-----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, LRfdI2iZXxPaqajUHjkiJxKrm2NRDYd7QD8uZ8yq9IoOXIT6tRHAis0lKWXvo1O5 1QLrNqqun6ErtOJ5z/CVEQ== 0000356446-05-000103.txt : 20051114 0000356446-05-000103.hdr.sgml : 20051111 20051114120425 ACCESSION NUMBER: 0000356446-05-000103 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-07986 FILM NUMBER: 051198070 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 10QSB 1 kent10q.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2005 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No.: 1-7986 ------ Kent Financial Services, Inc. ----------------------------- (Exact name of small business issuer as specified 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) (Zip Code) (908) 234-0078 -------------- (Issuer's telephone number) N/A --- (Former name, former address and former fiscal year, if changed since last report) 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 ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of October 31, 2005, the issuer had 2,815,374 shares of its common stock, par value $.10 per share, outstanding. Transitional Small Business Disclosure Format (check one). Yes No X ----- ----- PART I - FINANCIAL INFORMATION - ------ --------------------- Item 1. - Financial Statements - ------ -------------------- KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2005 (UNAUDITED) ($000 Omitted) ASSETS - ------ Current Assets: Cash and cash equivalents $ 13,934 Securities owned 383 Other current assets 44 -------- Total current assets 14,361 Property and equipment: Office furniture and equipment 6 Accumulated depreciation ( 4) -------- Net property and equipment 2 Goodwill 90 -------- Total assets $ 14,453 ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 901 Accrual for previously discontinued operations 166 -------- Total liabilities 1,067 -------- Contingent liabilities Minority interest in subsidiaries 5,755 Stockholders' equity: Preferred stock without par value; 500,000 shares authorized; none outstanding - Common stock, $.10 par value; 4,000,000 shares authorized; 2,816,762 shares issued and outstanding 282 Additional paid-in capital 12,408 Accumulated deficit ( 5,059) -------- Total stockholders' equity 7,631 -------- Total liabilities and stockholders' equity $ 14,453 ======== See accompanying notes to condensed consolidated financial statements. 2 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($000 Omitted, except per share data) Three Months Ended September 30, ---------------------- 2005 2004 -------- -------- Revenues: Investing losses ($ 125) ($ 54) Management fee income - 12 Interest income 102 45 Other income 76 53 Other Revenues: Gain on sale of property - 845 Gain on sale of T. R. Winston - 71 ------- ------- Total revenues 53 972 ------- ------- Expenses: General and administrative 244 208 Interest - 10 ------- ------- Total expenses 244 218 ------- ------- Income (loss) before income taxes ( 191) 754 Provision for income taxes - 39 ------- ------- Income (loss) before minority interest ( 191) 715 Minority interest in subsidiaries losses 10 24 ------- ------- Net income (loss) ($ 181) $ 739 ======= ======= Basic and diluted net income (loss) per common share ($ .06) $ .26 ======= ======= Basic and diluted weighted average number of common shares outstanding (in 000's) 2,817 2,887 ======= ======= See accompanying notes to condensed consolidated financial statements. 3 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($000 Omitted, except per share data) Nine Months Ended September 30, --------------------- 2005 2004 -------- -------- Revenues: Investing losses ($ 155) ($ 37) Management fee income 12 126 Equity in earnings of T. R. Winston - 138 Pre-acquisition equity in loss of Cortech - ( 83) Interest income 278 56 Other income 286 308 Other Revenues: Gain on sale of property - 845 Gain on sale of T. R. Winston - 71 ------- ------- Total revenues 421 1,424 ------- ------- Expenses: General and administrative 861 607 Interest - 37 ------- ------- Total expenses 861 644 ------- ------- Income (loss) before income taxes ( 440) 780 Provision for income taxes 22 56 ------- ------- Income (loss) before minority interest ( 462) 724 Minority interest in subsidiaries losses 35 24 ------- ------- Net income (loss) ($ 427) $ 748 ======= ======= Basic and diluted net income (loss) per common share ($ .15) $ .25 ======= ======= Basic and diluted weighted average number of common shares outstanding (in 000's) 2,830 2,943 ======= ======= See accompanying notes to condensed consolidated financial statements. 4 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ($000 Omitted) Nine Months Ended September 30, --------------------- 2005 2004 -------- -------- Cash flows from operating activities: Net income (loss) ($ 427) $ 748 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 1 20 Unrealized losses on securities owned 198 81 Equity in earnings of T. R. Winston - ( 138) Pre-acquisition equity in loss of Cortech - 83 Gain on sale of property - ( 845) Gain on sale of T. R. Winston - ( 71) Minority interest in subsidiaries losses ( 35) ( 24) Changes in operating assets and liabilities: Change in securities owned 624 ( 793) Change in accounts payable and accrued expenses 85 102 Change in other assets 141 ( 330) Other, net - ( 84) -------- -------- Net cash provided by (used in) operating activities 587 ( 1,251) -------- -------- Cash flows from investing activities: Cash acquired through consolidation of Cortech - 10,992 Cash acquired through consolidation of The Academy for Teaching and Leadership 50 - Cash acquired through consolidation of General Devices 74 - Proceeds from sale of property - 1,811 Proceeds from sale of T. R. Winston - 520 Investment in T. R. Winston - ( 53) Purchase of equipment - ( 4) Other, net - 3 -------- -------- Net cash provided by investing activities 124 13,269 -------- -------- Cash flows from financing activities: Dividends paid ( 851) - Repurchase of common stock ( 82) ( 867) Payments on debt - ( 658) -------- -------- Net cash used in financing activities ( 933) ( 1,525) -------- -------- Net increase (decrease) in cash and cash equivalents ( 222) 10,493 Cash and cash equivalents at beginning of period 14,156 3,737 -------- -------- Cash and cash equivalents at end of period $ 13,934 $ 14,230 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ - $ 37 ======== ======== Taxes $ 11 $ 11 ======== ======== Non-cash put option liability $ - ($ 390) ======== ======== See accompanying notes to condensed consolidated financial statements. 5 KENT FINANCIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (Unaudited) 1. Basis of Presentation --------------------- The accompanying unaudited condensed consolidated financial statements of Kent Financial Services, Inc. and subsidiaries (the "Company") as of September 30, 2005 and for the three and nine month periods ended September 30, 2005 and 2004, reflect all material adjustments consisting of only normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the year-end consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Certain reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. The results of operations for the three and nine month periods ended September 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the entire year or for any other period. 2. Business -------- The Company is a holding company that operates through its wholly-owned partnership Asset Value Fund Limited Partnership ("AVF"). AVF increased its ownership of Cortech, Inc. ("Cortech") to 50.06% at June 30, 2004 (the "Cortech Acquisition'). Prior to June 30, 2004, AVF had been accounting for its investment in Cortech based upon its fair value as determined by the management of AVF. Subsequent to the Cortech Acquisition, Cortech has been consolidated in 6 the Company's financial statements. Cortech is currently seeking the acquisition of an operating business. All of Cortech's assets, excluding its portfolio of pharmaceutical patents, are invested in cash and United States Treasury Bills. On July 22, 2005, Cortech received notice from The Nasdaq Stock Market, Listing Qualifications Department, that the staff had determined that Cortech's securities would be de-listed from The Nasdaq SmallCap Market. Cortech's securities were de-listed at the opening of business on August 2, 2005. Cortech did not appeal the staff's determination. As of August 2, 2005, Cortech's common stock is quoted on The Pink Sheets. Through AVF, Kent also owned 44% of General Devices, Inc, ("General Devices"). In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 explains the concept of a variable interest entity and requires consolidation by the primary beneficiary where the variable interest entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. Additional financing may be required for the business activities of General Devices for the next twelve months. The Board of Directors of General Devices authorized the sale of additional shares of its common stock to provide the required liquidity. During the second quarter of 2005, AVF orally agreed to purchase sufficient shares to provide the required funding. As a result, the Company believed that, under FIN 46, General Devices was a variable interest entity and the Company was the primary beneficiary. Therefore, General Devices has been consolidated in the financial statements of the Company beginning with the second quarter of 2005. As a result of consolidating General Devices, the Company recognized a loss on its investment of approximately $83,000 and recorded minority interest of approximately $36,000. In October 2005, the Company sold its interest in General Devices. (See Note 10.) At September 30, 2005, General Devices, a publicly traded company, had assets, consisting primarily of cash, of $54,472, accounts payable and accrued liabilities of $10,899 and stockholders' equity of $43,573. For the nine months ended September 30, 2005, General Devices reported a net loss of $68,137, which consisted solely of operating expenses, of which $36,000 were management fees paid to AVF and eliminated in consolidation. General Devices is currently seeking the acquisition of an operating business. In August 2004, the Company formed a new subsidiary, Kent Educational Services, Inc., ("KES"), initially funded with $300,000. KES purchased for $300,000, a 60% controlling interest in The Academy for Teaching and Leadership, Inc. ("The Academy"), a new company formed to offer educators high quality programs designed to dramatically improve themselves, their students, and their schools. Dr. Saul Cooperman, a former Commissioner of Education in the State of 7 New Jersey, heads the Academy. KES and The Academy are consolidated in the Company's financial statements. Goodwill of $90,000 was recorded in connection with the consolidation of The Academy. At September 30, 2005, The Academy had two contracts totaling $120,000 of which $29,500 was earned in the third quarter of 2005 and $27,500 was earned in the second quarter of 2005. The Academy recognizes revenues when services are provided. Additionally, the Company provides administrative and consulting services to certain non-affiliated companies. 3. Securities owned ---------------- Securities owned consist of portfolio positions held for capital appreciation, all of which are valued at fair value. The fair values of the portfolio positions generally are based on listed market prices. If listed market prices are not indicative of fair value or if liquidating the Company's position would reasonably be expected to impact market prices, fair value is determined based on other relevant factors. Among the factors considered by management in determining fair value of the portfolio positions are the financial condition, asset composition and operating results of the issuer, the long-term business potential of the issuer and other factors generally pertinent to the valuation of investments. The fair value of these investments are subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term. Securities owned as of September 30, 2005, consisting of portfolio positions (equity securities) held for capital appreciation consist of the following: % Value Owned ----- ----- (in $000's) Marketable equity securities: Portfolio positions of greater than 5% of outstanding common stock: Golf Rounds.com, Inc. (193,800 shares) $ 118 5.6% All other portfolio positions 265 ------- Aggregate market $ 383 ======= Securities owned which are not valued at listed market prices at September 30, 2005, of $118,000, consist of GolfRounds.com, Inc. 8 4. Income taxes ------------ The components of income tax expense for the three and nine months ended September 30, 2005 and 2004 are as follows ($000 Omitted): Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2005 2004 2005 2004 ---- ---- ---- ---- Federal-Current ($ 5) $ - ($ 1) $ - State-Current 5 39 23 56 ---- ---- ---- ---- Total $ - $ 39 $ 22 $ 56 ==== ==== ==== ==== 5. Capital Stock Activity ---------------------- On April 16, 2004 the Board of Directors approved a two for one stock split in the form of a 100% stock dividend. The record date was April 30, 2004 and distribution date was May 3, 2004. Accordingly, all share information has been restated. On March 10, 2005 the Company declared a dividend of $.30 per share. The record date for the dividend was March 21, 2005 and the distribution date was April 5, 2005. Common Stock Repurchases ------------------------ In August 2004, the Board of Directors approved a plan to repurchase up to 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. As of September 30, 2005, 77,612 shares under this plan have been repurchased, canceled and returned to the status of authorized but unissued shares. 6. Net Income Per Share -------------------- The Company reports income per share under the requirements of Statement of Financial Accounting Standards No. 128, "Earnings per Share". Basic income per share includes the weighted average number of common shares outstanding during the year. Diluted income per share includes the weighted average number of shares outstanding and dilutive potential common shares, such as warrants and options. Since there are no dilutive potential common shares, basic and diluted earnings per share are the same. Cortech Stock Options Plans --------------------------- Cortech has issued certain common stock options to its employees, directors and consultants. At September 30, 2005 Cortech had 365,881 common stock options 9 outstanding. Any exercises of these common stock options could have a dilutive effect on the percentage of Cortech owned by the Company. Cortech applies Accounting Principles Board ("APB") Opinion 25 and related interpretations in accounting for its options. Accordingly, no compensation cost has been recognized for stock options issued. Had compensation cost for the issued stock options been determined based upon the fair values at the dates of awards under those plans consistent with the method of FASB Statement 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2005 2004 2005 2004 ---- ---- ---- ---- Net income (loss)(in $000's) As reported ($181) $739 ($427) $748 Proforma compensation expense ( 16) ( 16) ( 47) ( 47) ---- ---- ---- ---- Pro forma ($197) $723 ($474) $701 ==== ==== ==== ==== Basic and fully diluted net income (loss) per share As reported ($.06) $.26 ($.15) $.25 Pro forma ($.07) $.25 ($.17) $.24 7. Investment Company Act of 1940 ------------------------------ The Company believes that a large portion of its assets have been invested in assets that would not be classified as "investment securities" as such term is defined in the Investment Company Act of 1940, as amended (the "1940 Act") and that the Company would not be required to register under that Act. Nevertheless, if the Company were deemed to be an investment company under the 1940 Act, it would be required to register as an investment company with the Securities and Exchange Commission and would become subject to restrictions that would require the Company to significantly change the manner in which it conducts its operations and require it to incur significant expenses for which it has not provided. Furthermore, if the Company were deemed to be an unregistered investment company, it would be subject to substantial restrictions on its ability to conduct its present business activities unless it became registered with the Securities and Exchange Commission. These restrictions would also have a material adverse effect on the Company's results of operations. 8. Legal Proceedings ----------------- By letter dated May 24, 2005, the Texas Commission on Environmental Quality ("TCEQ") advised Texas American Petrochemicals, Inc. ("TAPI"), that it was a 10 person responsible for solid waste at a hazardous waste site in Texas. TAPI is an inactive subsidiary of the Company with no assets. The TCEQ determined that the amount owed to the State of Texas for remediation is $2,459,593.92 and that failure to pay that amount would result in the matter being referred to the TCEQ Litigation Division. The Company has been advised by its environmental counsel that it has good legal arguments to support its position that it should not be subject to liability for the remediation costs of the site, however no assurances can be made as to the outcome of this matter. 9. Recent Accounting Standards --------------------------- In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." The standard requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is deemed impracticable. The standard states that a change in method of depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. The standard is effective for accounting changes and corrections of errors made occurring in fiscal years beginning after December 15, 2005. The Company is not able to assess, at this time, the future impact of this statement on its consolidated financial position or consolidated results of operations. In December 2004, the FASB issued Statement 123 (revised 2004),"Share-Based Payment (SFAS 123R)." The standard eliminates the disclosure-only election under the prior SFAS 123 and requires the recognition of compensation expense for stock options and other forms of equity compensation based on the fair value of the instruments on the date of grant. The standard is effective for fiscal years beginning after September 15, 2005. The Company is currently assessing the impact that SFAS 123R will have on the results of operations, financial positions and cash flows. 10. Subsequent Event ---------------- On October 18, 2005 the Company sold its investment in General Devices, Inc. held by AVF, for approximately $343,000, recording a pre-tax gain of approximately $307,000. 11 Item 2. Management's Discussion and Analysis of Financial Condition and - ------- -------------------------------------------------------------------- Results of Operations --------------------- The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, of Kent Financial Services, Inc. ("Kent" or the "Company") as well as the Company's financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-QSB. When used in this discussion, the word "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The forward-looking statements contained herein speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Results of Operations - --------------------- The Company recorded a net loss of $181,000, or $.06 basic and diluted loss per share, for the three months ended September 30, 2005 compared to net income of $739,000, or $.26 basic and diluted income per share, for the comparable quarter in 2004. For the nine months ended September 30, 2005, the net loss was $427,000, or $.15 basic and diluted loss per share, compared to net income of $748,000, or $.25 basic and diluted income per share, for the comparable period in 2004. Per share earnings have been adjusted to reflect a 100% stock dividend which was effected in April 2004. Net investing losses were $125,000 and $155,000 for the three and nine months ended September 30, 2005, respectively, compared to net investing losses of $54,000 and $37,000 for the comparable periods in 2004. These net investing losses are the result of changes in the fair value of portfolio positions. Management fees decreased in 2005 compared to 2004 because of the elimination of the fees due to the consolidation of Cortech and General Devices at June 30, 2004 and April 1, 2005, respectively. Equity in the losses of Cortech of $83,000 were recorded in the nine months ended September 30, 2004 for the period prior to the acquisition of Cortech and its consolidation in the financial statements of the Company and equity in the earnings of T. R. Winston and Company LLC ("Winston") of $138,000 was recorded in the nine months ended September 30, 2004 prior to the sale of the Company's interest in Winston in August 2004. 12 For the three months ended September 30, 2005, interest income increased to $102,000 from $45,000 for the three months ended September 30, 2004, due primarily to higher yields on investments. Interest is earned on cash in banks and on cash equivalents (U.S. treasury bills with original maturities of 90 days or less). Other income increased to $76,000 for the three months ended September 30, 2005 compared to $53,000 for the three months ended September 30, 2004. Other income for the three months ended September 30, 2005 included $30,000 in consulting fees earned from Winston and $29,500 earned for programs held by The Academy. Additionally, Cortech earned $10,000 from a patent licensing agreement and the Company received $6,000 in fees for providing administrative services to a non-affiliated company. Other income for the three months ended September 30, 2004 consisted primarily of $20,000 in fees earned for providing administrative services to a non-affiliated company, $15,000 in consulting fees earned from Winston and rental income of $13,000. The Company has not received rental income since the sale of its building in August 2004. For the nine months ended September 30, 2005, interest income increased to $278,000 from $56,000 for the nine months ended September 30, 2004, due primarily to the inclusion of Cortech in the Company's consolidated financial statements since June 30, 2004 and higher yields on investments. Other income decreased to $286,000 for the nine months ended September 30, 2005 from $308,000 for the nine months ended September 30, 2004. Other income for the nine months ended September 30, 2005 included $122,000 in fees earned for providing administrative services to a non-affiliated company, $90,000 in consulting fees earned from Winston and $57,000 in fees earned for programs held by The Academy. Other income for the nine months ended September 30, 2004 included $222,000 in fees earned for providing administrative services to a non-affiliated company, rental income of $66,000 and $15,000 in consulting fees earned from Winston. The Company has not received rental income since the sale of its building in August 2004. General and administrative expenses increased to $244,000 in the third quarter of 2005, from $208,000 in the third quarter of 2004, due primarily to the inclusion of General Devices in the Company's consolidated financial statements. In the third quarter of 2005, General Devices had general and administrative expenses of approximately $22,000. For the nine months ended September 30, 2005, general and administrative expenses increased to $861,000 from $607,000 for the same period in 2004, due primarily to the inclusion of Cortech in the Company's consolidated financial statements since June 30, 2004. Cortech had general and administrative expenses of approximately $261,000 in the first six months of 2004 which are not 13 consolidated in the accompanying financial statements of the Company. Liquidity and Capital Resources - ------------------------------- The Company had cash and cash equivalents (U.S. Treasury bills with original maturities of ninety days or less) of approximately $14 million and securities owned of approximately $383,000 at September 30, 2005. Substantially all securities are owned by AVF. Securities carried at fair value of $118,000 were valued based on management's estimates. These securities are subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term. The remainder of the securities owned are valued at quoted market prices. Net cash provided by operations was $587,000 for the nine months ended September 30, 2005, compared to net cash used in operations of $1,251,000 for the comparable period of 2004. For the nine month period ended September 30, 2005, the cash provided by operations was due primarily to the net loss of $427,000 offset by decreases in securities owned of $624,000, other assets of $141,000 and unrealized losses on securities owned of $198,000. For the nine month period ended September 30, 2004, the cash used in operations was due primarily to the decrease in securities owned of $793,000 and the increase in other assets of $330,000. Net cash provided by investing activities was $124,000 for the nine months ended September 30, 2005 compared to net cash provided by investing activities of $13.3 million for the nine months ended September 30, 2004. Net cash of $50,000 was acquired through the consolidation of The Academy in the first quarter of 2005 and net cash of $74,000 was acquired through the consolidation of General Devices in the second quarter of 2005. Net cash of approximately $11 million was acquired through the consolidation of Cortech in 2004. Also in 2004, proceeds from the sale of property and the sale of the Company's interest in Winston provided $1.8 million and $520,000, respectively. Net cash used in financing activities was $933,000 and $1,525,000 for the nine month periods ended September 30, 2005 and 2004, respectively. For the nine month period ended September 30, 2005, $851,000 was used for the payment of a cash dividend that was declared in March 2005 and $82,000 was used for the repurchase of Company common stock, which was subsequently retired. For the nine month period ended September 30, 2004, $867,000 was used for the repurchase of Company common stock, which was subsequently retired, and $658,000 was used for payments on the mortgage loan collateralized by the Company's headquarters building, which was sold in August 2004. The Company believes that its liquidity is sufficient for future operations for the next twelve months. 14 Factors Which May Affect Future Results - --------------------------------------- Future earnings of the Company are dependent on interest rates earned on the Company's invested balances, market risk, and expenses incurred. 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 price movements of its securities holdings. The fair value of securities owned at September 30, 2005 was approximately $383,000. The potential change in fair value, using a hypothetical 10% decline in prices, is estimated to be a $38,300 loss as of September 30, 2005. For working capital purposes, the Company invests in U.S. treasury bills or maintains interest-bearing balances in its brokerage accounts, which are classified as cash equivalents in the consolidated financial statements. Off-Balance Sheet Arrangements - ------------------------------ The Company has no off-balance sheet arrangements. Subsequent Event - ---------------- On October 18, 2005 the Company sold its investment in General Devices, Inc. held by AVF, for approximately $343,000 recording a pre-tax gain of approximately $307,000. 15 Item 3. - Controls and Procedures - ------- ----------------------- As of the end of the period covered by this report, the Company carried out, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There was no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Compliance with Section 404 of Sarbanes-Oxley Act - ------------------------------------------------- In order to achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") by December 31, 2007, the Company expects to begin, in fiscal 2006, the system and process documentation and evaluation needed to comply with Section 404. 16 PART II - OTHER INFORMATION - ------- ----------------- ITEM 1. Legal Proceedings - ------- ----------------- Texas American Petrochemicals, Inc. ("TAPI") - -------------------------------------------- By letter dated May 24, 2005, the Texas Commission on Environmental Quality ("TCEQ") advised Texas American Petrochemicals, Inc. ("TAPI"), that it was a person responsible for solid waste at a hazardous waste site in Texas. TAPI is an inactive subsidiary of the Company with no assets. The TCEQ determined that the amount owed to the State of Texas for remediation is $2,459,593.92 and that failure to pay that amount would result in the matter being referred to the TCEQ Litigation Division. The Company has been advised by its environmental counsel that it has good legal arguments to support its position that it should not be subject to liability for the remediation costs of the site, however no assurances can be made as to the outcome of this matter. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds - ------- ----------------------------------------------------------- Purchase of Equity Securities - ----------------------------- In August 2004, the Board of Directors approved a plan to repurchase up to 200,000 shares of the Company's common stock. This plan has no expiration date. The following table sets forth certain information about the Company's repurchase of shares under this Plan during the quarter ended September 30, 2005. SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES (COMMON STOCK-AUGUST 2004 REPURCHASE PLAN) (c) Total Number of (d) Maximum Shares Number of Purchased as Shares that Part of May Yet Be (a) Total Publicly Purchased Number of (b) Announced Under the Shares Average Price Plans or Plans or Period Purchased Paid per Share Programs Programs - -------------------------------------------------------------------------------- July 1, 2005- July 31, 2005 4 $ 2.27 4 122,388 August 1, 2005- - - - 122,388 August 31, 2005 September 1, 2005- - - - 122,388 September 30, 2005 Total 4 $ 2.27 4 122,388 17 ITEM 3. Defaults Upon Senior Securities - ------- ------------------------------- None. ITEM 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- The Company held its Annual Meeting of Stockholders on November 8, 2005. Management's nominees, Messrs. Paul O. Koether, William Mahomes, Jr., Casey K. Tjang, and M. Michael Witte, were elected to the Board of Directors The following is a tabulation for all nominees: For Withheld --------- -------- Paul O. Koether 1,541,658 - William Mahomes, Jr. 1,541,658 - Casey K. Tjang 1,541,658 - M. Michael Witte 1,541,658 - ITEM 5. Other Information - ------- ----------------- None. Item 6. - 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 Incorpora- tion. (3) 3.2(c) Certificate of Amendment to Certificate of Incorporation dated September 26, 1991. (4) 31.1 Certification pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 * 31.2 Certification pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 * 32 Certification pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 * 18 - ------------------ * 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. 19 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KENT FINANCIAL SERVICES, INC. Dated: November 14, 2005 By: /s/ Sue Ann Merrill --------------------------------------------- Sue Ann Merrill Chief Financial Officer and Secretary (Principal Financial and Accounting Officer, and officer duly authorized to sign on behalf of the small business issuer) 20 EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Paul O. Koether, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Kent Financial Services, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. November 14, 2005 /s/ PAUL O. KOETHER -------------------------------- Paul O. Koether Chairman and President EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Sue Ann Merrill, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Kent Financial Services, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. November 14, 2005 /s/ SUE ANN MERRILL --------------------------------- Sue Ann Merrill Chief Financial Officer and Secretary Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. 1350, as adopted), Paul O. Koether, the Chairman and President of Kent Financial Services, Inc., (the "Company"), and Sue Ann Merrill, the Chief Financial Officer and Secretary of the Company each hereby certifies that, to the best of his or her knowledge: 1. The Quarterly Report on Form 10-QSB of the Company for the period ended September 30, 2005, (the "Quarterly Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2005 /s/ Paul O. Koether - --------------------------------------- Paul O. Koether Chairman and President /s/ Sue Ann Merrill - --------------------------------------- Sue Ann Merrill Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----