<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SPECIAL FINANCIAL REPORT IN LIEU OF FORM 10-KSB ANNUAL REPORT PURSUANT TO RULE
15D-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934
NOTE: THIS FORM CONTAINS ONLY FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
For the fiscal year ended December 31, 1995
Commission file number _______________
KAYE KOTTS ASSOCIATES INC.
--------------------------
(Name of small business issuer in its charter)
Delaware 95-4248310
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation)
KAYE KOTTS ASSOCIATES INC.
15490 VENTURA BOULEVARD
SHERMAN OAKS, CALIFORNIA 91403
(Address of principal executive offices, zip code)
(818) 382-6300
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: none
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
------------
(Title of Class)
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Revenues for the registrant for the fiscal year ended December 31, 1995 were
$5,844,295.
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $10,594,694 as of May 9, 1996.
As of March 1, 1996, the Registrant had 2,387,400 shares of Common Stock, par
value $0.01, outstanding.
Total Number of Pages 23
-----
Transitional Small Business Disclosure Format (Check One): Yes No X
--- ---
<PAGE> 2
SUMMARY FINANCIAL INFORMATION
The summary financial information as of December 31, 1995 and 1994
and for the years then ended are derived from the financial statements of the
Company which have been audited by Feldman Radin & Co., P.C., independent
public accountants, whose report thereon is included in this Special Financial
Report along with such financial statements.
The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company appearing elsewhere in
this Special Financial Report.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------
1995 1994
---------- ----------
<S> <C> <C>
OPERATING RESULTS
Fee Income . . . . . . . . . . . . . . . . . . . . . $5,844,295 $4,949,720
Selling, General and Administrative
Expense . . . . . . . . . . . . . . . . . . . 5,920,261 4,731,328
Operating Income (Loss) . . . . . . . . . . . . . . . (75,966) 218,392
Income (Loss) Before Income Taxes . . . . . . . . . . (186,063) 204,236
Provision for Income Taxes . . . . . . . . . . . . . (9,442) 80,951
Net Income (Loss) . . . . . . . . . . . . . . . . . . (176,621) 123,285
Net Income (Loss) per Common Share . . . . . . . . . ( $0.14) $0.11
Weighted Average Number of Shares
Outstanding . . . . . . . . . . . . . . . . . 1,237,400 1,118,841
BALANCE SHEET DATA
Working Capital . . . . . . . . . . . . . . . . . . . (245,113) (140,805)
Total Assets . . . . . . . . . . . . . . . . . . . . 1,914,525 1,203,526
Total Liabilities . . . . . . . . . . . . . . . . . . 1,925,597 1,883,601
Stockholders' Equity* . . . . . . . . . . . . . . . . (11,072) 19,925
</TABLE>
*Does not reflect issuance of 1,150,000 shares of Common Stock and 1,265,000
Class A Redeemable Warrants for approximately $5,057,000, net of expenses.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Special
Financial Report.
INTRODUCTION
The Company's primary business is providing representation for
delinquent taxpayers before the collection division of the Internal Revenue
Service and the State of California. Generally, the Company does not challenge
the amounts owed, but rather it seeks to negotiate discounted settlements which
are commonly known as Offers-in-Compromise or full payments under installment
payment agreements.
The Company seeks potential clients who would either qualify for the
Offer-in-Compromise or installment payments programs of the Internal Revenue
Service or the State of California in settlement of their tax liabilities.
Services provided to qualifying clients are aid and assistance in helping them
to prepare, assemble and present compromise requests and installment payment
plans to taxing authorities in settlement of their liabilities. In providing
these services, the Company, in many cases, will obtain a power of attorney
from clients and negotiate on their behalf before the applicable taxing
authorities.
The Company charges a fixed fee for it's services. The fee is
determined by reference to the client's liability with additions for emergency
services.
Both individual persons and businesses (sole proprietorships,
partnerships, corporations, estates and trusts) are sought by the Company as
potential clients. The numerical composition, diversity and dispersion of the
current and potential Company client base eliminates any dependency on one
particular client. However, the foregoing does not ensure repeat business. If
a matter is resolved, it would be unlikely that the client would again need the
Company's services within the foreseeable future. As a result, revenue growth
is dependent upon the Company obtaining new clients in it's present market area
or penetrating new geographic markets, in addition to continued tax
delinquencies by potential clients in the Company's present and target markets.
Since inception, the Company has generated virtually all of its
revenues in the State of California. The client base is derived from public
lien information coupled with newspaper, magazine and radio advertisements and
direct mailings.
<PAGE> 4
COMPARISON YEARS ENDED DECEMBER 31, 1995 AND 1994
RESULTS OF OPERATIONS
For the year ended December 31, 1995 the Company had a net loss of
approximately ($176,000) compared with net income of $123,000 for the year
ended December 31, 1994. On a per share basis the 1995 loss was ($0.14) per
share compared with income of $0.11 per share for 1994. The net loss for 1995
includes interest expense and amortization of debt discount of $136,000
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 1995, the Company derived $5,844,295 in fee income compared
with $4,949,720 for 1994, reflecting an increase of $894,575 or approximately
20%. This revenue growth flows from the Company's greater presence within the
State of California. By the end of 1994, the Company had 12 offices in
California, 6 of which were fully staffed regional offices and 6 of which were
unstaffed branches. By the end of 1995 new branch offices had been opened
resulting in 18 offices in California, 7 of which are regional and 11 of which
are branch offices.
The Company closed a branch office in Las Vegas, Nevada in 1995 after
eleven months of operation. This Las Vegas office was only marginally
profitable and the Company elected to open an office in Sacramento, California
and reallocated its resources.
Management continued the use of direct mail marketing and media
advertising to develop business in California and anticipates continuing using
those techniques in California as well as other markets in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating costs increased by $1,188,933 or approximately 25% from
$4,731,328 in 1994 to $5,920,261 in 1995. This increase results from the costs
involved in developing support services and maintaining a growing revenue base
and corporate infrastructure. Of this increase, $936,859 or approximately 86%
of the increase is concentrated in staffing and employee benefits, which grew
from $2,671,043 in 1994 to $3,607,902 1995 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 from 1995 levels by $271,303 from $431,459 in
1994 to $702,762 in 1995. Rent and related expenses increased by $112,430 from
$356,741 in 1994
<PAGE> 5
to $469,171 in 1995. Depreciation and amortization of office pre-opening costs
increased $98,632 to $114,166 in 1995.
Marketing, communication and promotional expense increased in 1995 by
$15,646 from $859,952 for 1994 to $875,598 for 1995. For the same respective
periods, direct mail expenses declined by $24,561, promotional items declined
by $93,543 and advertising increased by $126,904.
As growth and expansion continues, Management fully expects operating
costs to grow in proportion.
CERTAIN BALANCE SHEET DATA
Net accounts receivable grew by $288,118 or approximately 33% from
1994 levels and stood at $1,131,206 at December 31, 1995. This amount
represented approximately 60% of the Company's total asset base at December 31,
1995 and approximately 69% of its current assets at the same date. This
volume, growth and concentration is consistent with an increasing client base
as well as a longer than normal payment period in comparison to typical
commercial accounts receivable. The allowance for doubtful accounts was
charged with provisions for approximately $588,000 and $547,000 for 1995 and
1994, respectively, and offset by actual write-offs of $449,000 and $411,000
for those respective periods. The Company reviews the provisions for
uncollectible accounts at least quarterly, and adjusts the provisions 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 1995, approximately $1,753,000 (or 30%) of the Company's revenues were
attributed to clients who did not furnish the Company with post dated checks.
At December 31, 1995, accounts receivable greater than 90 days old
stood at $179,240 which sum included $136,490 in accounts receivable greater
than 120 days old. Accounts receivable greater than 90 and 120 days old
represented approximately 13% and 10%, respectively, of total receivables at
December 31, 1995.
The accounts receivable turnover rate declined from approximately 63
days as of the end of 1994 to approximately 84 days at the end of 1995. This
slowdown in the turnover rate (i.e. how quickly clients are liquidating their
liability to the Company) coincides with a decision made by management during
the fourth quarter of 1994 to allow clients to make installment payments of the
fee over a twenty week period, as opposed to the ten week period which was
policy prior thereto.
<PAGE> 6
Additionally, the company altered its policy for down payments,
increasing the requirement from 33% of the fee to 35% of the fee. As a result
of these changes, which were implemented during February 1995, receivables are
now being collected over a longer time frame. Management believes, however,
that as a result of adopting such a policy and allowing for more manageable
payment plans, that overall results of operations will be favorably impacted in
the future.
The Company's collection process can also experience additional 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 approximately $1,131,000 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.
Property and equipment, before allowance for depreciation and
amortization, increased by $109,914 from $244,542 at year end 1994 to $354,456
at December 31, 1995 as a result of the increase in the number of the Company's
offices.
Trade payables, accrued expenses and other accrued liabilities
increased by $173,592 from $189,247 at year end 1994 to $362,839 at December
31, 1995 and is indicative of serving a larger corporate infrastructure.
Management expects these liabilities to increase as the Company continues to
grow.
Accrued payroll and payroll taxes decreased by $53,387 from $326,853
at December 31, 1994 to $273,466 at December 31, 1995. The Company is current
in paying its Federal and state payroll taxes.
Loans payable increased from $293,222 at December 31, 1994 to
$1,062,313 at December 31, 1995. This increase of $769,091 resulted from the
sale of notes to private investors. These notes had interest rates ranging from
4% to 10% and have substantially all been repaid from the proceeds of the
Company's public offering of Common Stock and Warrants in February 1996.
Deferred income declined by approximately $93,000 from $320,000 to
$227,000.
Additional Paid in Capital decreased by $148,643 primarily from the
retirement of treasury stock resulting in a decrease of $292,343 net of an
increase of $136,000 from the
<PAGE> 7
sale of 1,250,000 Common Stock Purchase Warrants in August 1995. These Warrants
allow the holders to purchase Common Stock at the price of $6.00 per share.
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.
<PAGE> 8
KAYE KOTTS ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Pages
-------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
BALANCE SHEET F-2
STATEMENTS OF OPERATIONS F-3
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) F-4
STATEMENTS OF CASH FLOW F-5-6
NOTES TO FINANCIAL STATEMENTS F-7-14
</TABLE>
<PAGE> 9
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Kaye Kotts Associates Inc.
We have audited the accompanying balance sheet of Kaye Kotts
Associates Inc. as of December 31, 1995, and the related statements of
operations, stockholders' equity and cash flows for the years ended December
31, 1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kaye Kotts
Associates Inc. as of December 31, 1995, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1994 in conformity
with generally accepted accounting principles.
Feldman Radin & Co., P.C. Certified
Public Accountants
New York, New York
April 10, 1996, except
as to Note 14 which
is as of May 15, 1996
F-1
<PAGE> 10
KAYE KOTTS AND ASSOCIATES, INC.
BALANCE SHEET
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
December 31,
------------------------
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 18,642 $ 32,634
Restricted cash - 25,000
Accounts receivable, net of allowance for doubtful
accounts of $275,000 and $136,000, respectively 1,131,206 843,088
Prepaid expenses 160,862 40,695
Deferred offering costs 315,619 67,880
Other current assets 54,155 33,399
---------- ----------
TOTAL CURRENT ASSETS 1,680,484 1,042,696
---------- ----------
PROPERTY AND EQUIPMENT- Net of accumulated depreciation
of $195,415 and $83,712, respectively 159,041 160,830
---------- ----------
DEFERRED FINANCING COSTS 75,000 -
---------- ----------
$1,914,525 $1,203,526
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 217,773 $ 168,583
Accrued payroll and payroll taxes 273,466 326,853
Loans payable 1,062,313 293,222
Other accrued liabilities 145,066 20,664
Deferred revenues 226,979 320,000
Deferred income taxes - 54,279
---------- ----------
TOTAL CURRENT LIABILITIES 1,925,597 1,183,601
---------- ----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued and outstanding - -
Additional paid-in capital - preferred stock - -
Common stock, $0.01 par value; 10,000,000 shares
authorized; 1,237,400 and 2,010,688 shares issued
and outstanding, respectively 12,374 20,107
Additional paid-in capital - common stock 168,455 315,098
Retained earnings (191,901) (15,280)
Less: Treasury stock, at cost (775,688 shares in 1994,
none in 1995) - (300,000)
---------- ----------
(11,072) 19,925
---------- ----------
$1,914,525 $1,203,526
========== ==========
</TABLE>
See notes to financial statements.
F-2
<PAGE> 11
KAYE KOTTS AND ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
FEE INCOME $ 5,844,295 $ 4,949,720
----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,920,261 4,731,328
OPERATING INCOME (LOSS) (75,966) 218,392
INTEREST EXPENSE, net (59,079) -
AMORTIZATION OF DEBT DISCOUNT (77,203) (40,000)
OTHER INCOME 26,185 25,844
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (186,063) 204,236
PROVISION FOR (BENEFIT FROM) INCOME TAXES (9,442) 80,951
----------- -----------
NET INCOME (LOSS) $ (176,621) $ 123,285
=========== ===========
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.14) $ 0.11
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 1,237,400 1,118,841
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 12
KAYE KOTTS AND ASSOCIATES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY/(DEFICIT)
YEARS ENDED DECEMBER 31, 1995 and 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------- --------------------------------
Additional Additional
Paid-in Paid-in Retained Treasury
Shares Amount Capital Shares Amount Capital Earnings Stock Totals
-------- -------- --------- ---------- -------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1993 - $ - $ - 1,460,679 $ 14,607 $ 943 $(138,565) $(300,000) $(423,015)
Net income - - - - - - 123,285 - 123,285
Issuance of common stock
for services rendered - - - 80,342 803 9,300 - - 10,103
Stock issued to employees
for services - - - 45,000 450 4,050 - - 4,500
Issuance of common stock
to outside director - - - 20,009 200 2,000 - - 2,200
Issuance of common stock
for financing - - - 129,658 1,297 124,500 - - 125,797
Issuance of preferred stock 300,000 3,000 290,537 - - - - - 293,537
Issuance of common stock
in exchange for
preferred stock (275,000) (2,750) (174,305) 275,000 2,750 174,305 - - -
Cancellation of preferred
shares in exchange
for cancellation of
officer loan (25,000) (250) (116,232) - - - - - (116,482)
-------- -------- --------- ---------- -------- ---------- ---------- -------- ---------
Balance - December 31, 1994 - - - 2,010,688 20,107 315,098 (15,280) (300,000) 19,925
Net loss - - - - - - (176,621) - (176,621)
Retirement of treasury stock - - - (775,688) (7,757) (292,243) - 300,000 -
Issuance of warrants in
connection with debt - 136,000 - - 136,000
Issuance of common stock
as employee bonuses - - - 2,400 24 9,600 - - 9,624
-------- -------- --------- ---------- -------- ---------- ---------- -------- ---------
- $ - $ - 1,237,400 $ 12,374 $ 168,455 $ (191,901) $ - $ (11,072)
======== ======== ========= ========== ======== ========== ========== ======== =========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 13
KAYE KOTTS AND ASSOCIATES, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (176,621) $ 123,285
----------- ------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 114,166 24,120
Issuance of common shares for services provided 9,624 17,100
Changes in assets and liabilities:
Increase in accounts receivable-trade (288,118) (503,630)
Increase in prepaid assets (120,167) (26,325)
Increase in other current assets (20,756) (13,995)
Increase in accounts payable-trade 49,190 51,372
Increase (decrease) in accrued payroll and
payroll taxes (53,387) 157,478
Increase (decrease) in other accrued liabilities 124,402 (112,930)
Increase (decrease) in deferred revenues (93,021) 128,000
Increase (decrease) in deferred income taxes 54,279 80,951
----------- ------------
TOTAL ADJUSTMENTS (223,788) (197,859)
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES (400,409) (74,574)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (112,377) (99,037)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (112,377) (99,037)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in restricted cash 25,000 (25,000)
Payments on loans payable (11,111) (77,778)
Proceeds from loans payable 722,644 400,000
Proceeds from issuance of warrants 100,000 -
Increase in deferred offering costs (247,739) (67,880)
Increase in deferred financing costs (90,000) -
Issuance of common stock - 750
Purchase of treasury stock - -
Repurchase and cancellation of preferred stock - (116,482)
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 498,794 113,610
----------- ------------
NET INCREASE/(DECREASE) IN CASH (13,992) (60,001)
----------- ------------
CASH AT BEGINNING OF PERIOD 32,634 92,635
----------- ------------
CASH AT END OF PERIOD $ 18,642 $ 32,634
=========== ============
</TABLE>
See notes to financial statements.
F-5
<PAGE> 14
KAYE KOTTS AND ASSOCIATES, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1995 1994
----------- ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 5,099 $ 8,974
=========== ============
Issuance of 300,000 shares of preferred stock in
exchange for cancellation of loan from officer $ - $ 293,537
=========== ============
Issuance of 275,000 shares of common stock in
exchange for and cancellation of
275,000 shares of preferred stock $ - $ 177,055
=========== ============
Issuance of warrants in connection with
debt financing $ - $ 119,000
=========== ============
</TABLE>
See notes to financial statements.
F-6
<PAGE> 15
KAYE KOTTS ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. BUSINESS
Kaye Kotts Associates Inc., ("the Company") is a financial services
firm engaged in providing mediation and compromise services to
businesses and individuals who have outstanding tax liabilities.
These liabilities are the result of deficiencies or nonpayment of tax
liabilities to the Internal Revenue Service, state and local taxing
authorities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. The accompanying financial statements have been prepared under
the accrual basis of accounting.
B. PROPERTY AND EQUIPMENT Property and equipment are stated at
cost. Depreciation is provided using the straight line method over
the estimated useful lives of the assets, generally ranging from five
to seven years. It is the Company's practice to capitalize costs
associated with the opening of new offices. These pre opening costs
are amortized on a straight line basis over a period of 18 months or
the lease term, whichever is shorter. There were no pre-opening costs
deferred at December 31, 1995. At December 31, 1994, $22,500 of such
costs were deferred.
C. REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Revenues are recognized as income as services are performed (and the
associated costs incurred) over the contract term, as measured by
various milestones. Costs are expensed when incurred; accordingly,
the Company does not defer any costs. A proper matching of costs with
revenues is accomplished by utilizing the stage of preparedness of the
document (which is a close reflection of the proportion of total costs
anticipated for the full job which have been incurred to date) to
determine how much of the total contract revenues should be recognized
and how much should be deferred. Generally, 60-65% of the work is
completed during the month that the client is invoiced, including data
gathering and initial preparation of client documents. As data is
further analyzed, and missing data collected, the preliminary draft of
a document to be filed with the IRS or other taxing authority is
prepared, generally within two months of origination of the work.
Management records another 25% of the contract amount as revenue at
this time. Substantially all of the remaining work necessary to
prepare the submission to the taxing authority is completed within the
next month, and virtually all revenues are recognized at such time.
F-7
<PAGE> 16
Revenues recognized from clients that did not provide the Company with
post-dated checks aggregated approximately 30% of total revenues for
the years ended December 31, 1995 and 1994, respectively.
The Company recognizes revenues on contingent fee arrangements as such
amounts are received. To date, no contingent fees have been
recognized.
The Company determines its allowance for doubtful accounts on the
allowance method. The Company records its provision for doubtful
accounts based upon historical data generally as a percentage of
revenues, as well as specifically reserved items. Accounts receivable
over 90 days old at December 31, 1995 amounted to approximately
$179,000. Of this amount, approximately $136,000 was over 120 days
old. Management's allowance for doubtful accounts of approximately
$275,000 at December 31, 1995 is considered adequate and was
determined based upon analysis of such receivables and the criteria
described above.
D. ADVERTISING COSTS Costs associated with the Company's direct
response marketing function, principally the costs of acquiring the
names of delinquent taxpayers who have liens filed against them, are
deferred and amortized over the period during which revenues from
those activities are derived, generally two to three months. At
December 31, 1995 and 1994, deferred direct response marketing costs
amounted to $31,800 and $30,900, respectively, and were included in
prepaid expenses.
Advertising expenses amounted to approximately $489,500 and $362,500
for the years ended December 31, 1995 and 1994, respectively.
E. STOCK SPLIT Effective July 26, 1994, the Board of Directors
of the Company authorized a 533.5267 to 1 common stock split. The
common share referred to in these financial statements have been
retroactively adjusted to give effect to the split for all periods
presented.
F. EARNINGS PER SHARE Earnings per share are computed using the
weighted average number of common shares and common share equivalents
outstanding during each year, retroactively restated for stock
dividends, stock splits and the conversion of the preferred stock into
common stock (for all periods presented). The number of shares used
to compute earnings per share amounted to 1,237,400 and 1,118,841 for
the years ended December 1995 and 1994, respectively.
G. ACCOUNTING ESTIMATES The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period.
Actual results
F-8
<PAGE> 17
could differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Furniture and fixtures $ 143,021 $ 117,984
Office equipment 137,318 73,269
Leasehold improvement 63,967 53,289
Computer software & other 10,150 -
------------ -----------
354,456 244,542
Less accumulated depreciation (195,415) (83,712)
------------ -----------
Net property and equipment $ 159,041 $ 160,830
============ ===========
</TABLE>
4. LOAN PAYABLE - LINE OF CREDIT
At December 31, 1995, the Company had borrowed $36,111 pursuant to a
bank line of credit providing for a maximum availability of $50,000.
Terms of the agreement provide for interest payments at 12-1/4% per
annum. The loan is unsecured and is personally guaranteed by one of
the Company's officers.
5. PROVISION FOR FEDERAL AND STATE INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income taxes" ("SFAS
109"). SFAS 109 requires the use of an asset and liability method of
recording income taxes. This method requires the recognition of
deferred tax assets and liabilities for the expected tax consequences
of temporary differences between the tax bases and the financial
reporting bases of assets and liabilities.
The following presents the components of the provision/(benefits) of
income taxes for the years ended December 31, 1995 and 1994:
F-9
<PAGE> 18
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Deferred
Federal $ (8,000) $ 61,951
State (1,442) 19,000
----------- ----------
$ (9,442) $ 80,951
=========== ==========
</TABLE>
Deferred tax assets and liabilities arise from differences in the
expected tax consequences derived from the timing of recognition of
income and expense items for financial reporting and taxation
purposes. Listed below are the tax effects of the items related to
the Company's net deferred tax asset:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
----------- ----------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss
Carryforward $ 246,500 $ 84,000
----------- ----------
Total 246,500 84,000
----------- ----------
Less Valuation Allowance 116,500 55,300
Net Deferred Tax Asset 130,000 28,700
----------- ----------
Deferred Tax Liabilities:
Cash To Accrual Adjustment 113,000 13,700
Accelerated Depreciation 17,000 15,000
----------- ----------
130,000 28,700
----------- ----------
Net Deferred Tax Asset $ 0 $ 0
=========== ==========
</TABLE>
F-10
<PAGE> 19
The provisions for income taxes varied from the appropriate Federal
statutory rates for the following reasons:
<TABLE>
<CAPTION>
1995 1994
----------------------- ----------------------
Amount Rate Amount Rate
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Provision at statutory rate ($63,240) (34.0)% $70,320 34.0%
Non deductible expenses 3,532 2.0
Increase in valuation
allowance 61,200 32.9
State taxes net of federal
tax benefit and other, net (7,402) (4.0) 7,099 3.0
------- ------- ------- -------
Total ($9,442) (5.1)% $80,951 39.0%
======= ======= ======= =======
</TABLE>
6. LEASES
The Company leases ten facilities in California pursuant to
operating leases, none of which exceeds five years in duration.
Minimum annual rental payments required for each of the next
five years are as follows:
<TABLE>
<S> <C>
1996 326,000
1997 262,000
1998 132,000
1999 35,000
</TABLE>
7. MAJOR CUSTOMERS
Due to the nature of the Company's business, there is no one customer
whose loss would have a material effect on its financial condition or
results of operations.
8. STOCKHOLDERS' EQUITY
During 1993 and 1994, a significant shareholder contributed 275,342
shares to the Company for cancellation. Simultaneously with the
contribution and cancellation of the aforementioned shares, the
Company issued 275,342 new shares as follows: on February 26, 1993 a
total of 159,991 shares to a consulting firm - 69,898 for obtaining a
credit line and 90,093 for services rendered; on February 7, 1994,
45,000 shares to employees; on May 6, 1994, 50,342 shares to an
individual for directorship services; and, on June 6, 1994, 20,009
shares to another individual for directorship services. All such
shares were recorded at the fair value at the time of issuance, which
ranged from approximately $.02 to $.12 per share, and the associated
compensation or finance
F-11
<PAGE> 20
cost was booked at the time. Total charges aggregated $14,146.
Effective July 26, 1994, the Company increased the number of
authorized common shares to 10,000,000 and the number of authorized
preferred shares to 1,000,000. Additionally, on the same date, the
Company issued 300,000 of its Series A preferred stock to its
surviving co-founder in consideration for the cancellation of the
Company's indebtedness to the shareholder in the amount of $300,000.
During 1994 the Company issued 30,000 shares of its common stock to a
director and a significant shareholder transferred 45,000 common
shares to other employees for services rendered. Such shares were
valued at approximately $.10 per share, based upon the estimated fair
value of such shares at the time of their issuance.
The Company is authorized to issue 1,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock") of which
300,000 are designated Series A Preferred Stock. Shares of the Series
A Preferred Stock rank prior to all other classes of capital stock of
the Company as to dividends and the distribution of assets upon
liquidation, carry a liquidation preference of $1.00 per share plus
any accumulated dividends and bear interest at the rate of eight
percent (8%) per year.
9. OTHER BORROWINGS
On February 17, 1994, the Company borrowed $50,000 from a previously
unrelated individual and concurrently issued approximately 24,700
common shares to this individual at no cost to the lending party. The
note bore interest of 6 percent per annum and was due on August 17,
1994 as to both principal and interest. The Company's accounts
receivable were pledged as collateral. The note was paid when due.
From July 1994 through February 1995, the Company sold an aggregate of
$350,000 in promissory notes and 105,000 shares of common stock for an
aggregate amount of $351,050 to certain private investors. In exchange
for the consent of the investors to permit the Company to increase the
Company's contemplated maximum offering to private investors and
revise the offering structure, the Company issued 105,000 common stock
purchase warrants to the investors. The basis of the issuance was one
warrant for each share of stock owned. The Company recorded
approximately $119,000 of debt discounts with respect to this
transaction.
In August 1995, the Company sold an aggregate of $400,000 of its 4%
Notes and 1,250,000 Class C Warrants to a group of private investors
for aggregate gross proceeds of $500,000 (the "Bridge Loan"). The
Class C Warrants were subsequently redenominated into Class A
Warrants, which are exercisable at a rate of $6.00 per common share
and are mandatorily redeemable at the option of the holder at the rate
of
F-12
<PAGE> 21
$2,000 for every 25,000 warrants in the event that the Company does
not complete an initial public offering by August 31, 1996. Notes are
due and payable in full with interest on the outstanding principal,
upon the earlier of a closing date of the initial public offering or
eighteen months after issuance. The public offering was completed in
February 1996. Accordingly, $136,000 has been credited to additional
paid in capital. In connection with the issuance of the 4% Notes and
Class C Warrants, the Company recorded debt discount of approximately
$36,000.
The following table sets forth the loans payable as of December 31,
1995 and 1994, respectively:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Bridge Notes $ 1,063,999 $ 325,000
Loans payable, bank (Note 4) 36,111 47,222
Less debt discount net of accumulated amortization (37,797) (79,000)
----------- ----------
$ 1,062,313 $ 293,222
=========== ==========
</TABLE>
10. ISSUANCE OF COMMON SHARES TO OFFICER
At December 31, 1993, the Company was indebted to its co-founder in
the amount of $293,537. That debt was extinguished in 1994 through
partial repayment and the issuance of 300,000 shares of preferred
stock. The preferred shares were exchanged for 275,000 common shares;
the balance of the preferred shares were cancelled in exchange for the
cancellation of a note receivable from the officer.
11. REVOLVING CREDIT AGREEMENT
Effective February 26, 1993, the Company entered into a $500,000
revolving credit agreement with a private group of lenders.
Borrowings pursuant to the agreement bear interest at 8 percent per
annum. Borrowings are limited to the Company's eligible accounts
receivable, as the term is defined in the loan agreement. In return
for entering into the loan agreement, the Company's principal
shareholder agreed to transfer 69,898 common shares to the lenders.
As of December 31, 1995 and 1994, borrowings under this agreement were
$225,000 and $0. Borrowings under this agreement were repaid in March
1996.
12. LITIGATION
On November 22, 1995, the Company and its Chief Executive Officer,
among others,
F-13
<PAGE> 22
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 plaintiff's allege
wrongful discharge in contravention of public policy, fraud,
misrepresentation and intentional infliction of emotional distress.
The plaintiff's 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.
13. 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 1,265,000 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 for up to eighteen months after the completion of the initial
public offering.
14. 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 any other
employees.
F-14
<PAGE> 23
KAYE KOTTS ASSOCIATES INC.
SIGNATURES
In accordance with Section 13 or 15(d) 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
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board of
Directors, Chief Executive
/s/David Kaye Officer, President, Treasurer May 13, 1996
- -------------
David Kaye
Vice President - Sales
/s/ Michael M. Kesner Director May 13, 1996
- ---------------------
Michael M. Kesner
Secretary
/s/ Susan E. Phillips Director May 13, 1996
- ---------------------
Susan E. Phillips
Assistant Secretary
___________________________ Director May ___, 1996
Linda Kaye
___________________________ Director May ___, 1996
Robert M. Rubin
/s/ Lawrence Cohen Director May 13, 1996
- ------------------
Lawrence Cohen
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 18,642
<SECURITIES> 0
<RECEIVABLES> 1,131,206
<ALLOWANCES> 275,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,680,484
<PP&E> 159,041
<DEPRECIATION> 195,415
<TOTAL-ASSETS> 1,914,525
<CURRENT-LIABILITIES> 1,925,597
<BONDS> 0
0
0
<COMMON> 12,374
<OTHER-SE> (23,446)
<TOTAL-LIABILITY-AND-EQUITY> 1,914,525
<SALES> 0
<TOTAL-REVENUES> 5,844,295
<CGS> 0
<TOTAL-COSTS> 5,920,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (136,282)
<INCOME-PRETAX> (186,063)
<INCOME-TAX> (9,442)
<INCOME-CONTINUING> (176,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (176,621)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
