<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, 1997.
[ ] 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, 1997, the Registrant had 2,403,400 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (Check One): Yes No X
--- ---
<PAGE> 2
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
RESULTS OF OPERATIONS
For the three month period ended March 31, 1997, the Company had an
operating loss of approximately $589, 872 compared with an operating loss of
$351,377 in the 1996 period. The increase in the loss of $238,505 resulted
primarily from a decrease in fee income of $275,382 offset by a reduction in
Costs and Expenses of $36,887. The decrease in fee income resulted primarily
from the change in selling methodology discussed in "Fee Income" below.
The Company had a net loss of $603,608 ($.25 per share) for the 1997
period compared with a net loss of $471,876 ($.29 per share) in 1996. The net
loss in 1996 was after an extraordinary charge of $98,550 for the write-off of a
deferred financing charge and unamortized debt discount upon the repayment of
debt.
FEE INCOME
Fee income declined by $275,382 (19%) to $1,172,731 in 1997 from
$1,448,113 in the 1996 period. The primary reason for the decrease was the
Company's change in selling methodology from a single phase sale to a two phase
sale.
Prior to November 1996, the Company sold a single phase solution to
taxpayer problems. This solution was based upon information provided by the
taxpayer at the initial interview. Over time, the Company experienced excessive
costs, client dissatisfaction and increased bad debts mainly attributable to the
lack of reliability of this initial information.
To correct this problem, the Company revised its sales policy to a two
phase approach. In Phase I, at the initial interview, the client is informed of
a tentative solution to their tax problem. However, the client is encouraged to
retain the Company to provide a detailed analysis and verification of that
solution. This detailed analysis then becomes the Phase I sale. Thereafter,
usually two months from the initiation of Phase I, the client returns for a more
informed consultation and may then retain the Company for Phase II which is the
implementation and negotiation of the proposed solution.
As a result of this change in selling methodology, 1997 revenues
decreased $275,382, although only six (6) fewer cases were sold in the first
quarter of 1996 compared with 1997, 516 cases and 522 cases respectively, due to
a decrease in the average unit sales price from $2,758 in 1996 to $2,273 in
1997.
For the first time, the Company now has a sales backlog, consisting of
Phase I cases that will become eligible for Phase II sales. The Company
anticipates that in subsequent months as this backlog matures, revenues which
had been lost due to the initiation of this new selling method will be regained
along with the attendant benefits of a reduction in bad debt rates and increased
client satisfaction.
<PAGE> 3
COSTS AND EXPENSES
Operating costs decreased by $36,887, or 2.2% from $1,799,490 in 1996
to $1,762,603 in 1997. The decrease resulted primarily from lower Payroll and
Employee Benefits of $858,829 in 1997 compared with $1,033,691 in the prior
year. The decrease of $175,462 resulted from fewer employees and lower
commissions because of reduced sales and a lower overall commission rate.
The decline in Payroll and Employee Benefits expense was offset
primarily by an increase of $69,529 in facilities equipment and communication
expense resulting from three additional sales offices which were subsequently
closed and the costs of the Company's new computer network system that was
installed in the last quarter of 1996, and an increase in professional and
consulting fees of $33, 383 to $146,791 from $113,408 in the prior period.
In March 1997, the Company sold its Burlingame Office resulting in a
net loss of $20,473 which is included in other administrative costs.
Subsequently, annual costs were further reduced by approximately $3.5
million (See Liquidity & Capital Resources)
CERTAIN BALANCE SHEET DATA
Net accounts receivable decreased by $152,908 or approximately 30% from
the December 31, 1996 level to $374,703 at March 31, 1997. This amount represent
20% of the Company's total assets at both March 31, 1997 and December 31, 1996.
The Company reviews the provision for uncollectible accounts quarterly and
adjusts the provision based on actual write-offs and aging analyses.
At March 31, 1997 accounts receivable greater than 90 days old were
$99,585 representing 15% of total receivables at that date. The decline in
accounts receivable results primarily from the reduced sales discussed in "Fee
Income" and the sale of the Burlingame office.
Deferred income declined by $141,335 to $504,561 from $645,896 at
December 31, 1996. This decline resulted primarily from lower sales because of
the use of the new two phase sale system and the transfer of the obligation to
complete servicing certain accounts to the purchaser of the Burlingame office.
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred substantial losses during 1996 and the three month
period ended March 31, 1997 and had a working capital deficiency of $967,124 at
March 31, 1997. Therefore, its continuation as a going concern is dependent upon
obtaining additional financing and attaining profitable operations. On May 15,
1997, the Company had a net cash balance of approximately $40,000. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
In April 1997, the Company signed a Letter of Intent for a proposed
private placement of 10% Convertible Preferred Stock in a minimum amount of
$250,000 and a maximum amount of $750,000. The Preferred Shares will be
convertible into Common Stock at 70% of the bid price of the Common Stock at the
time of conversion. There can be no assurance that this proposed private
placement will be completed.
The Company initiated a cost reduction program during the third quarter
of 1996 which resulted in a reduction in the number of employees from 108 on
June 30, 1996 to 53 on May 15, 1997. Annualized payroll and fringe costs have
decreased from $4.1 million in June 1996 to $2.0 million in May 1997. Facility
and communication costs were reduced through the consolidation of 7 regional
operating centers in June 1996 into 3 operating centers in May 1997. After these
and other cost reductions, the Company's annualized expense rate in May 1997,
excluding the provision for bad debts is approximately $4 million compared with
actual expenses of $7.5 million in 1996.
<PAGE> 5
KAYE KOTTS ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1996
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 14,474 $ 23,255
Short-term investments:
Unrestricted 187,800 742,125
Restricted 500,000 500,000
Accounts receivable, net of allowance for doubtful
accounts of $290,868 and $310,075 at March 31, 1997
and December 31, 1996 respectively 374,703 527,611
Prepaid expenses and other current assets 93,067 98,187
---------- ----------
TOTAL CURRENT ASSETS 1,170,044 1,891,178
---------- ----------
Property and Equipment - Net of accumulated depreciation
of $258,798 and $214,677 at March 31, 1997 and
December 31, 1996 respectively 452,856 431,445
Other Receivables 213,720 208,083
Other Assets 49,287 58,096
---------- ----------
$1,885,907 $2,588,802
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable-trade 641,269 510,239
Other accrued liabilities 467,395 558,628
Loans payable 523,943 523,943
Deferred revenues 504,561 645,896
---------- ----------
TOTAL CURRENT LIABILITIES 2,137,168 2,238,706
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT IN ASSETS)
Common Stock, $0.01 par value; 10,000,000 shares
authorized: 2,403,400 and 2,398,900 shares issued and
outstanding at March 31, 1997 and December 31, 1996,
respectively. 24,034 23,989
Additional paid-in-capital common stock 4,694,533 4,692,328
Deficit (4,969,829) (4,366,221)
---------- ----------
(251,262) 350,096
$1,885,907 $2,588,802
========== ==========
</TABLE>
<PAGE> 6
KAYE KOTTS ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
COMMON STOCK
<TABLE>
<CAPTION>
Additional
Paid-in Treasury
Shares Amount Capital Deficit Stock Totals
------ ------ ---------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 2,398,900 23,989 4,692,328 (4,366,221) -- 350,096
Issuance of common stock 4,500 45 2,205 2,250
Net Loss (603,608) (603,608)
--------- ------- ---------- ----------- -------- --------
Balance - March 31, 1997 2,403,900 $24,034 $4,694,533 $(4,969,829) 0 (251,262)
========= ======= ========== =========== ======== ========
</TABLE>
<PAGE> 7
KAYE KOTTS ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
1997 1996
------------ ------------
UNAUDITED
<S> <C> <C>
FEE INCOME $ 1,172,731 $ 1,448,113
COSTS AND EXPENSES
Payroll & Employee Benefits 858,829 1,033,691
Marketing & Sales Promotion 190,775 173,735
Facilities Equipment & Communications 319,522 249,993
Professional Fees & Other Outside Services 146,791 113,408
Provision For Bad Debts & Cancellations 166,318 154,115
Other Administrative Costs 80,368 74,548
------------ ------------
1,762,603 1,799,490
OPERATING (LOSS) (589,872) (351,377)
Interest Income 10,484 3,039
Interest Expense (24,220) (10,741)
Amortization of Debt Discount -- (14,247)
------------ ------------
(Loss) Before Income Taxes & Extraordinary Item (603,608) (373,326)
Provision for (Benefit From Income Taxes --
------------ ------------
(LOSS) BEFORE EXTRAORDINARY ITEM (603,608) (373,326)
Extraordinary Item: Write off of Deferred Finance
Charge and Unamortized Debt Discount Upon
Repayment of Debt -- 98,550
------------ ------------
NET (LOSS) $ (603,608) $ (471,876)
============ ============
(Loss) Per Common and Common Equivalent Share $ (0.25) $ (0.29)
Weighted Average Number of Common
And Common Equivalent Shares Outstanding 2,403,400 1,654,033
============ ============
</TABLE>
<PAGE> 8
KAYE KOTTS ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: UNAUDITED
<S> <C> <C>
Net (Loss) $ (603,608) $ (471,876)
------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Depreciation 52,946 16,549
Issuance of common shares for services provided 4,500 --
CHANGES IN ASSETS AND LIABILITIES:
(Increase)/decrease in accounts receivable-trade 152,908 88,926
(Increase)/decrease in prepaid assets 5,120 (65,761)
(Increase)/decrease in other assets 3,172 (14,770)
(Increase)/decrease in accounts payable-trade 131,030 (173,057)
(Increase)/decrease in accrued expenses (91,233) (145,582)
(Increase)/decrease in deferred revenues (141,335 (38,862)
(Decrease) in deferred income taxes -- --
------------ ------------
Total Adjustments 117,109 (332,557)
Net Cash (Used) by Operating Activities (486,499) (804,433)
------------ ------------
Cash Flows From Investing Activities:
Capital expenditures (104,322) (13,052)
------------ ------------
Cash Flows From Financing Activities
Payments on loan payable -- (1,054,021)
Proceeds from issuance of warrants -- 5,057,339
Payments on capital equipment leases (25,011) --
Proceeds from capital equipment leases 52,726 --
-- --
------------ ------------
Net Cash Provided By Financing Activities 27,715 4,003,318
------------ ------------
Net Increase/(Decrease) In Cash (563,106) 3,185,833
Cash At Beginning Of Period 1,265,380 18,643
------------ ------------
Cash And Short Term Investments At End of Period $ 702,274 $ 3,204,476
============ ============
</TABLE>
<PAGE> 9
1. GOING CONCERN
The Company incurred substantial losses during 1996 and the three month
period ended March 31, 1997 and had a working capital deficiency of $
967,124 at March 31, 1997. Therefore, its continuation as a going
concern is dependent upon obtaining additional financing and attaining
profitable operations. On May 15, 1997, the Company had a net cash
balance of approximately $40,000. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company initiated a cost reduction program during the third quarter
of 1996 which resulted in a reduction in the number of employees from
108 on June 30, 1996 to 53 on May 15, 1997. Annualized payroll and
fringe costs have decreased from $4.1 million in June 1996 to $2.0
million in May 1997. Facility and communication costs were reduced
through the consolidation of 7 regional operating centers in June 1996
into 3 operating centers in May 1997. After these and other cost
reductions, the Company's annualized expense rate in May 1997,
excluding the provision for bad debts is approximately $4 million
compared with actual expenses of $7.5 million in 1996.
2. LITIGATION
On September 16, 1996, the Company and other persons not affiliated
with the company, were served with a lawsuit, alleging breach of
contract and exercise of due care in connection with negotiation by the
Company for an Offer in Compromise. Pursuant to the written retainer
agreement between the Company and the Plaintiff , in February, 1997,
the Company filed a demand for arbitration with the American
Arbitration Association. Pending that arbitration, the Court has stayed
the Superior Court action. Management of the Company believes that
there are valid defenses to this action and intends to defend this
lawsuit vigorously.
On December 4, 1996, the Company and its Chief Executive Officer, were
served with a lawsuit by a stockholder for $37,500. The plaintiff
alleges the Company's prospectus omitted material facts regarding the
company's operations; the Company breached its fiduciary duties; and
the Company failed to disclose facts regarding the company's negative
operating results in a timely manner. The Company has agreed in
principle with the plaintiff to settle this lawsuit for a minimal
amount.
<PAGE> 10
3. INTERNAL REVENUE SERVICE INVESTIGATION
In April 1996 a former employee of the Company was accused of violating
the law in connection with negotiations with the IRS. The employee, who
was not an executive officer, director or principal stockholder of the
Company, pled guilty to one felony count charging the employee with a
violation of 26 U. S. C. 7212, a statute proscribing the corrupt
obstruction or impeding of the due administration of the Internal
Revenue laws. He received probation.
The Company's counsel has been advised that the U.S. Attorney has
requested authorization from the Tax Division of the Justice Department
to file criminal tax charges against the Company, allegedly arising out
of the illegal acts of the former employee. In April 1997, the
Company's Counsel met with representatives of the Justice Department in
Washington D.C. to discuss final resolution of this matter. The Company
is awaiting a final determination by the Justice Department.
4. PROPOSED FINANCING
In April 1997, the Company signed a Letter of Intent for a proposed
private placement of 10% Convertible Preferred Stock in a minimum
amount of $250,000 and a maximum amount of $750,000. The Preferred
Shares will be convertible into Common Stock at 70% of the bid price of
the Common Stock at the time of conversion. There can be no assurance
that this proposed private placement will be completed.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000929528
<NAME> KAYE KOTTS ASSOCIATES, INC.
<MULTIPLIER> 1
<CURRENCY> US-DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 14,474
<SECURITIES> 687,800
<RECEIVABLES> 665,571
<ALLOWANCES> 290,868
<INVENTORY> 0
<CURRENT-ASSETS> 1,170,044
<PP&E> 711,654
<DEPRECIATION> 258,798
<TOTAL-ASSETS> 1,885,907
<CURRENT-LIABILITIES> 2,137,168
<BONDS> 0
0
0
<COMMON> 24,034
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,885,907
<SALES> 1,172,731
<TOTAL-REVENUES> 1,183,215
<CGS> 0
<TOTAL-COSTS> 1,762,603
<OTHER-EXPENSES> 24,220
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,220
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (603,608)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (603,608)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> 0
</TABLE>
