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 JUNE 30, 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
incorporation or organization) Identification No.)
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 June 30, 1996, the Registrant had 2,387,400 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (Check One): Yes _____ No __X__
THIS DOCUMENT IS A COPY OF THE FORM 10-QSB FOR THE PERIOD ENDED JUNE 30, 1996
FILED ON AUGUST 15, 1996 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
<PAGE>
KAYE KOTTS ASSOCIATES INC.
FORM 10-QSB
For the Three Month Period Ended June 30, 1996
TABLE OF CONTENTS Page
Part I Financial Information
Item 1. Financial Statements 3
Balance Sheets 3
Statements of Operations 5
Statement of Changes in Shareholders' Equity 6
Statements of Cash Flows 7
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10
Part II Other Information 14
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KAYE KOTTS ASSOCIATES INC.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Kaye Kotts Associates, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -----------
unaudited
<S> <C> <C>
Assets
Current Assets:
Cash $ 112,325 $ 18,642
Short-term investments 2,832,186 --
Accounts Receivable, net of allowance for
doubtful accounts of $242,441 and $275,000
at June 30, 1996 and December 31, 1995,
respectively 975,574 1,131,206
Prepaid expenses 197,917 160,862
Deferred offering costs -- 315,619
Other current assets 136,518 54,156
----------- -----------
Total Current Assets 4,253,520 1,680,484
----------- -----------
Property and Equipment - Net of accumulated
depreciation of $175,795 and $195,415 at
June 30, 1996 and December 31, 1995,
respectively 201,006 159,041
Deferred Financing Costs -- 75,000
----------- -----------
$ 4,454,525 $ 1,914,525
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable-trade $ 310,358 $ 217,773
Accrued payroll and payroll taxes 130,186 273,466
Loans payable 523,943 1,062,313
Other accrued liabilities 361,064 145,066
Deferred revenues 167,883 226,979
----------- -----------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total Current Liabilities 1,493,433 1,925,597
----------- -----------
Stockholders' Equity
Common Stock, $0.01 par value, 10,000,000 shares
authorized: 2,394,400 and 1,237,400 shares
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 23,944 12,374
Additional paid-in-capital - common stock 4,683,373 168,455
Retained earnings (deficit) (1,746,224) (191,901)
----------- -----------
2,961,093 (11,072)
4,454,525 1,914,525
=========== ===========
</TABLE>
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<PAGE>
Kaye Kotts Associates, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Six Months
ended June 30 ended June 30
--------------------------------- ---------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Fee Income $ 1,275,384 $ 1,455,037 $ 2,718,336 $ 2,753,420
Selling, General and
Administrative Expenses 2,396,399 1,260,500 4,195,889 2,577,287
----------- ----------- ----------- -----------
Operating (Loss)/Income (1,121,015) 194,537 (1,477,553) 176,133
Interest (Income)/Expense, Net (30,512) 11,230 (22,810) 24,566
Amortization of Debt Discount -- 22,329 -- 52,077
Other Income (8,057) (10,222) (13,219) (10,222)
----------- ----------- ----------- -----------
(Loss)/Income Before Income
Tax and Extraordinary Item (1,082,446) 171,200 (1,441,525) 109,712
----------- ----------- ----------- -----------
Extraordinary Item: Write-Off
of Deferred Finance Charge and
Unamortized Debt Discount Upon
Repayment of Debt -- -- 112,797 --
----------- ----------- ----------- -----------
(Loss)/Income Before Income
Taxes (1,082,446) 171,200 (1,554,322) 109,712
----------- ----------- ----------- -----------
Provision for Income Taxes -- 68,480 -- 43,885
Net (Loss)/Income (1,082,446) 102,720 (1,554,322) 65,827
----------- ----------- ----------- -----------
(Loss)/Income per Common and
Common Equivalent Share ($ 0.45) $ 0.08 ($ 0.77) $ 0.05
=========== =========== =========== ===========
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 2,389,730 1,237,400 2,028,190 1,237,400
=========== =========== =========== ===========
</TABLE>
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Kaye Kotts Associates, Inc.
Statement of Changes in Shareholders' Equity
for the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Common Stock
----------------------------------
Additional
Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Totals
------ ------ ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance-December 31, 1995 1,237,400 $12,374 $ 168,455 $ (91,902) $0 (11,073)
Net (Loss) (Unaudited) (1,554,322) (1,554,322)
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 (297,018) (297,108)
Public Offering Costs (442,269) (442,269)
Issuance of common stock
in repayment of legal
fees 7,000 70 9,930 10,000
Printing of prospectus (90,000) (90,000)
------------------------------------------------------------------------------------
Balance - June 30, 1996 2,394,400 23,994 4,683,373 (1,746,224) 0 2,961,093
====================================================================================
</TABLE>
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<PAGE>
Kaye Kotts Associates, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months For the Six Months
ended June 30 ended June 30
--------------------------------- ---------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income $(1,082,446) $ 102,720 $(1,554,322) $ 65,827
----------- ----------- ----------- -----------
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation 22,798 34,766 39,347 37,433
Issuance of common shares
for services provided 9,930 (9,300) 9,930 324
Changes in assets and
liabilities:
Decrease/(increase) in
accounts receivable-
trade 67,704 (599,199) 156,630 (448,359)
(Increase)/decrease in
prepaid assets 28,707 (24,958) (37,054) (57,566)
(Increase)/decrease in
other current assets (67,592) (30,062) (82,362) 2,789
Increase in accounts
payable-trade 265,642 159,276 92,585 159,276
(Decrease)/increase in
accrued expenses (56,104) 223,534 (143,281) 184,410
Increase/(decrease) in
other accrued
liabilities 274,404 28,395 215,999 28,395
(Decrease) in other
deferred revenues (20,234) -- (59,096) --
(Decrease) in preferred
income taxes -- 38,920 -- 38,920
----------- ----------- ----------- -----------
Total Adjustments 525,255 (178,628) 192,698 (54,378)
Net Cash Provided/(Used)
by Operating Activities (557,192) (75,908) 1,361,625 11,449
----------- ----------- ----------- -----------
Cash Flows From Investing
Activities:
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Capital expenditures (75,231) (21,309) (88,283) (21,309)
----------- ----------- ----------- -----------
Cash Flows From Financing
Activities
Payments on loans payable (27,557) (6,944) (1,081,578) (6,944)
Proceeds from loans payable 499,943 139,000 499,943 139,000
Issuance of common stock
and warrants net of
$288,438 of expenses 0 -- 5,057,339 --
Increase in deferred
offering costs -- (97,656) -- (97,656)
Expenses Pertaining to
Issuance of Common
Stock and Warrants (99,930) (99,930)
----------- ----------- ----------- -----------
Net Cash Provided by
Financing Activities 372,456 34,400 4,373,774 34,400
----------- ----------- ----------- -----------
Net Increase/(Decrease)
in Cash (259,966) (62,817) 2,925,867 24,540
Cash at Beginning of Period 3,204,476 77,140 18,643 77,140
----------- ----------- ----------- -----------
Cash and Short-Term
Investments at End of Period $ 2,944,510 $ 14,323 $ 2,944,510 $ 101,680
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period
for interest $ 30,723 $ 6,316 $ 30,723 $ 6,316
=========== =========== =========== ===========
Issuance of warrants in
connection with debt financing -- 36,000 -- 36,000
=========== =========== =========== ===========
</TABLE>
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<PAGE>
KAYE KOTTS ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 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 moths after the completion
of the initial public offering.
3. Internal Revenue Service Investigation
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 the investigation. The Government's attorney has indicated to
the Company's counsel that no substantial evidence exists linking the
Company and its officers to these activities;
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<PAGE>
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. Direct legal and other
expenses of approximately $210,000 were incurred through June 30, 1996 in
connection with this investigation.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
Results of Operations
For the three month period ended June 30, 1996, the Company had a loss
before income taxes and extraordinary item of ($1,082,000) compared with income
of $171,000 during the same period in 1995. The increase in the loss of
($1,253,000) resulted primarily from staffing, facility and marketing costs
incurred in order to build the organization required to support an increased
sales base and the Company's planned national expansion, which is in progress.
The loss was also increased by approximately $250,000 of costs related to the
Internal Revenue Service investigation and litigation related to matters
described in the Notes to Financial Statements. The Company had a net loss of
($1,082,446) for the 1996 period compared with a net income of $102,720 for the
three months ended June 30, 1996. The 1996 loss was ($0.45) per share compared
with income of $0.08 per share for the three months ended June 30, 1995.
Fee Income
During the three months ended June 30, 1996, the Company had $1,275,384 in
fee income compared with $1,455,037 for the same period in 1995, reflecting a
decrease of $179,653 or approximately 14%. The decrease in fees resulted
primarily from the temporary closing of two offices, other shifts in personnel
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<PAGE>
and the diversion of sales personnel from selling to administrative activities
as a result of the Internal Revenue Service investigation described in Note 3 of
Notes to Financial Statements.
Selling, General and Administrative Expenses
Operating costs increased by $1,135,899 to $2,396,399 in 1996 for the three
months ended June 30, 1996, or approximately 90% from $1,260,500 in 1995. The
increase results from the costs involved in building the organization and
infrastructure necessary to support the Company's planned growth. Of this
increase, $328,683 or approximately 28% of the increase was concentrated in
staffing and employee benefits which grew from $842,406 in 1995 to $1,169,089 in
1996, result from the increase in the Company's staffing levels to service more
clients and increase in management staff for the Company's planned national
expansion.
Facility costs grew by $51,357 for the three months ended June 30, 1996,
from $159,933 in 1995 to $210,290 in 1996. Rent and related expenses increased
by $48,736 from $171,510 in 1995 to $223,246 in 1996.
Marketing, communication and promotional expense increased for the three
months ended June 30, 1996, by $148,085 from $199,759 for 1995 to $347,844 for
1996, primarily resulting from the cost of supporting new offices and developing
and testing the Company's first television commercial, which is a test of a
potential new source of business.
Professional fees increased to $284,335 from $2,922 in 1995 primarily
resulting from the litigation and Internal Revenue Service investigation
described in the Notes to Financial Statements, and the cost of compliance with
Securities and Exchange Commission requirements for public companies.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
Results of Operations
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<PAGE>
For the six month period ended June 30, 1996, the Company had a loss before
income taxes and extraordinary items of approximately ($1,441,000) compared with
operating income of $109,000 in the 1995 period. The increase in the loss of
($1,550,000) resulted primarily from staffing, facility and marketing costs
incurred in order to build the organization required to support an increased
sales base and the Company's planned national expansion, which is in progress.
The loss was also increased by approximately $320,000 of costs related to the
Internal Revenue Service investigation and litigation described in Notes to
Financial Statements. The Company had a net loss of approximately ($1,554,322),
for the 1996 period compared with net income of $65,827 for the six months ended
June 30, 1996. The 1996 loss was ($0.77) per share compared with income of $0.05
per share for the six months ended June 30, 1995. The net loss for 1996 includes
an extraordinary charge of $112,797 for the write-off of deferred financing
charge and unamortized debt discount.
Fee Income
During the six months ended June 30, 1996, the Company had $2,718,336 in
fee income compared with $2,753,420 for the 1995 period, reflecting a decrease
of $35,084 or approximately 1.3%.
Selling, General and Administrative Expenses
Operating costs increased by $1,618,602 to $4,195,889 for the six months
ended June 30, 1996, or approximately 63% from $2,577,287 in 1995. The increase
results from the costs involved in building the organization and infrastructure
necessary to support the Company's planned expansion, which is in progress. Of
this increase, $518,815 or approximately 32% of the increase is concentrated in
staffing and employee benefits, which grew from $1,685,965 in 1995 to $2,202,780
in 1996, result, from the opening of four new sales offices and one new full
service office, as well as an increase in the Company's management staff levels
to improve the quality of the Company's product and to service more clients in
the Company's planned national expansion.
Facility costs grew by $79,546 for the six months ending June 30, 1996,
from $313,151 in 1995 to $392,697 in 1996.
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<PAGE>
Rent and related expenses increased by $77,632 from $275,718 in 1995 to $353,350
in 1996.
Marketing, communication and promotional expense increased for the six
months ending June 30, 1996, by $181,139 from $408,027 for 1995 to $589,166 for
1996, primarily resulting from the cost of supporting new offices and developing
and testing the Company's first television commercial, which is a test of a
potential new source of business.
Professional fees increased to $369,163 from $35,320 in 1995 primarily
resulting from the litigation and Internal Revenue Service investigation
described in the Notes to Financial Statements, and the cost of compliance with
Securities and Exchange Commission requirements for public companies.
Certain Balance Sheet Data
Net accounts receivable declined by $156,630 or approximately 16% from the
December 31, 1995, level and stood at $974,574 at June 30, 1996. This amount
represented approximately 22% of the Company's total asset base at June 30,
1996, and approximately 23% of its current assets at the same date. The
allowance for doubtful accounts was charged with provisions of $333,962 and
$140,633 for 1996 and 1995, respectively. The Company reviews the provisions 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 a
safeguard, a substantial initial 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 six
months ended June 30, 1996, approximately $293,000 or (23%) of the Company's
cash receipts, other than initial payments, did not come from post dated checks.
At June 30, 1996, accounts receivable greater than 90 days old stood at
$246,334 which sum included $211,477 in accounts receivable greater than 120
days old. Accounts receivable greater than 90 and 120 days old represented
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<PAGE>
approximately 20% and 17% respectively, of total accounts receivable at June 30,
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 preceding paragraph, management believes that trade accounts
receivable as stated at $974,574 are collectible in the normal course of
business.
Management expects its investment in client accounts receivable to remain
consistent or increase in proportion to the Company's growth. Trade accounts
payable, accrued expenses and other accrued liabilities increased by $165,304
from $636,304 at December 31, 1995 to $801,608 at June 30, 1996.
Loans payable decreased from $1,062,313 at December 31, 1995, to $523,943
at June 30, 1996. This decrease of $538,370 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. Additionally, the Company established a Credit
Line of $500,000 with a local bank and has used the entire amount at June 30,
1996.
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 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
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<PAGE>
for up to eighteen months after the completion of the initial public offering.
The net proceeds of the offering amounting to $5,048,757 was credited to common
stock and paid in capital. In addition, $532,269 of expenses related to the
offering were charged to paid-in capital.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
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 the
investigation. The Government's attorney has indicated to the Company's counsel
that 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.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on June 20, 1996
at 9 a.m. at Radisson Valley Center Hotel, 15433 Ventura Boulevard, Sherman
Oaks, California 91403 ("Annual Meeting"). At the Annual Meeting the
Shareholders elected the following to the Board of Directors to serve for a
period of one year: David Kaye, Susan E. Phillips, Michael M. Kesner, Robert M.
Rubin and Lawrence Cohen.
The Shareholders also approved an amendment to the Kaye Kotts
Associates 1995 Stock Incentive Plan to increase the available shares of Common
Stock underlying the options to 666,000 shares from 350,000 shares, to limit the
number of shares of Common Stock with respect to which options may be granted
during any calendar year to any person to 100,00 shares, and increase the class
of employees eligible to receive incentive stock options.
Finally, the Shareholders ratified the appointment of Feldman, Radin &
Co., P.C. as independent auditors of the Company for the year ending December
31, 1996.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable
(b) Not applicable
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<PAGE>
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.
August 13, 1996 By: /s/ David Kaye
--------------------------
David Kaye
Chief Executive Officer
President
Treasurer
August 13, 1996 By: /s/ Arnold Levitt
--------------------------
Arnold Levitt
Chief Financial Officer
Assistant Treasurer
