordinary Item:
Write Off of Deferred Financing Costs
and Unamortized Debt Discount Upon
Repayment of Debt 98,550 -
----------------------------
(Loss) Before Income Tax Benefit (471,876) (61,489)
Provision for Income Tax Benefit - (24,596)
Net (Loss) ($471,876) ($36,893)
============================
(Loss) Per Common And Common
Equivalent Share ($0.29) ($0.03)
============================
Weighted Average Number Of Common
And Common Equivalent Shares Outstanding 1,654,033 1,237,000
============================
</TABLE>
<PAGE> 4
KAYE, KOTTS ASSOCIATES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
Additional
Paid-in Retained
Shares Amount Capital Earnings Totals
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1995 1,237,400 $ 12,374 $ 168,455 ($191,901) ($11,072)
Net (Loss) (Unaudited) (471,876) (471,876)
Issuance of common stock in
Public Offering 1,150,000 11,500 5,163,500 5,175,000
Issuance of common stock
purchase warrants in Public Offering 170,775 170,775
Underwriter, Legal, and Consulting Fees (288,436) (288,436)
Public Offering Costs (442,269) (442,269)
---------------------------------------------------------------------------------
Balance - March 31, 1996 2,387,400 $ 23,874 ($4,772,025) ($663,778) $ 4,132,121
=================================================================================
</TABLE>
<PAGE> 5
KAYE KOTTS ASSOCIATES, INC.
STATEMENTS OF CASH FLOW
MARCH 1996
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
March 31,
---------------------------
1996 1995
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED)
<S> <C> <C>
Net Income ($471,876) ($36,893)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
Depreciation 16,549 2,667
Issuance of common shares for services provided - 9,624
CHANGES IN ASSETS AND LIABILITIES:
Decrease/(increase) in accounts receivable-trade 88,926 (150,840)
Increase/(decrease) in prepaid expenses (65,761) 32,608
Increase in other current assets (14,770) (32,851)
Decrease/(increase) in accounts payable-trade (173,057) 39,124
Decrease/(increase) in accrued expenses (87,177) 160,514
Decrease/(increase) in other accrued liabilities (58,405) 2,546
Decrease in other deferred revenues (38,862) -
Increase in deferred income taxes - 5,986
---------- ---------
TOTAL ADJUSTMENTS (332,557) 69,378
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES (804,433) 32,485
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,052) (40,057)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (13,052) (40,057)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on loans payable (1,054,021) (5,533)
Decrease(increase) in deferred offering costs - 5,964
Issuance of common stock and warrants
net of $288,436 of expenses 5,057,339 -
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,003,318 431
---------- ---------
NET INCREASE/(DECREASE) IN CASH 3,185,833 (7,141)
CASH AT BEGINNING OF PERIOD 18,643 57,634
---------- ---------
CASH AND SHORT TERM INVESTMENTS
AT END OF PERIOD $3,204,476 50,062
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 57,061 6,316
========== =========
Issuance of warrants in connection with debt financing - 36,000
========== =========
</TABLE>
<PAGE> 6
KAYE KOTTS ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. LITIGATION
On November 22, 1995, the Company and its Chief Executive Officer,
among others, were served with a lawsuit by two former employees whose
services had been terminated by the Company in May and June 1995,
respectively, for what, in management's opinion, was cause. The
plaintiffs allege wrongful discharge in contravention of public
policy, fraud, misrepresentation and intentional infliction of
emotional distress. The plaintiffs in the action are suing for
approximately $4,525,000, including damages. Management believes that
the action is without merit and is vigorously defending the case.
2. INITIAL PUBLIC OFFERING OF THE COMPANY'S COMMON SHARES
The Company completed an Initial Public Offering on February 22, 1996,
selling a total of 1,150,000 shares of common stock for $5.00 per
share, and 1,275,000 Class A Redeemable Warrants (the "Warrants") at
$.15 per warrant. The warrants entitle the holder to purchase one
share of common stock at $6.00 per share through February 22, 2001.
Warrants are redeemable by the Company commencing one year after
issuance, on not less than 30 days written notice, at a price of $.08
per warrant, at any time that the average closing bid price of the
common stock exceeds $10.00 per share for thirty consecutive business
days. Consent of the underwriters is also needed to redeem the
warrants for up to eighteen months after the completion of the initial
public offering.
3. SUBSEQUENT EVENT
In April 1996 the Internal Revenue Service subpoenaed certain of the
Company's records as part of an investigation concerning the related
activities of three employees whom the Company has suspended pending
the results of that investigation. The Government's attorney has
indicated to Company's counsel that as of May 13, 1996, no substantial
evidence exists linking the Company and its officers to these
activities; however, since these activities involved Company employees,
the Company and its officers' conduct are within the scope of the
investigation.
In the opinion of management, the conduct of these employees, who are
allegedly engaged in these activities, is neither condoned nor
encouraged by the Company, nor overtly displayed by other employees.
<PAGE> 7
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
RESULTS OF OPERATIONS
For the three months ended March 31, 1996 the Company had an operating
loss of approximately ($356,000) compared with an operating loss of ($18,000)
in the 1995 period. The increase in the loss of ($347,000) resulted primarily
from the staffing, facility and marketing costs incurred in order to build the
organization required to support the Company's planned national expansion as
described in the Prospectus of February 22, 1996. The Company had a net loss of
approximately ($472,000) for the 1996 period compared with a net loss of
($37,000) for the three months ended March 31, 1995. On a per share basis the
1996 loss was ($0.29) per share compared with a loss of ($0.03) per share for
1995. The net loss for 1996 includes an extraordinary charge of $98,550 for the
write-off of deferred financing charges and unamortized debt discount upon the
repayment of debt, and interest expense and amortization of debt discount of
$25,000 compared with $40,000 in 1994. The interest and amortization result from
the issuance of the Company's Common Stock and Common Stock Warrants and
borrowings from private investors in late 1994 and 1995.
FEE INCOME
During the 1996 period, the Company had $1,442,951 in fee income
compared with $1,298,976 for the 1995 period, reflecting an increase of
$143,975 or approximately 11%.
This revenue growth resulted primarily from the opening of one fully
staffed regional office and four unstaffed branch offices during 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating costs increased by $482,703 or approximately 36% from
$1,316,787 in 1995 to $1,799,490 in 1996. This increase results from the costs
involved in developing support services and maintaining a growing revenue base
and corporate infrastructure. Of this increase, $190,132 or approximately 39%
of the increase is concentrated in staffing and employee benefits, which grew
from $843,559 in 1995 to $1,033,691 in 1996 and resulted from the opening of
new offices, as well as an increase in the Company's staffing levels to handle
more clients and provide increased management staff for the Company's planned
national expansion.
Facility costs grew by $28,189 from $153,218 in 1995 to $182,407 in
1996. Rent and related expenses increased by $28,896 from $104,208 in 1995 to
$130,104 in 1996.
Marketing, communication and promotional expense increased in 1996 by
$33,052 from $208,269 for 1995 to $241,321 for 1996.
CERTAIN BALANCE SHEET DATA
Net accounts receivable declined by $88,926 or approximately 8% from
the December 31, 1995 level and stood at $1,042,278 at March 31, 1996. This
amount represented approximately 22% of the Company's total asset base at March
31, 1996 and
<PAGE> 8
approximately 23% of its current assets at the same date. The allowance for
doubtful accounts was charged with provisions of $153,491 and $53,270 for 1996
and 1995, respectively. The Company reviews the provision for uncollectible
accounts quarterly, and adjusts the provision based on actual write-offs and
aging analyses.
The Company's typical client is in financial difficulty at the outset
of the Company's engagement. Under these circumstances, the Company usually
arranges extended payment terms ranging up to six months in length. As an
additional safeguard, a substantial down payment of approximately 35% of the
Company's total fee from the client is required. Finally, it is the Company's
policy to obtain post dated checks for the balance of the Company's fee.
During the three months ended March 31, 1996, approximately $328,000 or (24%)
of the Company's revenues were attributed to clients who did not furnish the
Company with post dated checks.
At March 31, 1996, accounts receivable greater than 90 days old stood
at $166,578 which sum included $105,904 in accounts receivable greater than 120
days old. Accounts receivable greater than 90 and 120 days old represented
approximately 13% and 9% respectively, of total receivables at March 31, 1996.
The Company's collection process can experience delays due to
rescheduling of installments, as well as insufficiency of available funds in
the client's bank account when an installment is due. When the client does not
have a bank account, the Company will accept a client without receiving post
dated checks. As a result, the Company may not have the necessary leverage to
ensure payment from the client. Management believes that there is no material
risk in extending the payment and, in fact, historical experience suggests that
rescheduling of payments occurs infrequently, perhaps up to 10% of the time,
and that 90% of the Company's clients generally honor the rescheduled payment
plan.
Based upon the forgoing, management believes that receivables as
stated at $1,042,278 are collectible in the normal course of business.
Management expects its investment in client receivables to remain
consistent or increase in relation to the Company's growth. Trade payables,
accrued expenses and other accrued liabilities decreased by $318,639 from
$636,304 at year end 1995 to $317,665 at March 31, 1996. The decrease resulted
from the use of some of the proceeds of the Company's public offering of Common
Stock and Common Stock Warrants to liquidate liabilities.
Loans payable decreased from $1,062,313 at December 31, 1995 to
$59,945 at March 31, 1996. This decrease of $1,002,368 resulted from the use of
some of the proceeds from the Company's public offering of Common Stock and
Warrants in February 1996 to repay loans.
Deferred income declined by $38,862 from $226,979 to $188,117.
<PAGE> 9
The Company completed an Initial Public Offering on February 22, 1996,
selling a total of 1,150,000 shares of common stock for $5.00 per share, and
1,265,000 of Class A Redeemable Warrants (the "Warrants") at $.15 per warrant.
The warrants entitle the holder to purchase one share of common stock at $6.00
per share through February 22, 2001. Warrants are redeemable by the Company
commencing one year after issuance, on not less than 30 days written notice, at
a price of $.08 per warrant, at any time that the average closing bid price of
the common stock exceeds $10.00 per share for thirty consecutive business days.
Consent of the underwriters is also needed to redeem the warrants for up to
eighteen months after the completion of the initial public offering. The net
proceeds of the offering amounting to $5,057,339 was credited to common stock
and paid in capital. In addition, $442,269 of expenses related to the offering
were charged to paid-in capital.
<PAGE> 10
KAYE KOTTS ASSOCIATES INC.
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.
KAYE KOTTS ASSOCIATES INC.
By: /s/ David Kaye
----------------------------
David Kaye
Chief Executive Officer
President
Treasurer
By: /s/ Arnold Levitt
---------------------
Arnold Levitt
Assistant Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 217,694
<SECURITIES> 2,986,783
<RECEIVABLES> 1,042,278
<ALLOWANCES> 233,572
<INVENTORY> 0
<CURRENT-ASSETS> 4,542,304
<PP&E> 155,543
<DEPRECIATION> 216,964
<TOTAL-ASSETS> 4,697,847
<CURRENT-LIABILITIES> 565,727
<BONDS> 0
0
0
<COMMON> 23,874
<OTHER-SE> 4,108,247
<TOTAL-LIABILITY-AND-EQUITY> 4,697,847
<SALES> 0
<TOTAL-REVENUES> 1,442,951
<CGS> 0
<TOTAL-COSTS> 1,799,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,741
<INCOME-PRETAX> (471,876)
<INCOME-TAX> 0
<INCOME-CONTINUING> (471,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 98,550
<CHANGES> 0
<NET-INCOME> (471,876)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
