-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dj0g4p6qU7mpcb2J7YZu1h0LRmR06/eSVsUDWRW3x+M7HNr8ebhJp9TKfpbxinin sSYZwEj6PysMHtxx5hMAkg== 0000316028-02-000005.txt : 20020415 0000316028-02-000005.hdr.sgml : 20020415 ACCESSION NUMBER: 0000316028-02-000005 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENT FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000316028 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 751695953 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-07986 FILM NUMBER: 02595575 BUSINESS ADDRESS: STREET 1: 376 MAIN ST PO BOX 74 CITY: BEDMINSTER STATE: NJ ZIP: 07921 BUSINESS PHONE: 9082340078 MAIL ADDRESS: STREET 1: 376 MAIN STREET STREET 2: P O BOX 74 CITY: BEDMINSTER STATE: NJ ZIP: 07921 FORMER COMPANY: FORMER CONFORMED NAME: TEXAS AMERICAN ENERGY CORP DATE OF NAME CHANGE: 19900815 10KSB 1 kent10-k01.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB MARK ONE: [X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 [ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to _________________. Commission file number 1-7986 ------ KENT FINANCIAL SERVICES, INC. ----------------------------------------------------------------- (Name of small business issuer in its charter) Delaware 75-1695953 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 376 Main Street, P.O. Box 74, Bedminster, New Jersey 07921 ----------------------------------------------------------- (Address of principal executive offices with Zip Code) Issuer's telephone number, including area code (908) 234-0078 -------------- Securities registered under Section 12(b) of the Exchange Act: -------------------------------------------------------------- NONE Securities registered under Section 12(g) of the Exchange Act: -------------------------------------------------------------- Common Stock, par value $.10 per share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B 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.[X] Issuer's revenues for the fiscal year ended December 31, 2001 were approximately $2.9 million. At February 28, 2002, there were 1,688,769 shares of common stock outstanding. The aggregate market value of the voting shares held by non-affiliates of the registrant, based on the closing bid price of such stock on such date as reported by NASDAQ, was approximately $3.4 million. Transitional Small Business Disclosure Format Yes No X --- --- PART I Item 1. DESCRIPTION OF BUSINESS ----------------------- General - ------- The principal business of Kent Financial Services, Inc. (the "Company" or "Kent") is the operation of its wholly-owned subsidiary, T.R. Winston & Company, Inc. ("Winston"), a securities broker-dealer licensed in all states (except Alaska) and the District of Columbia. Winston is a member of the National Association of Securities Dealers, Inc. ("NASD") and the Securities Investor Protection Corporation. All clearing arrangements for Winston are conducted pursuant to an agreement with Bear, Stearns Securities Corporation, an unrelated major broker-dealer that is a member of the New York Stock Exchange, Inc. Winston conducts various activities customary for broker-dealers of comparable size including buying and selling securities for customer accounts, trading securities in the over-the-counter market and providing various corporate finance services including underwritings, private placements, mergers, acquisitions and similar transactions. Winston has two offices in New Jersey, and one office in each of California, Texas and New Hampshire. As of December 31, 2001, Winston's equity capital was $335,000, all of which was advanced by Kent or generated by Winston's earnings. Winston had regulatory net capital at that same date, pursuant to the provisions of Rule 15c3-1 under the Securities Exchange Act of 1934, of $288,000, which was $188,000 in excess of the required minimum net capital. Winston is exempt from the customer protection provisions of Rule 15c3-3 (the "Rule") under the 1934 Act as its activities are limited to those set forth in the conditions appearing in paragraphs (k)(2)(ii) of the Rule. The Company also invests through Asset Value Fund Limited Partnership ("AVF"), which was originally founded in 1991 to provide investment advisory and management services and was funded at inception with $5 million. As of December 31, 2001, the equity capital of AVF was approximately $10.8 million. Currently AVF is wholly-owned by the Company. AVF primarily invests in a limited number of publicly traded portfolio companies, the securities of which are considered undervalued by AVF's management. As of December 31, 2001, AVF held 10 equity investments, of which five consisted of owning more than 5% of the investee's outstanding capital stock. AVF owns approximately 40% of Cortech, Inc., a company supervising the exploitation of its technology by third parties and also seeking a new business; 23% of General Devices, Inc., a non-operating company seeking a new business; 16% of Gish Biomedical, Inc., a manufacturer of medical devices; 9% of Star Buffet, Inc., a company engaged in the restaurant industry; and 5% of GolfRounds.com, Inc., an internet content provider. The securities business is, by its nature, subject to various risks, particularly in volatile or illiquid markets, including the risk of losses resulting from the underwriting or ownership of securities, customer fraud, employee errors and misconduct, failures in connection with the processing of securities transactions and litigation. The Company's business and its profitability are affected by many factors, including the volatility and price level of the securities markets; the volume, size and timing of securities transactions; the demand for investment banking services; the level and volatility of interest rates; the availability of credit; legislation affecting the business and financial communities; and the economy in general. Markets characterized by low trading volumes and depressed prices generally result in reduced commissions and lower investment banking revenues as well as losses from declines in the market value of securities positions. In addition, Kent is likely to be adversely affected by negative economic developments in New Jersey, the Mid-Atlantic region or the financial services industry in general. Reduced volume and prices generally result in lower investment banking revenues and commissions and may result in losses from declines in the market value of securities held in trading, investment and underwriting positions. In periods of relatively low business activity for the Company, profitability will likely be adversely affected because a significant portion of the Company's expenses are fixed. I-1 Competition - ----------- The Company is engaged in an extremely competitive business. Competitors include, with respect to one or more aspects of its business, all of the member organizations of the New York Stock Exchange and other registered securities exchanges, all members of the NASD, commercial banks, thrift institutions and financial consultants. Most of these organizations have substantially more employees and greater financial resources than the Company. The Company also competes for investment funds with banks, insurance companies and investment companies. Discount brokerage firms and on-line internet brokerage firms oriented to the retail market, including firms affiliated with commercial banks and thrift institutions, are devoting substantial funds to advertising and direct solicitation of customers in order to increase their share of commission dollars and other securities-related income. The Company typically has not engaged in extensive advertising programs for this type of business. In addition to competition from firms traditionally engaged in the financial services business, there has been increasing competition in recent years from other sources, such as commercial banks, insurance companies, on-line financial services providers, sponsors of mutual funds and other companies offering financial services both in the United States and on a world-wide basis. The financial services industry has also experienced consolidation and convergence in recent years, as institutions involved in a broad range of financial services industries, such as investment banking, brokerage, asset management, commercial banking and insurance have merged. This convergence trend is expected to continue, and could result in the Company's competitors gaining greater capital and other resources, a broader range of products and services and/or more geographic diversity. In November 1999, the Gramm-Leach Bliley Act was passed in the United States, effectively repealing certain sections of the 1933 Glass-Steagall Act. Its passage allows commercial banks, securities firms and insurance firms to affiliate, which may accelerate consolidation and lead to increasing competition in markets traditionally dominated by investment banks and retail securities firms. Employees - --------- As of December 31, 2001, the Company and its subsidiaries employed 18 people of whom 15 are registered with the NASD. Item 2. DESCRIPTION OF PROPERTY ----------------------- Corporate and Branch Offices - ---------------------------- The Company and certain of its affiliates occupy the Company's corporate office building and share direct occupancy costs. The office building is collateral for a mortgage loan with a balance of approximately $681,000 at December 31, 2001, bearing interest on that date at the rate of 7.875% per annum. The mortgage loan is payable to a bank in equal monthly payments of $5,345 including interest, through November 2024. Effective February 1, 1999, an affiliate entered into an extension of a lease agreement with the Company for office space for a five-year period. The Company's aggregate rental income from this arrangement was $43,000 in each of the years ended 2001 and 2000. Winston leases space for its Los Angeles office from its clearing broker-dealer. I-2 Item 3. LEGAL PROCEEDINGS ----------------- Environmental Matters - Texas American Petrochemicals, Inc. ("TAPI") - -------------------------------------------------------------------- In January, 1988, an inactive subsidiary of the Company, TAPI, was notified by environmental regulators in Texas ("Texas Regulators") that it was a potentially responsible party ("PRP") in connection with a hazardous waste site in the state. TAPI advised the Texas Regulators that TAPI had no assets and could not conduct a remedial investigation of the site. Based on information and belief, the Company understands a remedial action has been developed to stabalize any contaminants. The Company does not believe it has any liability in connection with this environmental matter. In May 2001, the State of Texas notified TAPI and a group of other potentially responsible parties ("PRP's") that the State of Texas incurred costs for remedial investigation, feasibility studies and remedial design at an allegedly contaminated site in Texas known as the Sonics International Superfund Site, and that it would join TAPI and the other PRP's as parties to a pending lawsuit in the state courts of Texas to recover its costs and attorney's fees, which are alleged to be approximately $203,000. In July 2001, the State of Texas served the complaint State of Texas v. Sonics International, Inc. et al, GV002838, Travis County, Texas District Court, by serving the Secretary of State. Due to the uncertainty and cost of litigation, TAPI and the Company agreed to a settlement with the other PRP's, in which TAPI and the Company paid approximately $17,000 towards an overall settlement with the State of Texas even while denying liability. This settlement agreement with the other PRP's became effective on September 26, 2001. TAPI and the Company, as well as the participating PRP's executed a written settlement agreement with the State of Texas and received a release and contribution protection from the State of Texas. Other Legal Matters - ------------------- Winston Legal Matters In July 2000, T.R. Winston and two Winston officers were notified that NASD Regulation, Inc.("NASDR"), District 9 intended to recommend that the NASDR authorize a disciplinary proceeding against Winston and the two Winston officers. In January 2001, the NASDR accepted from Winston a letter of Acceptance, Waiver and Consent ("AWC"), which alleged violations for failure to establish, maintain and enforce adequate written supervisory procedures regarding trading and market-making, alleged failure to have a supervisor who was Series 55 registered, alleged failures to report, accept, or decline certain trades within specified time periods, and alleged failures to maintain records for certain principal transactions. Pursuant to the terms of the AWC, while neither admitting nor denying the allegations, Winston consented to the findings contained in the AWC and a censure, and paid the NASDR a fine of $20,000. NASDR did not recommend charges against the two Winston officers. In the fourth quarter of 2000, Winston recovered approximately $257,000 as a plaintiff in the NASDAQ Market-Makers Antitrust Litigation which alleged that certain defendants conspired to fix spreads in the purchase and sale of securities which damaged Winston. I-3 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The Company held its Annual Meeting of Stockholders on November 6, 2001. Management's nominees, Messrs. Paul O. Koether, Mathew E. Hoffman, Casey K. Tjang, M. Michael Witte and Qun Yi Zheng, were elected to the Board of Directors. The following is a vote tabulation for all nominees: FOR WITHHELD ------- -------- Paul O. Koether 975,548 - Mathew E. Hoffman 975,548 - Casey K. Tjang 975,548 - M. Michael Witte 975,548 - Qun Yi Zheng 975,548 - I-4 PART II ------- Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -------------------------------------------------------- The Company's common stock trades on the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") Small Cap Market under the symbol "KENT". The table below lists the high and low bid prices for the common stock as reported by NASDAQ for the periods indicated. These prices represent quotations between dealers and do not include retail markups, markdowns or commissions, and may not represent actual transactions. High Low ------ ------- Calendar Quarter: 2001 ---- First Quarter $ 4.50 $ 3.25 Second Quarter $ 4.35 $ 3.0625 Third Quarter $ 4.50 $ 3.76 Fourth Quarter $ 4.65 $ 3.52 2000 ---- First Quarter $ 5.6875 $ 3.6875 Second Quarter $ 4.625 $ 4.00 Third Quarter $ 4.9375 $ 4.0625 Fourth Quarter $ 4.4375 $ 3.50 As of February 28, 2002, the Company had approximately 1,850 stockholders of record of its common stock. The closing price of the common stock was $4.74 on February 28, 2002. The Company did not pay dividends in 2001 or 2000 and does not anticipate paying dividends in the foreseeable future. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Liquidity and Capital Resources - ------------------------------- At December 31, 2001, the Company had consolidated cash and cash equivalents of approximately $3.6 million. The cash equivalents consisted of U.S. Treasury Bills with original maturities of three months or less, with yields ranging from 1.77% to 2.24%. The Company had securities owned valued at approximately $7.6 million at December 31, 2001. See Notes 1 and 3 of Notes to Consolidated Financial Statements for additional information on the valuation of securities owned. The Company's mortgage note payable on its headquarters facility had a remaining principal amount of approximately $681,000 at December 31, 2001. The loan currently bears interest at the rate of 7.875% with principal payments amortized over twenty-five years. The loan matures in November 2024. The Company believes that its liquidity is adequate for future operations. II-1 Net cash of approximately $150,000 was provided by operations in 2001, compared to net cash provided by operations of approximately $319,000 in 2000. The principal reasons for the decrease was the change in the value of securities owned at year end in 2001 compared to 2000 offset by the increase in unrealized gains on securities owned and the increase in the net receivable from the clearing broker. Unrealized gains and losses are included in consolidated operations, but do not utilize or generate cash flows. During 2001, the Company repurchased 93,991 shares of its common stock for an aggregate cost of approximately $378,000. In 2000, the Company repurchased 138,554 shares for an aggregate cost of approximately $579,000. All shares acquired were purchased at market prices and have been canceled and returned to the status of authorized and unissued shares. Results of Operations - --------------------- The Company had a net loss in 2001 of $701,000, or $.41 basic and fully diluted loss per share, compared to a net loss of $357,000, or $.19 basic and fully diluted earnings per share, in 2000. Total brokerage revenue, which consisted of commissions and principal trading transactions was approximately $1.8 million in 2001, a decrease of approximately $2 million from 2000 total brokerage revenue of $3.8 million. Brokerage expenses (including all fixed and variable expenses) decreased by $1.2 million, from $2.5 million in 2000 to $1.3 million in 2001. The decrease in total brokerage income, total brokerage expense and net brokerage income for 2001 compared to 2000 was due to decreased activity by the brokers employed at Winston, which was consistent with the activity in the equity markets in general. While the events of September 11, 2001 did not have a direct impact on the Company, they have contributed to the volatility in the equity markets and the sluggishness of the overall economy. Net investing gains were $309,000 in 2001, an increase of $1 million from the net investing losses in 2000 of $721,000. This fluctuation is principally the result of an increase in the carrying value of selected investments in the investment portfolio. Affiliates of the Company pay an administrative fee of $15,200 per month for management services performed by the Company on behalf of the affiliates. These services include corporate governance, financial management and accounting services. Interest, dividends and other income totaled $699,000 in 2001 and $1,018,000 in 2000. The decrease was primarily the result of lower interest rates on lower invested balances of the Company's cash equivalents. In 2000, Winston recovered approximately $257,000 as a plaintiff in the NASDAQ Market-Makers Antitrust Litigation which alleged that certain defendants conspired to fix spreads in the purchase and sale of securities which damaged Winston. General and administrative expenses were $2 million in 2001, an increase of approximately $200,000 from the $1.8 million recorded in 2000. This increase in general and administrative expense was principally the result of write-offs amounting to $150,000 and $20,000 for non-marketable investments and goodwill, respectively included in other assets. II-2 Market Risk - ----------- Market risk represents the potential loss as a result of absolute and relative price movements in financial instruments due to changes in interest rates, foreign exchange rates, equity prices, and other factors. The Company's exposure to market risk is directly related to securities holdings. Each day, position and exposure reports are prepared by the operations manager in the group engaged in trading activities for traders and group management. These reports are independently reviewed by the Company's corporate accounting group. The position report is distributed to management throughout the Company, including the Chief Executive Officer, and it enables senior management to control inventory levels and monitor results of the trading group. The Company also reviews and monitors inventory aging, pricing, concentration and securities ratings. In addition to position and exposure reports the Company produces a daily revenue report that summarizes the trading, interest, commissions, fees, underwriting and other revenue items for each of the business groups. Daily revenue is reviewed for various risk factors and is independently verified by the corporate accounting group. The daily revenue report is distributed to various levels of management throughout the Company, including the Chief Executive Officer, and together with the position and exposure report, enables senior management to monitor and control overall activity of the trading groups. Since its inception, neither the Company nor its subsidiaries has traded or otherwise transacted in derivatives. The fair value of securities owned at December 31, 2001 was approximately $7.6 million for its long positions. The potential change in fair value, using a hypothetical 10% decline in prices, is estimated to be a $760,000 loss for its long positions as of December 31, 2001. For working capital purposes, the Company invests in U.S. Treasury Bills or maintains interest bearing balances in its trading accounts with its clearing broker, which are classified as cash equivalents and receivable from clearing broker, respectively, in the consolidated financial statements. Sale Of Subsidiary - ------------------ In January 2000, T.R. Winston Capital, Inc.("Wincap") stockholders signed a letter of intent with Direct Capital Markets.com, Inc. ("DCM") to sell all outstanding shares in exchange for 75,000 unregistered, non-marketable shares of DCM's Series C Convertible Preferred Stock ("DCM Shares"). In April 2000, Wincap's stockholders negotiated a definitive agreement for the sale. In July, 2000 regulatory approval for the sale was obtained and the closing of the sale was completed. Winston received for its proportionate ownership interest in Wincap approximately $52,000 in cash. In addition Winston received 25,000 DCM Shares. Because Winston's investment in Wincap approximated the amount of cash received, Winston did not record any material gain or loss in connection with the sale. II-3 Item 7. FINANCIAL STATEMENTS -------------------- The financial statements filed herein are listed below: Independent Auditors' Reports Financial Statements: Consolidated Balance Sheet - December 31, 2001 Consolidated Statements of Operations - Years ended December 31, 2001 and 2000 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2001 and 2000 Consolidated Statements of Cash Flows - Years ended December 31, 2001 and 2000 Notes to Consolidated Financial Statements - Years ended December 31, 2001 and 2000 II-4 Amper, Politziner & Mattia P.A. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Kent Financial Services, Inc. We have audited the accompanying consolidated balance sheet of Kent Financial Services, Inc. and Subsidiaries (the "Company") as of December 31, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Kent Financial Services, Inc. and Subsidiaries at December 31, 2001, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Amper, Politziner & Mattia P.A. February 28, 2002 Edison, New Jersey F-1 Deloitte & Touche LLP INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Kent Financial Services, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows for Kent Financial Services, Inc. and Subsidiaries (the "Company") for the year ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Kent Financial Services, Inc. and Subsidiaries for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP March 16, 2001 New York, New York F-2 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ($000 Omitted) December 31, 2001 ------------ Assets - ------ Cash and cash equivalents $ 3,570 Securities owned 7,570 Receivable from clearing broker 209 Property and equipment: Land and building 1,447 Office furniture and equipment 278 ------- 1,725 Accumulated depreciation ( 665) ------- Net property and equipment 1,060 Other assets 33 ------- Total assets $12,442 ======= Liabilities and Stockholders' Equity - ------------------------------------ Liabilities: Securities sold, not yet purchased $ 1 Accounts payable 32 Accrued expenses 943 Mortgage payable 681 Accrual for previously discontinued operations 211 ------- Total liabilities 1,868 ------- Contingent liabilities (Note 4) Stockholders' equity: Preferred stock without par value, 500,000 shares authorized; none outstanding - Common stock, $.10 par value, 4,000,000 shares authorized; 1,688,807 shares outstanding 169 Additional paid-in capital 13,727 Accumulated deficit ( 3,322) ------- Total stockholders' equity 10,574 ------- Total liabilities and stockholders' equity $12,442 ======= See accompanying notes to consolidated financial statements. F-3 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ($000 Omitted, except per share data) Year ended December 31, ------------------------- 2001 2000 -------- -------- Revenues: Brokerage commissions and fees $ 1,392 $ 1,806 Principal transactions: Trading 363 1,958 Investing gains (losses) 309 ( 721) Management fee income 184 180 Litigation settlement - 257 Interest, dividends and other 699 1,018 ------- ------- Total revenues 2,947 4,498 ------- ------- Expenses: Brokerage 1,294 2,539 General, administrative and other 1,999 1,827 Interest 352 462 ------- ------- Total expenses 3,645 4,828 ------- ------- Loss before income taxes ( 698) ( 330) Provision for income taxes 3 27 ------- ------- Net loss ($ 701) ($ 357) ======= ======= Basic and diluted net loss per common share ($ .41) ($ .19) ======= ======= Weighted average number of common shares outstanding (in 000's) 1,728 1,849 ======= ======= See accompanying notes to consolidated financial statements. F-4 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ($000 Omitted) Additional Total Common Paid-In Accumulated Stockholders' Stock Capital Deficit Equity ------ ----------- ---------- ------------ Balance, December 31, 1999 $ 190 $14,615 ($ 2,264) $ 12,541 Issuance of common stock 2 45 - 47 Repurchase and cancellation of common stock ( 14) ( 565) - ( 579) Net loss - - ( 357) ( 357) ------ ------- ------- ------- Balance, December 31, 2000 178 14,095 ( 2,621) 11,652 Repurchase and cancellation of common stock ( 9) ( 368) - ( 377) Net loss - - ( 701) ( 701) ------ ------- ------- ------- Balance, December 31, 2001 $ 169 $13,727 ($ 3,322) $10,574 ====== ======= ======= =======
See accompanying notes to consolidated financial statements. F-5 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($000 Omitted) Year Ended December 31, ----------------------- 2001 2000 ------ ------ Cash flows from operating activities: Net loss ($ 701) ($ 357) Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 50 77 Unrealized (gains) losses on securities owned ( 363) 780 Change in operating assets and liabilities: Change in securities 1,027 ( 720) Change in net receivable from clearing broker 170 692 Change in accounts payable and accrued expenses ( 189) ( 252) Change in income taxes payable ( 14) 21 Other, net 170 78 ------- ------- Net cash provided by operating activities 150 319 ------- ------- Cash flows from investing activities - Purchase of equipment ( 5) ( 8) ------- ------- Cash flows from financing activities: Repurchase of common stock ( 378) ( 579) Issuance of common stock - 47 Payments on loan ( 9) ( 10) ------- ------- Net cash used in financing activities ( 387) ( 542) ------- ------- Net decrease in cash and cash equivalents ( 242) ( 231) Cash and cash equivalents at beginning of period 3,812 4,043 ------- ------- Cash and cash equivalents at end of period $ 3,570 $ 3,812 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid for: Interest $ 352 $ 462 ======= ======= Taxes $ 18 $ 5 ======= =======
See accompanying notes to consolidated financial statements. F-6 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Kent Financial Services, Inc. (the "Company" or "Kent") and its wholly-owned subsidiaries, Kent Advisors, Inc., T.R. Winston & Company, Inc. ("Winston"), Texas American Petrochemicals, Inc. ("TAPI") and Asset Value Management, Inc. and its respective subsidiaries, Asset Value Fund Limited Partnership ("AVF"), a limited partnership, and Asset Value Holdings, Inc. TAPI is inactive. All material intercompany balances and transactions have been eliminated in consolidation. Cash Equivalents - ---------------- The Company considers as cash equivalents all short-term investments which are highly liquid and readily exchangeable for cash at amounts equal to their stated value. Cash equivalents consist entirely of U. S. Treasury Bills that matured through March 2002 and were reinvested for an additional 90 days. All cash and cash equivalents are on deposit either with a major money center bank or with the clearing broker. Securities Owned - ---------------- Securities owned are recorded on a trade date basis and are valued at fair value. The Company takes proprietary trading securities positions to satisfy customer demand for Nasdaq market and over-the-counter securities. Realized and unrealized gains and losses from holding proprietary trading positions for resale to customers are included in principal transaction trading revenues. The Company also holds from time to time principal investment securities which are recorded at quoted market prices or at fair value as determined by management based on other relevant factors. The net change in market or fair value of investment securities owned is included in principal transactions investing gains. Substantially all securities are owned by AVF and consist of equity securities valued at market value. Property and Equipment - ---------------------- The Company records all property and equipment at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the individual assets generally ranging from two to thirty-nine years. Fair Value of Financial Instruments - ----------------------------------- Substantially all assets and liabilities are stated at fair value or at amounts which approximate fair value. F-7 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Interest Income and Expenses - ---------------------------- Winston receives interest income on its credit balances at the clearing broker and is charged interest expense on its debit balances at the clearing broker. Income Taxes (Benefit) - ---------------------- The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company and its subsidiaries file a consolidated federal income tax return. Earnings Per Common Share - ------------------------- Earnings per common share is calculated based on the weighted average number of shares outstanding. Diluted earnings per share includes the assumed conversion of shares issuable upon exercise of options, where appropriate. Estimates - --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to change include assumptions used in determining the fair value of securities owned and non-readily marketable securities. F-8 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SECURITIES BROKERAGE BUSINESS ----------------------------- The Company's business is comprised principally of the operation of Winston and the management of AVF. Winston is a licensed securities broker-dealer in all states (except Alaska) and the District of Columbia and is a member of the National Association of Securities Dealers, and the Securities Investor Protection Corporation. Winston conducts retail securities brokerage, trading and investment banking activities. All safekeeping, cashiering, and customer account maintenance activities are provided by an unrelated broker-dealer, Bear, Stearns Securities Corporation, pursuant to a clearing agreement. Pursuant to the net capital provisions of Rule 15c3-1 under the Securities Exchange Act of 1934 ("1934 Act"), Winston is required to maintain minimum net capital, as defined, of $100,000. At December 31, 2001, Winston had net capital, as defined, of $288,000 which was $188,000 in excess of the required minimum. Winston is exempt from the customer protection provisions of Rule 15c3-3 under the 1934 Act as its activities are limited to those set forth in the conditions appearing in paragraphs (k)(2)(ii) of the Rule. AVF is an investment partnership whose primary purpose is to make investments in a limited number of companies whose securities are considered undervalued by the partnership's management. 3. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED ------------------------------------------------------- Securities owned and securities sold not yet purchased as of December 31, 2001, consisting of proprietary trading positions held for resale to customers and portfolio positions (equity securities) held for capital appreciation consist of the following (in 000's): Sold, Not Yet Owned Purchased ----- --------- Marketable equity securities Portfolio Positions of Greater than 5% of outstanding common stock: Cortech, Inc. (1,495,500 shares) $ 5,384 $ - Gish Biomedical, Inc. (590,400 shares) 401 - Golf Rounds.com, Inc. (189,600 shares) 114 - General Devices, Inc. (316,558 shares) 63 - Star Buffet, Inc. (289,000 shares) 676 - All other portfolio positions 913 - Held for resale to customers 19 1 ------- ------ Aggregate market $ 7,570 $ 1 ======= ======
4. COMMITMENTS AND CONTINGENCIES ----------------------------- Leases - ------ The Company leases certain office space for a monthly rental of approximately $7,350, however, this lease is cancelable with 90 days notice. Future minimum rental requirements under the terms of this lease are approximately $22,050 for 2002. F-9 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Winston subleases part of its premises at one location to several subtenants under sublease terms substantially equivalent to Winston's lease agreement. Rental income under these agreements in 2001 and 2000 was approximately $47,000 and $42,000, respectively. Aggregate net rent expense for the years ended December 31, 2001 and 2000 was approximately $43,000 and $53,000, respectively. Legal Matters - ------------- In the normal course of business, Winston at December 31, 1999, had been named as a respondent in two arbitrations, one of which was settled in January 2000 and the other was settled in December 2000. The resolution of these actions did not have a material adverse effect on the consolidated financial statements. In July 2000, T. R. Winston and two Winston officers were notified that NASD Regulation, Inc. ("NASDR"), District 9 intended to recommend that the NASDR authorize a disciplinary proceeding against Winston and the two Winston officers. In January 2001, the NASDR accepted from Winston a letter of Acceptance, Waiver and Consent ("AWC"), which alleged violations for failure to establish, maintain and enforce adequate written supervisory procedures regarding trading and market-making, alleged failure to have a supervisor who was Series 55 registered, alleged failures to report, accept, or decline certain trades within specified time periods, and alleged failures to maintain records for certain principal transactions. Pursuant to the terms of the AWC, while neither admitting nor denying the allegations, Winston consented to the findings contained in the AWC and a censure, and paid the NASDR a fine of $20,000. NASDR did not recommend charges against the two Winston officers. In 2000, Winston recovered approximately $257,000 as a plaintiff in the NASDAQ Market-Makers Antitrust Litigation which alleged that certain defendants conspired to fix spreads in the purchase and sale of securities which damaged Winston. 5. INCOME TAXES ------------ The components of income tax expense are as follows: ($000 Omitted) Year Ended December 31, ----------------------- 2001 2000 ------ ------ Federal-Current $ - $ 3 State-Current 3 24 Deferred - - ----- ----- Total $ 3 $ 27 ===== ===== F-10 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Total income tax expense for the years ended December 31, 2001 and 2000 is different from the amount computed by multiplying total earnings (loss) before income taxes by the statutory Federal income tax rate of 34%. The reasons for these differences and the related tax effects are: ($000 Omitted) Year Ended December 31, ----------------------- 2001 2000 ------ ------ Income tax expense computed at statutory rates on total earnings (loss) before income taxes ($ 237) ($ 112) Increase (decrease) in tax from: State income tax, net of Federal benefit 2 16 Change in estimate of net operating losses 179 - Expiration of General Business Credits and state net operating loss carryforwards - 1,061 Increase (decrease) in valuation allowance 74 ( 945) Other, net ( 15) 7 ------ ------ Total tax expense $ 3 $ 27 ====== ====== The tax effects of significant items comprising the Company's net deferred tax asset at December 31, 2001 are as follows: ($000 Omitted) -------------- Deferred tax assets: Operating loss carryforwards $ 2,846 Alternative minimum tax credit carryforward 958 Mark-to-market valuation adjustments 241 Deferred Compensation 159 Other 79 ------- 4,283 Valuation allowance ( 4,283) ------- Net deferred tax asset $ - ======= Deferred tax assets reflect the net effects of operating loss and tax credit carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Due to the uncertainty of realizing its deferred tax asset, a valuation allowance of an equal amount is maintained. For the year ended December 31, 2001, the valuation allowance increased by $74,000, principally as a result of the generation of new deferred tax liabilities. F-11 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Significant carryforward balances for Federal income tax purposes as of December 31, 2001 are: ($000 omitted) Expiration Amount Years ----------- ------------ Net operating loss $ 7,716 2006-2021 Alternative minimum tax credit $ 958 N/A 6. MORTGAGE PAYABLE ---------------- The mortgage loan is collateralized by the Company's headquarters facility and bears interest at the rate of 7.875%. The mortgage loan is payable in equal monthly installments of $5,345 including interest, through November 2024. Scheduled maturities for years ending December 31, are as follows (in $000): YEAR MATURITY ---- -------- 2002 $ 10 2003 10 2004 10 2005 10 2006 10 Thereafter 631 ----- $ 681 ===== 7. CAPITAL STOCK ------------- Common Stock Repurchases - ------------------------ On March 26, 1996, the Board of Directors approved a plan to repurchase up to 300,000 shares of the Company's common stock at prices deemed favorable in the open market or in privately negotiated transactions subject to market conditions, the Company's financial position and other considerations ("1996 Plan"). As of March 21, 2000 all shares including 24,165 shares repurchased during 2000 had been acquired under this 1996 Plan, and have been canceled and returned to the status of authorized but unissued shares. In February 2000 the Board of Directors approved a new plan to repurchase up to an additional 200,000 shares of the Company's common stock at prices deemed favorable in the open market or in privately negotiated transactions subject to market conditions, the Company's financial position and other considerations("2000 Plan"). During 2001, all shares had been acquired under the 2000 Plan and have been canceled and returned to the status of authorized but unissued shares. In March 2001, the Board of Directors approved a plan to repurchase up to an additional 150,000 shares of the Company's common stock at prices deemed favorable in the open market or in privately negotiated transactions subject to market conditions, the Company's financial position and other considerations ("2001 Plan"). As of December 31, 2001 8,380 shares under the 2001 Plan have been repurchased, canceled and returned to the status of authorized but unissued shares. F-12 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Common Stock Options - -------------------- The Non-Qualified Stock Option Plan adopted by the stockholders of the Company in 1987 provides for a maximum of 133,332 shares of common stock of the Company to be issued to key executives, including officers and directors of the Company, at the discretion of the Board of Directors. Options under this plan expire five years from the date of grant and are exercisable as to one-half of the shares on the date of grant and, as to the other half, after the first anniversary of the date of grant, or at such other time, or in such other installments as may be determined by the Board of Directors at the time of grant. No options are outstanding at December 31, 2001. The following table summarizes option transactions under this plan: Average Shares Price ------ --------- Options outstanding at December 31, 1999 42,000 $2.25000 Options exercised in 2000 (21,000) 2.25000 Options forfeited in 2000 (21,000) 2.25000 ------ Options outstanding at December 31, 2000 and 2001 - ====== The Company does not accrue compensation expense for the issuance of stock options granted in accordance with its accounting policy, which is based on Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." 8. COMPENSATION ARRANGEMENTS ------------------------- In April 1990, the Company entered into an employment agreement (the "Agreement") with the Company's Chairman for a three-year term commencing April, 1990 (the "Effective Date") at an annual salary of $175,000 (adjusted to $240,000 in December 2000) ("Base Salary"), which may be increased but not decreased at the discretion of the Board of Directors. The term is to be automatically extended one day for each day elapsed after the Effective Date. The Chairman may terminate his employment under the Agreement under certain conditions specified in the Agreement and the Company may terminate the Chairman's employment under the Agreement for cause. In the event of the Chairman's death during the term of the Agreement, his beneficiary shall be paid a death benefit equal to his Base Salary per year for three years payable in equal monthly installments. Should the Chairman become "disabled" (as such term is defined in the Agreement) during the term of the Agreement he shall be paid an annual disability payment equal to 80% of his Base Salary in effect at the time of the disability. In September 1999, the Company entered into an employment agreement with the Company's Executive Vice President for a three-year term commencing September, 1999 at an annual salary of $180,000 (adjusted to $190,000 in December 2000). All other terms and conditions are identical to that of the Chairman's agreement except that long term disability payments are equal to 70% of the base salary. F-13 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company is accruing the present value of the contingent payments under these agreements. Included is accrued expenses at December 31. 2001 is approximately $399,000 related to this liability. 9. PREVIOUSLY DISCONTINUED OPERATIONS ---------------------------------- In January, 1988, an inactive subsidiary of the Company, TAPI, was notified by environmental regulators in Texas ("Texas Regulators") that it was a potentially responsible party ("PRP") in connection with a hazardous waste site in the state. TAPI advised the Texas Regulators that TAPI had no assets and could not conduct a remedial investigation of the site. Based on information and belief, the Company understands a remedial action has been developed to stabalize any contaminants. The Company does not believe it has any liability in connection with this environmental matter. In May 2001, the State of Texas notified TAPI and a group of other potentially responsible parties ("PRP's") that the State of Texas incurred costs for remedial investigation, feasibility studies and remedial design at an allegedly contaminated site in Texas known as the Sonics International Superfund Site, and that it would join TAPI and the other PRP's as parties to a pending lawsuit in the state courts of Texas to recover its costs and attorney's fees, which are alleged to be approximately $203,000. In July 2001, the State of Texas served the complaint State of Texas v. Sonics International, Inc. et al, GV002838, Travis County, Texas District Court, by serving the Secretary of State. Due to the uncertainty and cost of litigation, TAPI and the Company agreed to a proposed settlement with the other PRP's, in which TAPI and the Company paid approximately $17,000 towards an overall settlement with the State of Texas even while denying liability. This settlement agreement with the other PRP's became effective on September 26, 2001. TAPI and the Company, as well as the participating PRP's executed a written settlement agreement with the State of Texas and received a release and contribution protection from the State of Texas. In April 1989, TAPI was formally notified that the Michigan Department of Natural Resources deemed TAPI a responsible party in connection with alleged environmental problems at a site owned by TAPI. In the fourth quarter of 1994, TAPI entered into a consent judgment with the State of Michigan. The consent judgment provides for the payment by TAPI of approximately $450,000 to satisfy TAPI's alleged liability for past and future costs incurred and to be incurred by the State of Michigan in undertaking remedial environmental activities at TAPI's former refinery site in Michigan. Under the terms of the settlement, TAPI paid $90,000 in the fourth quarter of 1994 and $45,000 per year in 1995 through 2001. The Company is required to make a final payment of $45,000 in the year 2002. The Company joined the consent judgment for the sole purpose of assuring payments by TAPI. Neither TAPI nor the Company admitted any liability. The liability had been accrued for in prior years as part of discontinued operations. 10. TRANSACTIONS WITH RELATED PARTIES --------------------------------- Rosenman & Colin LLP ("R&C") performed legal work for the Company and its affiliates in 2001 and 2000. Natalie I. Koether, wife of the Chairman and President of the Company is of counsel to R&C and also employed by the Company. Aggregate fees and expenses billed by R&C to the Company and its subsidiaries in 2001 and 2000 were approximately $47,000 and $39,000, respectively. Mrs. Koether F-14 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) received $150,000 in each of 2001 and 2000 as an employee. She received no compensation from R&C related to fees charged to the Company for her time. The payable to R&C at December 31, 2001 was approximately $24,000. Since March 1990 certain non-subsidiary affiliates have rented office space from the Company. The Company's aggregate rental income from these arrangements was approximately $43,000 in 2001 and 2000. The Company reimburses an affiliate for the direct cost of certain group medical insurance, and office supplies. Such reimbursements were approximately $160,000 and $187,000 during 2001 and 2000, respectively. Eligible employees can elect to participate in the Company's qualified 401(k) Retirement Plan (the "Plan"). Employees may voluntarily contribute up to 15% of their compensation, not to exceed the Internal Revenue Service limit ($10,500 in 2001 and 2000). The employees' contributions are 100% vested and the Company's contribution, if any, vests over a six-year period in accordance with the vesting schedule in the Plan. There was no employer matching contribution in 2001 or 2000. 11. OFF-BALANCE SHEET RISK ---------------------- The Company is engaged in various trading and brokerage activities, on an agency and principal basis. The Company's exposure to off-balance sheet credit risk occurs in the event a customer, clearing agent or counterparty does not fulfill their obligations arising from a transaction. Winston conducts its business on a fully disclosed basis with one clearing broker, Bear, Stearns Securities Corp., on behalf of its customers and for its own proprietary accounts, pursuant to a clearance agreement. At December 31, 2001, substantially all of the securities owned and the total receivable from clearing broker are positions with and amounts due from this clearing broker. The Company is subject to credit risk should the clearing broker be unable to pay this balance. 12. SALE OF SUBSIDIARY ------------------ In January 2000, T. R. Winston Capital, Inc. ("Wincap") stockholders signed a letter of intent with Direct Capital Markets.com, Inc., ("DCM") to sell all outstanding shares in exchange for 75,000 unregistered, non-marketable shares of DCM's Series C Convertible Preferred Stock ("DCM Shares"). In April 2000, Wincap's stockholders negotiated a definitive agreement for the sale. In July, 2000 regulatory approval for the sale was obtained and the closing of the sale was completed. Winston received for its proportionate ownership interest in Wincap approximately $52,000 in cash. In addition Winston received 25,000 DCM Shares. Because Winston's investment in Wincap approximated the amount of cash received, Winston did not record any material gain or loss in connection with the sale. 13. SEGMENT REPORTING ----------------- The Company has determined that it does not have reportable operating segments. The Company conducts stock brokerage activities through its wholly-owned subsidiaries Winston and AVF, as described in Note 2 of Notes to the Consolidated Financial Statements. These wholly-owned subsidiaries do not have individual segment managers or discrete financial data used to allocate resources. F-15 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS --------------------------------------------- ON ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------- On December 4, 2001 the Board of Directors of the Company retained Amper, Politziner & Mattia, P.A., Certified Public Accountants, as its certifying accountant for the fiscal year ended December 31, 2001, dismissing Deloitte & Touche LLP. No report on the financial statements of the Company issued by Deloitte & Touche during the last two fiscal years contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles, nor were there any disagreements during the last two fiscal years and through December 4, 2001, between Deloitte & Touche and the Company concerning any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved would have required Deloitte & Touche to make reference to the subject matter thereof in connection with its report. During the last two fiscal years and through December 4, 2001, none of the events listed in items (1) through (3) of Item 304(b) of Regulation S-K have occurred; and during such period the Company has not consulted with Amper, Politziner & Mattia concerning any matter referred to under paragraphs (i) or (ii) of Item 304(a) (2) of Regulation 8-K. II-5 PART III -------- Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS ------------------------------------------------------------ The members of the current Board of Directors were elected at the 2001 Annual Meeting and will serve until the next Annual Meeting or until their successors have been elected and qualify. The Company's officers are elected by and serve at the leave of the Board. None of the executive officers of the Company is related to any other. There is no arrangement or understanding between any executive officer and any other person pursuant to which such officer was selected. The directors and executive officers of the Company at February 28, 2002 were as follows: Name Age Position Held ---- --- ------------- Paul O. Koether 65 Chairman, Director and President Mathew E. Hoffman 48 Director Casey K. Tjang 63 Director M. Michael Witte 75 Director Qun Yi Zheng 44 Director John W. Galuchie, Jr. 49 Executive Vice President and Treasurer - ------------------------------------ Paul O. Koether is principally engaged in the following businesses: (i) Chairman and director since July 1987 and President since October 1990 of the Company and the general partner since 1990 of Shamrock Associates, ("Shamrock") an investment partnership which is the principal stockholder of the Company; (ii) various positions with affiliates of the Company, including Chairman since 1990 and a registered representative since 1989 of T. R. Winston & Company, Inc. ("Winston"); and (iii) Chairman since April 1988, President from April 1989 to February 1997 and director since March 1988 of Pure World, Inc., ("Pure World") and since December 1994 has been a director and since January 1995 has been Chairman of Pure World's wholly-owned subsidiary, Pure World Botanicals, Inc., a manufacturer and distributor of natural products. He is also Chairman and a director of Pure World's principal stockholder, Sun Equities Corporation, ("Sun") a private company. In September 1998, Mr. Koether was elected a director and Chairman of Cortech, Inc., ("Cortech") a biopharmaceutical company seeking to redeploy its assets. Mr. Koether was a director of Golf Rounds.com, Inc., ("Golf Rounds") an internet content provider from July 1992 to January 2000. III-1 Mathew E. Hoffman. Since January 1997, he has been head of the litigation department of Todtman, Nachamie, Spizz & Johns, P.C. From May 1994 until January 1997 Mr. Hoffman was head of the litigation department of the law firm of Rosen & Reade. His articles have been published in the United States, Europe and Japan. Casey K. Tjang. Since August 2000, he has been Executive Vice President Finance with Knowledgewindow, Inc., an e-learning provider of internet training. From December 1995, until August 2000, with Leading Edge Packaging, Inc., a marketing, wholesaler and distribution company of consumer product packagings in the following capacities: director and secretary since December 1995; Chief Financial Officer since September 1996 and President since September 1998. On August 16, 2000 Leading Edge Packaging, Inc., filed a Chapter XI petition and on November 21, 2000, converted to Chapter VII under the United States Bankruptcy Code. M. Michael Witte. Since August 1980, he has been President of M. M. Witte & Associates, Inc., a private corporation which is engaged in oil and gas consulting and investment management. In November 1995 Mr. Witte was elected Co-Chairman of The American Drilling Company, L.L.C., a position he subsequently relinquished after his election on August 1, 1996 as President and Chief Executive Officer of South Coast Oil Corporation, a Los Angeles based oil company founded in 1921. Qun Yi Zheng, Ph.D. Since March 1996, he has been Executive Vice President and Director of Science and Technology at Pure World Botanicals, Inc. From January 1995 to March 1996 he was Technical Manager at Hauser Nutraceuticals, a division of Hauser Chemicals, Inc., a manufacturer and distributor of nutraceuticals. Dr. Zheng has been a director of Cortech since August 2000. John W. Galuchie, Jr., a certified public accountant, is engaged in the following businesses: (i) the Company, as Executive Vice President and Treasurer since September 1986 and a director from June 1989 to August 1993; (ii) Winston, as President and Treasurer since January 1990 and a director since September 1989; (iii) Pure World, as Executive Vice President from April 1988 until October 2001; (iv) Cortech as President and director since September 1998; (v) since September 1999 a director of Gish Biomedical, Inc. a medical device manufacturer and since March 2000, Chairman; and (vi) General Devices, Inc., as Chairman, President and director since September 2000, a company seeking an operating business. Mr. Galuchie also served as a director of HealthRite, Inc., a nutritional products company, from December 1998 to June 1999; served as a director of NorthCorp Realty Advisors, Inc., a real estate asset manager, from June 1992 until August 1996; and served as Vice President, Treasurer and a director from July 1992 to January 2000 of Golf Rounds. Section 16(a) of the Securities Exchange Act requires the Company's officers and directors and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission ("SEC") and the National Association of Securities Dealers ("NASD"). Officers and directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 which they file. III-2 Based solely on the Company's review of the copies of such forms it has received, the Company believes that all its officers, directors and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to transactions during fiscal 2001. Item 10. EXECUTIVE COMPENSATION ---------------------- There is shown below information concerning the annual compensation for services in all capacities to the Company for the fiscal years ended December 31, 2001, 2000 and 1999, for those persons who were, at December 31, 2001 (i) the chief executive officer and (ii) the other most highly compensated officers of the Company, whose annual compensation exceeds $100,000 (the "Named Officers"). Summary Compensation Table Long-Term Name and Principal Annual Compensation(1)(2) Compensation Other Officer ---------------------------------- -------------- ----------- Year Salary Bonus Other(3) Options(#) Paul O. Koether 2001 $240,000 $ - $104,699 - - Chairman, Presi- 2000 $203,333 $ 25,000 $155,814 - - dent and Chief 1999 $200,000 $ - $200,471 - - Executive Officer John W. Galuchie, Jr. 2001 $190,352 $ - $ 152 - - Executive Vice Presi- 2000 $180,833 $ 12,500 $ 1,203 - - dent and Treasurer 1999 $175,833 $ - $ 412 - -
- ---------------------------------------------------- (1) The Company has no bonus or deferred compensation plans and pays bonuses at the discretion of the Board based on performance. (2) The individuals named in the table above received incidental personal benefits during the fiscal years covered by the table. The value of these incidental benefits did not exceed the lesser of either $50,000 or 10% of the total annual salary and bonus reported for any of the Named Officers. Such amounts are excluded from the table. (3) Represents commissions paid by Winston to these individuals in their capacity as registered representatives for securities trades made for their respective customers. There were no stock options granted pursuant to the Company's 1987 Non-Qualified Stock Option Plan (the "Plan") during the fiscal years ended December 31, 2001, 2000 and 1999 to the Named Officers. All activity in the Plan was completed as of December 31, 2000 and there were no outstanding options as of December 31, 2001. Remuneration of Directors ------------------------- Directors who are not employees of the Company receive a monthly fee of $1,000 plus $200 for each day of attendance at board and committee meetings. During 2001, the Company paid directors' fees in the aggregate amount of approximately $52,000. III-3 Compensation Arrangements - ------------------------- In April, 1990, the Company and Paul O. Koether entered into an employment agreement ("Agreement") pursuant to which Mr. Koether serves as the Company's Chairman for an initial three-year term ("Commencement Date") at an annual salary of $175,000 (changed to $240,000 in December 2000) ("Base Salary"), which may be increased but not decreased at the discretion of the Board of Directors. The term is to be automatically extended one day for each day elapsed after the Commencement Date. Mr. Koether may terminate his employment under the Agreement at any time for "good reason" (defined below) within 36 months after the date of a Change in Control (defined below) of the Company. Upon his termination, he shall be paid the greater of the (i) Base Salary and any bonuses payable under the Agreement through the expiration date of the Agreement or (ii) an amount equal to three times the average annual Base Salary and bonuses paid to him during the preceding five years. Change in Control is deemed to have occurred if (i) any individual or entity, other than individuals beneficially owning, directly or indirectly, common stock of the Company representing 30% or more of the Company's stock outstanding as of April, 1990, is or becomes the beneficial owner, directly or indirectly, of 30% or more of the Company's outstanding stock or (ii) individuals constituting the Board of Directors on April, 1990 ("Incumbent Board"), including any person subsequently elected to the Board whose election or nomination for election was approved by a vote of at least a majority of the Directors comprising the Incumbent Board, cease to constitute at least a majority of the Board. "Good reason" means a determination made solely by Mr. Koether, in good faith, that as a result of a Change in Control he may be adversely affected (i) in carrying out his duties and powers in the fashion he previously enjoyed or (ii) in his future prospects with the Company. Mr. Koether may also terminate his employment if the Company fails to perform its obligations under the Agreement (including any material change in Mr. Koether's duties, responsibilities and powers or the removal of his office to a location more than five miles from its current location) which failure is not cured within specified time periods. The Company may terminate Mr. Koether's employment under the Agreement for "cause" which is defined as (i) Mr. Koether's continued failure to substantially perform his duties under the Agreement (other than by reason of his mental or physical incapacity or the removal of his office to a location more than five miles from its current location) which is not cured within specified time periods, or (ii) Mr. Koether's conviction of any criminal act or fraud with respect to the Company. The Company may not terminate Mr. Koether's employment except by a vote of not less than 75 percent of the entire Board of Directors at a meeting at which Mr. Koether is given the opportunity to be heard. In the event of Mr. Koether's death during the term of the Agreement, his beneficiary shall be paid a death benefit equal to the Base Salary per year for three years payable in equal monthly installments. Should Mr. Koether become "disabled" (as such term is defined in the Agreement) during the term of the Agreement and either long-term disability insurance is not provided by the Company or such policy does not provide an annual benefit to age 70 equal to 80% or more of Mr. Koether's Base Salary, he shall be paid an annual disability payment equal to 80% of his Base Salary in effect at the time of the disability. Such payments shall continue until Mr. Koether attains the age of 70. In September 1999, the Company entered into an Employment Agreement with the Company's Executive Vice President, John W. Galuchie, Jr., for a three-year term commencing September, 1999 at an annual salary of $180,000 (changed to $190,000 in December 2000). All other terms and conditions of Mr. Galuchie's III-4 employment agreement are identical to Mr. Koether's agreement except that long term disability payments are equal to 70% of his base salary in effect at the time of disability and such payments continue until Mr. Galuchie attains the age of 65. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table provides information with respect to the Company's common stock beneficially owned as of February 28, 2002 by each director of the Company, by each person having beneficial ownership of five percent or more of the Company's common stock and by all directors and officers of the Company as a group. Amount and Nature Name and Address of Beneficial Percent of of Beneficial Owner Ownership(1) Class - ------------------- ----------------------- ---------- Paul O. Koether 943,608(2) 55.87% 211 Pennbrook Road Far Hills, NJ 07931 Shamrock Associates 850,000 50.33% 211 Pennbrook Road Far Hills, NJ 07931 Tweedy, Brown Company, LLC 138,766(3) 8.22% 52 Vanderbilt Avenue 8th Floor New York, NY 10017 Dimensional Fund Advisors, Inc. 85,480(4) 5.06% 1299 Ocean Avenue 11th Floor Santa Monica, CA 90401 M. Michael Witte - - 1120 Granville Avenue Suite 102 Los Angeles, CA 90049 Casey K. Tjang 6,000 * 510 Tallwood Lane Greenbrook, NJ 08812 Mathew E. Hoffman 7,000 * 62 Rosehill Avenue New Rochelle, NY 10804 John W. Galuchie, Jr. 48,332(5) 2.86% 376 Main Street Bedminster, NJ 07921 Qun Yi Zheng - - 375 Huyler Street South Hackensack, NJ 07606 All Directors and Officers 976,608 57.83% as a Group (6 persons) - ----------------------------------------- *Less than 1 percent. III-5 (1) The beneficial owner has both sole voting and sole investment powers with respect to these shares except as set forth in this footnote or in other footnotes below. (2) Includes the 850,000 Shares beneficially owned by Shamrock Associates ("Shamrock"). As a general partner of Shamrock, Mr. Koether may be deemed to own these shares beneficially. Includes 28,332 shares owned by Sun Equities Corporation ("Sun"), a private corporation of which Mr. Koether is the Chairman and a principal stockholder. Mr. Koether is also a limited partner of Shamrock and may be deemed to own beneficially that percentage of the shares owned by Shamrock represented by his partnership percentage. Mr. Koether disclaims beneficial ownership of such shares. (3) According to Schedule 13G filed on January 28, 2002 by Tweedy, Brown Company, LLC, TBK Partners, L.P. and Vanderbilt Partners, L.P. (4) According to Schedule 13G filed on January 30, 2002 by Dimensional Fund Advisors, Inc. ("Dimensional"), an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, that furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies, trusts and accounts are the "Funds". In its role as investment advisor or manager, Dimensional possesses voting and/or investment power over the securities of the issuer described in this schedule are owned by the Funds. All securities reported in this schedule are owned by the Funds. Dimensional disclaims beneficial ownership of such securities. (5) Includes 28,332 Shares owned by Sun, a private corporation of which Mr. Galuchie is a director and officer. Mr. Galuchie disclaims beneficial ownership of such shares. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Rosenman & Colin LLP ("R&C") performed legal work for the Company and its affiliates in 2001 and 2000. Natalie I. Koether, wife of the Chairman and President of the Company, is of counsel to R&C and also employed by the Company. Aggregate fees and expenses billed by R&C to the Company and its subsidiaries in 2001 and 2000 were approximately $47,000 and $39,000, respectively. Mrs. Koether received $150,000 in both 2001 and 2000, respectively, as an employee. She received no compensation from R&C related to fees charged to the Company for her time. The payable to R&C at December 31, 2001 was approximately $24,000. Since March 1990 certain non-subsidiary affiliates have rented office space from the Company. The Company's aggregate rental income from these arrangements was approximately $43,000 in 2001 and 2000. The Company reimburses an affiliate for the direct cost of certain group medical insurance, and office supplies. Such reimbursements were approximately $160,000 and $187,000 during 2001 and 2000, respectively. Eligible employees can elect to participate in the Company's qualified 401 (k) Retirement Plan (the "Plan"). Employees may voluntarily contribute up to 15% of their compensation, not to exceed the Internal Revenue Service limit ($10,500 in 2001 and 2000). The employees' contributions are 100% vested and the Company's contribution, if any, vests over a six-year period in accordance with the vesting schedule in the Plan. There was no employer matching contribution in 2001 or 2000. III-6 PART IV Item 13. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- The following exhibits are filed as part of this report: (a) Exhibits 3.1 Bylaws of the Registrant, as amended. (l) 3.2(a) Articles of Incorporation of Registrant, as amended (including certificate of stock designation for $2.575 Cumulative Convertible Exchangeable Preferred Stock).(2) 3.2(b) Certificate of Amendment to Certificate of Incorporation. (3) 3.2(c) Certificate of Amendment to Certificate of Incorporation dated September 26, 1991. (4) 10.1 1987 Non-Qualified Executive Stock Option Plan. (6) 10.2 Employment Agreement, dated July 1, 2001 by and between Kent Financial Services, Inc. and Paul O. Koether. (7) 10.3 Employment Agreement, dated July 1, 2001 by and between Kent Financial Services, Inc., and John W.Galuchie, Jr.(7) 21 Subsidiaries* (b) Reports on Form 8-K ------------------- On December 4, 2001 the Company filed a Form 8-K in connection with a change in Auditors to Amper, Politziner & Mattia, P.A. for the fiscal year end December 31, 2001. - ------------------- * Filed herewith. (1) Incorporated by reference to Texas American Energy Corporation Registration Statement, as amended, on Form S-l, No. 33-11109. (2) Incorporated by reference to Texas American Energy Corporation Form 10-K, for the fiscal year ended December 31, 1984. (3) Incorporated by reference to Texas American Energy Corporation Form 10-K for the fiscal year ended December 31, 1987. (4) Incorporated by reference to Kent Financial Services, Inc. Form 10-Q for the quarter ended September 30, 1991. (5) Intentionally left blank. (6) Incorporated by reference to Texas American Energy Corporation Proxy Statement dated November 11, 1987. (7) Incorporated by reference to Kent Financial Services, Inc., Form 10-QSB for the quarter ended June 30, 2001. IV-1 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KENT FINANCIAL SERVICES, INC. Dated: March 28, 2002 BY /s/ Paul O. Koether ---------------------------------- Paul O. Koether Chairman of the Board, President and Director (Principal Executive Officer) Dated: March 28, 2002 BY /s/ John W. Galuchie, Jr. ---------------------------------- John W. Galuchie, Jr. Executive Vice President (Principal Financial and Accounting 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. Dated: March 28, 2002 /s/ Paul O. Koether ---------------------------------- Paul O. Koether Chairman of the Board, President and Director (Principal Executive Officer) Dated: March 28, 2002 /s/ Mathew E. Hoffman ---------------------------------- Mathew E. Hoffman Director Dated: March 28, 2002 /s/ Casey K. Tjang ---------------------------------- Casey K. Tjang Director Dated: March 28, 2002 /s/ M. Michael Witte ---------------------------------- M. Michael Witte Director Dated: March 28, 2002 /s/ Qun Yi Zheng ---------------------------------- Qun Yi Zheng Director IV-2 EXHIBIT 21 KENT FINANCIAL SERVICES, INC. SUBSIDIARIES Name of Subsidiary State of Incorporation - ------------------ ---------------------- Asset Value Holdings, Inc. Delaware Asset Value Management, Inc. Delaware Kent Advisors, Inc. New Jersey Texas American Petrochemicals, Inc. (Inactive) Texas T. R. Winston & Company, Inc. New Jersey -----END PRIVACY-ENHANCED MESSAGE-----