|
Item
6.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS
|
The
following discussion and analysis should be read in conjunction with the
Company’s Financial Statements and Notes thereto included elsewhere in this Form
10-KSB. Statements in this report relating to future plans,
projections, events or conditions are forward-looking
statements. Such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected and
include, but are not limited to, the risks discussed below, the risks discussed
in the section of this Form 10-KSB entitled “Description of Business” and risks
discussed elsewhere in this Form 10-KSB. The Company expressly
disclaims any obligation or undertaking to update these statements in the
future.
The
Company's business is comprised of the management of Kent International
Holdings, Inc. (“Kent International”) and Kent Educational Services, Inc. (“Kent
Educational”).
Kent
International
Kent
International is a publicly traded company (stock symbol “KNTH.PK”) currently
seeking to redeploy its assets into an operating business. The
Company owned approximately 53.25% of Kent International at December 31,
2007. All of Kent International’s assets, excluding its portfolio of
pharmaceutical patents (which have a zero carrying value on the consolidated
financial statements), are invested in cash and United States Treasury
Bills. Kent International’s current business plan is to serve as a
vehicle for the acquisition of or merger or consolidation with another
company. Kent International may use its available working capital,
capital stock, debt or a combination of these to start a business or to effect a
business combination with a company seeking to establish a public trading market
for its securities while avoiding the time delays, significant expense, loss of
voting control and other burdens including significant professional fees of an
initial public offering. A business combination may be with a
financially stable, mature company or a company that is in its early stages of
development or growth, which could include companies seeking to obtain capital
and to improve their financial stability.
Additionally,
Kent International has developed a niche social networking website,
www.chinauspals.com
,
designed to promote cultural exchange between the citizens of the United States
and those of the People’s Republic of China. Membership to the site
is free, thus, any potential revenues will be derived from advertisements placed
on the site by third parties. The site provides users with access to
other users’ personal profiles and enables the user to send private messages to
other registered users of similar interests in order to develop lasting
friendships or simply attain a pen pal. Chinauspals.com also features
user generated discussion forums and blogs as well as user submitted videos and
pictures.
Kent
International does not expect that these activities will generate any
significant revenues for an indefinite period as these efforts are in their
early stages. As a result, these programs may produce significant
losses until such time as meaningful revenues are achieved.
Kent
Educational
Kent
Educational, a wholly owned subsidiary of Kent has a 60% controlling interest in
The Academy for Teaching and Leadership, Inc., (“The Academy”). The
Academy, headed by Dr. Saul Cooperman, a former Commissioner of Education in the
State of New Jersey, offers educators high quality programs designed to
dramatically improve themselves, their students and their
schools. The Academy brings together educators from school districts
to engage in quality programs related to curriculum, assessment, and
instructional strategies that have the potential to assist them in their own
development as well as to enhance the learning of their
students. Similarly, it offers administrators the latest programs in
leadership practices that can support their school district’s goals and give
them the skills to achieve their specific objectives.
The
Academy has also produced an innovative educational DVD entitled “
Sex Over
Sixty”
. The Academy has worked to produce this DVD based on
research that enables those people over 60 to learn about their changing bodies
and experience a healthier, happier sex life. “
Sex Over Sixty”
provides
frank answers to sexual questions that mature adults face as they age,
experience health problems, or begin dating again after a loss or
divorce. The DVD was released on October 16, 2007; however, as with
any new media release, the possible commercial success of this DVD is
uncertain. Initial marketing, which has commenced, will be
constrained by a modest advertising budget. Initial sales results are
disappointing.
Kent
Educational and The Academy are consolidated in the accompanying financial
statements. The Company has determined that continued revenue growth
and profitability at The Academy are uncertain. As a result, losses may be
incurred.
Results
of Operations
The
Company had a consolidated net loss of $551,000, ($.20 basic and fully diluted
loss per share) in 2007, compared to a consolidated net loss of $546,000 ($.19
basic and fully diluted loss per share) in 2006. The change in the
net loss was mainly the result of increased interest revenue, seminar fees and
administrative fees paid by an un-affiliated investment partnership offset by
costs related to the separation agreement with Dr. Qun Yi Zheng, our former
President. Accordingly, results for 2007 and 2006 may not be
comparable nor are they necessarily indicative of future results.
Revenues
Seminar
fees based on seminars held by The Academy increased to $481,000 for the year
ended December 31, 2007, compared to $378,000 for the year ended December 31,
2006. This increase is a result of an increase in marketing efforts
and name recognition during The Academy’s third year of
operations. The Academy currently has approximately $113,125 under
contract for services to be rendered in 2008. The Company recognizes
seminar revenue when the services are provided.
Interest
income was $613,000 and $619,000 in 2007 and 2006, respectively, a decrease of
$6,000. Although we enjoyed a higher yield on short-term investments
and cash equivalents during the first six months of 2007 as compared to the
first six months of 2006, the yield on our United States Treasury Bills
purchased between June and December 2007 decreased resulting in a decrease in
interest revenue for the year ended December 31, 2007.
Net
unrealized losses on available for sale securities were $3,000, and realized
gains were $7,000 for the year ended December 31, 2007. Net investing
gains were $28,000 for the year ended December 31, 2006. As a result
of the transfer in classification from trading securities to available for sale
securities, unrealized losses during the year ended December 31, 2007 were
recorded as an adjustment to accumulated other comprehensive income in
stockholder’s equity instead of a component of operating
income. Accordingly, investing gains reported for the year ending
December 31, 2007 are not comparable to those reported for the year ending
December 31, 2006.
For the
year ended December 31, 2007, other income increased to approximately $139,000
from approximately $60,000 for the comparable period in 2006, caused primarily
by the increase in administrative fees paid by an un-affiliated investment
partnership. As these administrative fees fluctuate based on the
performance of the investment partnership, we cannot be certain they will
recur. The largest concentration of other income for the year ended
December 31, 2006 was related to the one time sale of certain of Kent
International’s pharmaceutical patent rights to Accuthera, Inc., a Colorado
corporation, for $50,000 in September 2006. These patents were
previously recorded on the Company’s books at a zero carrying
value.
Expenses
General
and administrative expenses increased to $1,805,000 for the year ended December
31, 2007 from $1,766,000 for 2006. The increase in expenses of 2.2%
is primarily attributed to Kent International’s costs associated with the
separation agreement with Dr. Qun Yi Zheng of approximately $136,000, expenses
associated with operating
www.ChinaUSPals.com
of approximately $40,000 and expenses associated with
Sex Over Sixty
of
approximately $62,000. These increases were offset by decreases in
accounting and legal fees of approximately $46,000, other general administrative
expenses of $26,000 and expenses related to travel and entertainment associated
with our ongoing business development activities of approximately
$40,000.
The
Company recorded a charge of approximately $90,000 to write off goodwill
associated with the investment in The Academy. Although seminar
revenue increased $93,000 in 2007 as compared to 2006, The Academy experienced a
net loss of approximately $7,000 due to costs associated with marketing a
documentary DVD and consulting fees. Additionally, as discussed in
risk factors related to Kent Educational, The Academy is currently reviewing its
strategic options after the resignation of its sole full time executive
officer. Consequently, management determined that as further revenue
growth and profitability were uncertain, writing off the goodwill associated
with the investment would be appropriate.
Our
consolidated subsidiary, Kent International recorded a charge of approximately
$38,000 in June 2007 to write off certain website development costs related to
our social networking website, ChinaUSPals.com. These costs were
associated with a beta version of the website that Kent International is no
longer utilizing.
Other
In 2006,
the Company acquired 69,834 additional shares of Kent International (then known
as Cortech, Inc.) in open market transactions for approximately $192,000
recording an extraordinary gain of approximately $28,000, as the amount paid for
the shares was less than the fair value of the net assets recorded.
Liquidity
and Capital Resources
At
December 31, 2007, the Company had cash and cash equivalents of
$135,000. Cash and cash equivalents consist of cash held in banks and
brokerage firms. The Company had short-term investments, consisting
of U.S. Treasury Bills with original maturities of six months, of $12.27 million
at December 31, 2007 with yields ranging from 3.18% to 5.04%. Working
capital at December 31, 2007 was approximately $12.4
million. Management believes its cash and cash equivalents are
sufficient for its business activities for at least the next 12 months and for
the costs of seeking an acquisition of an operating business.
Net cash
used in operations was $649,000 for the year ended December 31, 2007, compared
to net cash used in operations of $757,000 in 2007. Cash used in
operations is a direct result of operating expenses offset by operating revenues
and adjusted for changes in operating assets and liabilities. The
decrease in net cash used in operations was largely the result of the timing of
interest received on short term investments, the timing of payments for accounts
payable and the receipt of a larger than average administrative fee paid by an
unaffiliated investment partnership, not an indication of decreasing
expenses. If net cash used in operations for the year ended December
31, 2007 were adjusted to eliminate the larger than average administrative fee,
the net result would be $745,000 net cash used in operations.
$639,000
was provided by investing activities during the year ended December 31, 2007 by
the sales and maturities of short-term investments of $25.58 million offset by
the purchase of short-term investments of $24.96 million and $14,000 for
capitalized costs related to the development of
www.chinauspals.com
. The
Company used $886,000 for investing activities during the year ended December
31, 2006 for the purchase of short-term investments of $24.3 million and the
purchase of additional shares of Kent International of $192,000 offset by the
sales and maturities of short-term investments of $23.6 million.
The
Company used $17,000 for financing activities for the year ended December 31,
2007 to repurchase 7,770 shares of common stock compared to the $12,000 used for
financing activities for the year ended December 31, 2006 to repurchase 5,335
shares of common stock. Kent International also used approximately
$5,000 and $68,000 to repurchase their stock in the years ended December 31,
2007 and 2006, respectively.
Other
Disclosures – Related Party Transactions
The
Company receives a monthly management fee of $21,000 from Kent International for
management services. These services include, among other things,
preparation of periodic and other filings with the Securities and Exchange
Commission, evaluating merger and acquisition proposals, providing internal
accounting services and shareholder relations. This arrangement may
be terminated at will by either party. The monthly management fee
revenue and offsetting expense is eliminated during
consolidation. The Company is the beneficial owner of approximately
53.25% of Kent International’s outstanding Common Stock at December 31,
2007. Paul O. Koether, Chairman of the Company is also the Chairman
of Kent International and the beneficial owner of approximately 56.17% of the
Company’s outstanding common stock. Bryan P. Healey, Chief Financial
Officer and Director of the Company is also the Chief Financial Officer and
Director of Kent International and the son-in-law of Paul O.
Koether.
The
Company and its consolidated subsidiaries reimburse an affiliate, Bedminster
Management Corp., for the allocated direct cost of group health insurance and
office supplies. These reimbursements were approximately $83,000 and $78,000 in
the years ended December 31, 2007 and 2006, respectively. Bedminster
Management Corp. facilitates the allocation of certain central administrative
costs on a cost reimbursement basis and is owned equally by Kent, Kent
International and T.R. Winston & Company, LLC.
Other
Disclosures
Dr. Qun
Yi Zheng resigned as President of the Company and as President and Director of
Kent International Holdings, Inc., the Company’s 53.25% owned subsidiary and all
other subsidiaries effective August 31, 2007. Paul O. Koether has
assumed the title and duties of President.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements.
Contractual
Commitments
The
Company has no contractual commitments.
Critical
Accounting Estimates
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.
In our preparation of the financial statements for 2007, there was one estimate
made which was (a) subject to a high degree of uncertainty and (b) material to
our results. The estimate was our determination, detailed in Note 5
to the Financial Statements, to write-off approximately $90,000 in goodwill
attributable to our acquisition of The Academy. The determination was
based on our uncertainty as to whether The Academy can achieve sustained revenue
growth and profitability.
We made
no material changes to our critical accounting policies in connection with the
preparation of financial statements for 2006.
New
Accounting Pronouncements
FASB
issued SFAS No. 157 ("SFAS 157") “
Fair Value Measurements
” on
September 15, 2006. SFAS 157 enhances existing guidance for measuring
assets and liabilities using fair value. Previously, guidance for
applying fair value was incorporated in several accounting
pronouncements. The new statement provides a single definition of
fair value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and
liabilities. While the statement does not add any new fair value
measurements, it does change current practice. One such change is a
requirement to adjust the value of nonvested stock for the effect of the
restriction even if the restriction lapses within one year. SFAS 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
adoption of SFAS 157 is not expected to have a material impact on the financial
statements of the Company.
There
were no other recently issued accounting pronouncements with delayed effective
dates that would currently have a material impact on the consolidated financial
statements of the Company.
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 price movements of its securities
holdings.
The fair
value of securities owned at December 31, 2007 was approximately $117,000. The
potential change in fair value, using a hypothetical 10% decline in prices, is
estimated to be a $11,700 loss as of December 31, 2007. 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.
Item
7.
FINANCIAL
STATEMENTS
The financial statements filed herein
are listed below:
Report of Independent Registered Public
Accounting Firm
Financial Statements:
Consolidated Balance Sheet as of
December 31, 2007
Consolidated Statements of Operations
for the
Years ended December 31, 2007 and
2006
Consolidated Statements of Cash Flows
for the
Years ended December 31, 2007 and
2006
Consolidated Statements of
Stockholders’ Equity for the
Years ended December 31, 2007 and
2006
Notes to Consolidated Financial
Statements
Report
of Independent Registered Public Accounting Firm
To the
Stockholders’ and Board of Directors of Kent Financial Services,
Inc.
We have
audited the accompanying consolidated balance sheet of Kent Financial Services,
Inc. and subsidiaries as of December 31, 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years
ended December 31, 2007 and 2006. 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
audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provided a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Kent Financial Services,
Inc. and subsidiaries as of December 31, 2007, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
/s/
Paritz & Company, P.A.
March 3,
2008
Hackensack,
New Jersey
|
KENT
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
|
|
CONSOLIDATED
BALANCE SHEET
|
|
|
As
of December 31, 2007
|
|
|
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
135
|
|
|
Short-term
investments
|
|
|
12,270
|
|
|
Securities
owned
|
|
|
117
|
|
|
Accounts
receivable
|
|
|
98
|
|
|
Prepaid
expenses
|
|
|
18
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
12,638
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $1
|
|
|
6
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
62
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
12,706
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
269
|
|
|
|
|
|
|
|
|
Noncurrent
liabilities:
|
|
|
|
|
|
Accrued
post employment obligations
|
|
|
685
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
954
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiaries
|
|
|
5,083
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
Preferred
stock without par value;
|
|
|
|
|
|
500,000
shares authorized;
|
|
|
|
|
|
none
outstanding
|
|
|
-
|
|
|
Common
stock, $.10 par value;
|
|
|
|
|
|
8,000,000
shares authorized;
|
|
|
|
|
|
2,792,022
shares issued and outstanding
|
|
|
279
|
|
|
Additional
paid-in capital
|
|
|
12,390
|
|
|
Accumulated
deficit
|
|
|
(5,997
|
)
|
|
Accumulated
other comprehensive income
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
6,669
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
12,706
|
|
See
accompanying notes to consolidated financial statements.
|
KENT
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Seminar
fees
|
|
$
|
481
|
|
|
$
|
378
|
|
|
Interest
revenue
|
|
|
613
|
|
|
|
619
|
|
|
Investing
gains
|
|
|
7
|
|
|
|
28
|
|
|
Sale
of patent rights
|
|
|
|
|
|
|
50
|
|
|
Other
income
|
|
|
139
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
1,240
|
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,805
|
|
|
|
1,766
|
|
|
Write
off capitalized software costs
|
|
|
38
|
|
|
|
|
|
|
Write
off goodwill
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
1,933
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes, minority
|
|
|
|
|
|
|
|
|
|
interest
and extraordinary gain
|
|
|
(693
|
)
|
|
|
(631
|
)
|
|
Provision
for income tax benefit (expense)
|
|
|
(2
|
)
|
|
|
(14
|
)
|
|
Loss
before minority interest
|
|
|
|
|
|
|
|
|
|
and
extraordinary gain
|
|
|
(695
|
)
|
|
|
(645
|
)
|
|
Minority
interest in subsidiaries losses
|
|
|
144
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before extraordinary gain
|
|
|
(551
|
)
|
|
|
(574
|
)
|
|
Extraordinary
gain due to purchase of
|
|
|
|
|
|
|
|
|
|
subsidiary
stock
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(551
|
)
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on available for sale securities
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(554
|
)
|
|
$
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
Loss
per share before extraordinary gain
|
|
$
|
(0.20
|
)
|
|
$
|
(0.20
|
)
|
|
Extraordinary
gain
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
|
|
|
|
|
|
|
outstanding
(in 000's)
|
|
|
2,794
|
|
|
|
2,802
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(551
|
)
|
|
$
|
(546
|
)
|
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
|
|
cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5
|
|
|
|
2
|
|
|
Write
off goodwill
|
|
|
90
|
|
|
|
|
|
|
Write
off capitalized software costs
|
|
|
38
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
36
|
|
|
Unrealized
gains on securities owned
|
|
|
|
|
|
|
5
|
|
|
Extraordinary
gain on purchase of stock of subsidiary
|
|
|
|
|
|
|
(28
|
)
|
|
Minority
interest in subsidiaries losses
|
|
|
(144
|
)
|
|
|
(71
|
)
|
|
Interest
receivable on short-term investments
|
|
|
5
|
|
|
|
(28
|
)
|
|
Change
in accounts receivable and other current assets
|
|
|
(8
|
)
|
|
|
(116
|
)
|
|
Change
in other assets
|
|
|
(6
|
)
|
|
|
(16
|
)
|
|
Change
in accounts payable and accrued expenses
|
|
|
(55
|
)
|
|
|
(18
|
)
|
|
Change
in deferred revenue
|
|
|
(23
|
)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(649
|
)
|
|
|
(757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of stock of subsidiary
|
|
|
|
|
|
|
(192
|
)
|
|
Sale
of marketable securities
|
|
|
30
|
|
|
|
|
|
|
Purchase
of short-term investments
|
|
|
(24,959
|
)
|
|
|
(24,267
|
)
|
|
Maturity
and sales of short-term investments
|
|
|
25,582
|
|
|
|
23,607
|
|
|
Acquisition
of property and equipment
|
|
|
(14
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
639
|
|
|
|
(886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock by subsidiary
|
|
|
(5
|
)
|
|
|
(68
|
)
|
|
Repurchase
of common stock
|
|
|
(17
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(22
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(32
|
)
|
|
|
(1,723
|
)
|
|
Cash
and cash equivalents at beginning of period
|
|
|
167
|
|
|
|
1,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
135
|
|
|
$
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
8
|
|
|
$
|
25
|
|
See
accompanying notes to consolidated financial statements.
|
KENT
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005
|
|
|
2,805
|
|
|
$
|
280
|
|
|
$
|
12,382
|
|
|
$
|
(4,900
|
)
|
|
|
|
|
|
$
|
7,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
|
(5
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(546
|
)
|
|
|
|
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
|
2,800
|
|
|
|
280
|
|
|
|
12,406
|
|
|
|
(5,446
|
)
|
|
|
|
|
|
|
7,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(551
|
)
|
|
|
|
|
|
|
(551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2007
|
|
|
2,792
|
|
|
$
|
279
|
|
|
$
|
12,390
|
|
|
$
|
(5,997
|
)
|
|
$
|
(3
|
)
|
|
$
|
6,669
|
|
See
accompanying notes to consolidated financial statements.
KENT
FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2007 and 2006
NOTE
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 subsidiary, Kent
Educational Services, Inc. (“Kent Educational”) and Kent’s majority owned
subsidiary, Kent International Holdings, Inc., (“Kent International”) and Kent
Educational’s majority owned subsidiary, The Academy of Teaching and Leadership,
Inc. (“The Academy”). Intercompany balances and transactions between
the Company and its subsidiaries have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
that are 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 and the differences could be material.
Cash
Equivalents
The
Company considers as cash equivalents all short-term investments that are highly
liquid and readily exchangeable for cash at amounts equal to their stated
value. Cash equivalents consist of U. S. Treasury Bills with an
original maturity of 90 days. The Company also maintains interest
bearing balances in its brokerage accounts. All cash and cash
equivalents are on deposit either with a major money center bank or with a
securities broker dealer.
Short-Term
Investments
Short-term
investments consist of U.S. Treasury Bills purchased with an original maturity
of six months and are valued at cost plus accrued interest, which approximates
the fair market value. The Company currently intends to hold these
investments until maturity.
Marketable
Securities
Marketable
securities, consisting of equity securities, are stated at fair value and are
considered available for sale securities.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation, which is calculated
using the straight-line method, is provided by periodic charges to expense over
the estimated useful lives of the assets ranging from 3 to 5 years.
Other
Assets
Other
assets consist primarily of capitalized film costs expended by The Academy for
the production of a documentary on DVD for direct sale to consumers titled
Sex Over
Sixty
. These costs are being amortized utilizing the
individual-film-forecast method pursuant to the AICPA’s Statement of Position
00-2,
Accounting by Producers
and Distributors of Motion Picture Films
. This method
amortizes film costs using the ratio of current period actual revenue to
estimated remaining unrecognized ultimate revenue.
Goodwill
In
accordance with SFAS No. 142,
Goodwill and Other Intangible
Assets
, we do not amortize goodwill or intangibles with indefinite lives
resulting from acquisitions. We review these assets annually for
potential impairment issues. Separable intangible assets that are not
deemed to have an indefinite life are amortized over their estimated useful
lives.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities related to the expected
future tax consequences of events that have been recognized in the Company’s
financial statements and tax returns. However, if it is more likely
than not that some portion or all of the net deferred tax assets will not be
realized, a valuation allowance is established and the tax benefit is not
recognized in the statements of operations.
Revenue
Recognition
Revenue
consists primarily of interest revenue on invested balances and educational
services provided by the Academy. Interest revenue is recognized on
an accrual basis. The Academy recognizes revenue when services are
provided to customers. When the Academy collects payments from
customers before services are rendered, the advance payments are recorded as
deferred revenue and realized after services are rendered.
Basic
and Diluted Net Loss Per Share
Basic
loss per common share is computed by dividing the net loss by the
weighted-average number of common shares outstanding. Diluted loss
per share is computed by dividing the net loss by the sum of the
weighted-average number of common shares outstanding plus the dilutive effect of
shares issuable through the exercise of stock options. We have
excluded 300,000 Common Stock options from the calculation of diluted loss per
share for the year ended December 31, 2006, which, if included, would have an
antidilutive effect.
For more
information on stock options, see Note 10 of Notes to Consolidated Financial
Statements.
Accounting
for Stock Based Compensation
Until
December 31, 2005, the Company applied Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its common stock
options. Accordingly, no compensation cost had been recognized for
the common stock options issued. In December 2004, the FASB issued
SFAS No. 123(R), "
Share-Based
Payment
," (“SFAS 123(R)”), a revision of SFAS 123, "
Accounting for Stock-Based
Compensation
.” SFAS 123(R) requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. The compensation cost is measured based on the fair value
of the equity or liability instruments issued. SFAS 123(R) was effective as of
the beginning of the first interim or annual period beginning after December 15,
2005. The Company adopted SFAS 123(R) on January 1,
2006.
New
Accounting Pronouncements
FASB
issued SFAS No. 157 ("SFAS 157") “
Fair Value Measurements
” on
September 15, 2006. SFAS 157 enhances existing guidance for measuring
assets and liabilities using fair value. Previously, guidance for applying fair
value was incorporated in several accounting pronouncements. The
statement provides a single definition of fair value, together with a framework
for measuring it, and requires additional disclosure about the use of fair value
to measure assets and liabilities. While the statement does not add
any new fair value measurements, it does change current practice. One
such change is a requirement to adjust the value of nonvested stock for the
effect of the restriction even if the restriction lapses within one
year. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The adoption of SFAS 157 is not expected to have a
material impact on the financial statements of the Company.
NOTE 2
–
BUSINESS AND SEGMENT
INFORMATION
The
Company's business is comprised of the management of Kent International and Kent
Educational. The Company has determined that its operations can be
segregated into two principal operating segments which are business development
activities and education services. We define operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the Chairman in deciding how to
allocate resources and in assessing performance.
Kent
International is a publicly traded company (stock symbol “KNTH.PK”) currently
seeking to redeploy its assets into an operating business. The
Company owned approximately 53.25% of Kent International at December 31,
2007. All of Kent International’s assets, excluding its portfolio of
pharmaceutical patents (which have a zero carrying value on the consolidated
financial statements), are invested in cash and United States Treasury
Bills. Kent International’s activity is reported in the business
development activities segment.
Additionally,
Kent International has developed a niche social networking website,
www.chinauspals.com
,
designed to promote cultural exchange between the citizens of the United States
and those of the People’s Republic of China. Membership to the site
is free, thus, any potential revenues will be derived from advertisements placed
on the site by third parties. The site provides users with access to
other users’ personal profiles and enables the user to send private messages to
other registered users of similar interests in order to develop lasting
friendships or simply attain a pen pal. Chinauspals.com also features
user generated discussion forums and blogs as well as user submitted videos and
pictures.
The
Company does not expect that these activities will generate any significant
revenues for an indefinite period as these efforts are in their early
stages. As a result, these programs may produce significant losses
until such time as meaningful revenues are achieved.
The
education services segment represents the activity of Kent Educational; which is
a wholly owned subsidiary of the Company that has a 60% controlling interest in
the Academy for Teaching and Leadership Inc. (“The Academy”). The
Academy, headed by Dr. Saul Cooperman, a former Commissioner of Education in the
State of New Jersey, provides educators various programs designed to improve
themselves, their students, and their schools.
The
allocation of resources for educational purposes is currently under great
scrutiny in New Jersey. Funding for public schools in New Jersey
comes from either State aid or local property taxes. Although
property taxes have increased rapidly in New Jersey over the last eight years,
this has not resulted in additional educational expenditures, because the State
of New Jersey has at the same time reduced its aid allocated to public
schools. It is impossible to foresee the future developments of
property taxes and educational State aids. As public schools in New
Jersey are currently our primary customer, our revenue growth is restricted by
any limitation on these resources.
The
following table summarizes the assets and operations of the Company’s segments
as of and for the years ended December 31, 2007 and 2006:
|
|
|
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
Educational
|
|
|
All
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Activities
|
|
|
Services
|
|
|
Operations
|
|
|
Eliminations
|
|
|
Totals
|
|
|
For the year ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
|
|
|
$
|
481
|
|
|
$
|
123
|
|
|
|
|
|
$
|
604
|
|
|
Management
fees
|
|
|
|
|
|
|
|
|
|
296
|
|
|
$
|
(296
|
)
|
|
|
|
|
|
Interest
revenue
|
|
$
|
518
|
|
|
|
11
|
|
|
|
84
|
|
|
|
|
|
|
|
613
|
|
|
Investing
gains
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
Other
Income
|
|
|
|
|
|
|
1
|
|
|
|
15
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
518
|
|
|
|
493
|
|
|
|
525
|
|
|
|
(296
|
)
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
(795
|
)
|
|
|
(500
|
)
|
|
|
(806
|
)
|
|
|
296
|
|
|
|
(1,805
|
)
|
|
Write
off capitalized software costs
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
Write
off goodwill
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
Income
tax expense
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
Minority
interest
|
|
|
141
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss by segment
|
|
$
|
(175
|
)
|
|
$
|
(95
|
)
|
|
$
|
(281
|
)
|
|
|
-
|
|
|
$
|
(551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets by segment
|
|
$
|
10,598
|
|
|
$
|
372
|
|
|
$
|
1,736
|
|
|
|
-
|
|
|
$
|
12,706
|
|
|
|
|
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
Educational
|
|
|
All
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Activities
|
|
|
Services
|
|
|
Operations
|
|
|
Eliminations
|
|
|
Totals
|
|
|
For the year ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
|
|
|
$
|
378
|
|
|
$
|
37
|
|
|
|
|
|
$
|
415
|
|
|
Management
fees
|
|
|
|
|
|
|
|
|
|
252
|
|
|
$
|
(252
|
)
|
|
|
|
|
|
Interest
revenue
|
|
$
|
512
|
|
|
|
10
|
|
|
|
97
|
|
|
|
|
|
|
|
619
|
|
|
Investing
losses
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
28
|
|
|
Sale
of patent rights
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
Other
income
|
|
|
2
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
564
|
|
|
|
388
|
|
|
|
435
|
|
|
|
(252
|
)
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
(775
|
)
|
|
|
(306
|
)
|
|
|
(937
|
)
|
|
|
252
|
|
|
|
(1,766
|
)
|
|
Income
tax expense
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
Minority
interest
|
|
|
101
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
Extraordinary
gain
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) by segment
|
|
$
|
(111
|
)
|
|
$
|
44
|
|
|
$
|
(479
|
)
|
|
|
-
|
|
|
$
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets by segment
|
|
$
|
10,948
|
|
|
$
|
515
|
|
|
$
|
2,042
|
|
|
|
-
|
|
|
$
|
13,505
|
|
Note
3 – MARKETABLE SECURITIES
Marketable
securities owned as of December 31, 2007, comprised mainly of portfolio
positions (equity securities) held for capital appreciation consisted of the
following (all numbers in thousands):
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Owned
|
|
|
Estimated
Fair Value
|
|
|
Gains
in Accumulated Other Comprehensive Income
|
|
|
Losses
in Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GolfRounds.com,
Inc.
|
|
|
4.35
|
%
|
|
$
|
92
|
|
|
|
|
|
$
|
(10
|
)
|
|
All
other equity securities
|
|
|
N/A
|
|
|
|
24
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116
|
|
|
$
|
7
|
|
|
$
|
(10
|
)
|
During
the first quarter of 2007, the Company reclassified its marketable securities
from trading securities to available for sale securities. The
Company’s securities are valued at fair value. Fair value is
ordinarily the listed market price of the stock. 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, including the analysis of the valuation of
comparable companies.
NOTE 4
– PROPERTY, PLANT &
EQUIPMENT
Net
property, plant and equipment as December 31 consisted of (numbers in
thousands):
|
|
|
2007
|
|
|
|
|
|
|
|
Office
Furniture and Equipment
|
|
$
|
7
|
|
|
|
|
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
$
|
6
|
|
NOTE 5
– KENT EDUCATIONAL SERVICES,
INC.
Goodwill
Kent
Educational recorded a charge in the fourth quarter of 2007 of approximately
$90,000 to write off the goodwill associated with the acquisition of the 60%
interest of the Academy. Although seminar revenue increased $93,000
in 2007 as compared to 2006, The Academy experienced a net loss of approximately
$7,000 due to costs associated with marketing a documentary DVD and consulting
fees. Additionally The Academy is currently reviewing its strategic
options after the resignation of its sole full time executive
officer. Consequently, management determined that as further revenue
growth and profitability were uncertain, writing off the goodwill associated
with the purchase would be appropriate.
NOTE 6
–
KENT INTERNATIONAL HOLDINGS,
INC.
In 2006,
the Company acquired 69,834 additional shares of Kent International (then known
as Cortech, Inc.) in open market transactions for $191,979 recording, in
accordance with SFAS No. 141, “Business Combinations”, an extraordinary gain of
approximately $28,000, as the amount paid for the shares was less than the fair
value of the net assets recorded. At December 31, 2007, the Company
owned 1,900,000 shares or 53.25% of Kent International’s issued
shares.
On May
25, 2006, Cortech was reincorporated in Nevada by a merger with its wholly owned
subsidiary, Kent International Holdings, Inc. The reincorporation
effected a change in Cortech’s legal domicile from Delaware to Nevada and a
change in the name from Cortech, Inc. to Kent International Holdings,
Inc.
Kent
International Stock Option Plans
Kent
International has issued certain common stock options to its employees,
directors and consultants. At December 31, 2007, Kent International
had 120,000 common stock options outstanding.
Until
December 31, 2005, Kent International applied Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its common stock
options. Accordingly, no compensation cost had been recognized for
the common stock options issued. In December 2004, the FASB issued
SFAS No. 123(R), "
Share-Based
Payment
," (“SFAS 123(R)”), a revision of SFAS 123, "
Accounting for Stock-Based
Compensation
.” SFAS 123(R) requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. The compensation cost is measured based on the fair value
of the equity or liability instruments issued. SFAS 123(R) was effective as of
the beginning of the first interim or annual period beginning after December 15,
2005. Kent International adopted SFAS 123(R) on January 1,
2006. The adoption did not have an impact on the Kent International’s
financial position or results of operations as all stock options granted to date
were fully vested prior to January 1, 2006.
The
Company’s 1986 Stock Option Plan (“1986 Plan”) authorizes the grant of stock
options to officers and employees of the Company to purchase an aggregate of
300,000 shares of common stock. No options were granted in 2007 or
2006.
The
Company’s 1993 Equity Incentive Plan (“1993 Plan”), approved by the stockholders
on May 10, 1994, authorizes the issuance of 340,000 shares through the grant of
options to purchase common stock, stock bonuses, and rights to purchase
restricted stock. The 1993 Plan was terminated on December 9, 2003
and no further options may be awarded under this plan.
The stock
options granted under either plan may be incentive stock options (“ISO”) or
nonstatutory stock options (“NSO”). The Board of Directors may set
the rate at which the options expire, subject to limitations discussed
below. However, no options shall be exercisable after the tenth
anniversary of the date of grant or, in the case of ISOs, three months following
termination of employment, except in cases of death or disability, for which the
time or exercisability is extended. In the event of dissolution,
liquidation or other corporate reorganization, all stock options outstanding
under the 1986 Plan and the 1993 Plan would become exercisable in
full.
ISOs may
not be granted at an exercise price of less than the fair market value of the
common stock at the date of grant. If an ISO is granted to an
employee who owns more than 10% of the Company’s total voting stock, such
exercise price shall be at least 110% of fair market value of the common stock,
and the ISO shall not be exercisable until after five years from the date of
grant. The exercise price of each NSO may not be less than 85% of the
fair market value of the common stock at the date of grant.
Each of
these plans also provides for stock appreciation rights, which may be granted
with respect to any stock option. No stock appreciation rights have
been granted through December 31, 2007.
A summary
of the status of Kent International’s 1986 Plan and 1993 Plan as of December 31,
2007 and 2006 and changes during the years ended on those dates is presented
below:
|
|
|
2007
|
|
2006
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Range
of
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Range
of
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at the beginning of the year
|
|
|
290,850
|
|
$
|
3.52
|
|
$
|
3.50
- $7.34
|
|
|
350,880
|
|
$
|
4.27
|
|
$
|
3.50
- $12.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(170,850
|
)
|
$
|
3.54
|
|
$
|
3.50
- $7.34
|
|
|
(60,030
|
)
|
$
|
7.90
|
|
$
|
5.00
- $12.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at the end of the year
|
|
|
120,000
|
|
$
|
3.50
|
|
$
|
3.50
|
|
|
290,850
|
|
$
|
3.52
|
|
$
|
3.50
- $7.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at the end of the year
|
|
|
120,000
|
|
$
|
3.50
|
|
$
|
3.50
|
|
|
290,850
|
|
$
|
3.52
|
|
$
|
3.50
- $7.34
|
|
The
status of other Kent International options awarded to certain directors and
consultants is summarized below:
|
|
|
2007
|
|
2006
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Range
of
Exercise
Price
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Range
of
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at the beginning of the year
|
|
|
300
|
|
$
|
|
|
$
|
|
|
|
6,250
|
|
$
|
5.92
|
|
$
|
5.00
- $7.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(300
|
)
|
$
|
7.34
|
|
$
|
7.34
|
|
|
(5,950
|
)
|
$
|
5.85
|
|
$
|
5.00
- $7.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at the end of the year
|
|
|
-
|
|
|
|
|
|
|
|
|
300
|
|
$
|
|
|
$
|
7.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at the end of the year
|
|
|
-
|
|
|
|
|
|
|
|
|
300
|
|
$
|
|
|
$
|
|
|
For all
Kent International options outstanding and exercisable at December 31, 2007, the
exercise price ranges are:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
Range
of Exercise Prices
|
|
Number
Outstanding at December 31, 2007
|
|
Weighted
Average Remaining Life (in Years)
|
|
Weighted
Average Exercise Price
|
|
Number
Outstanding at December 31, 2007
|
|
Weighted
Average Remaining Life (in Years)
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.50
|
|
|
120,000
|
|
|
2.54
|
|
$
|
3.50
|
|
|
120,000
|
|
|
2.54
|
|
$
|
3.50
|
|
NOTE
7 - INCOME TAXES
The
components of income tax expense are as follows ($000 Omitted):
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Federal
– Current
|
|
|
|
|
$
|
4
|
|
|
State
– Current
|
|
$
|
2
|
|
|
|
10
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2
|
|
|
$
|
14
|
|
The
income tax expense for the years ended December 31, 2007 and 2006 is different
from the amount computed by multiplying earnings before income taxes by the
statutory Federal income tax rate of 34%. The reasons for this
difference and the related tax effect are as follows (in 000's):
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Expected
tax expense (benefit) computed on total income before
taxes
|
|
$
|
(236
|
)
|
|
$
|
(190
|
)
|
|
Increase
(decrease) in tax from:
|
|
|
|
|
|
|
|
|
|
State
income taxes
|
|
|
2
|
|
|
|
10
|
|
|
Post
employment benefit obligations
|
|
|
14
|
|
|
|
13
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
12
|
|
|
Taxable
income of subsidiary
|
|
|
|
|
|
|
4
|
|
|
Change
in valuation allowance
|
|
|
222
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income tax
|
|
$
|
2
|
|
|
$
|
14
|
|
Temporary
differences and carryforwards that result in the Company’s net deferred tax
asset at December 31, 2007 are as follows (in 000’s):
|
|
|
|
|
|
Kent
|
|
|
|
|
|
|
|
Company
|
|
|
International
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
2,358
|
|
|
$
|
77,567
|
|
|
$
|
79,925
|
|
|
Mark-to-market
valuation adjustments
|
|
|
190
|
|
|
|
|
|
|
|
190
|
|
|
Post
employment benefit obligations
|
|
|
685
|
|
|
|
|
|
|
|
685
|
|
|
Stock
based compensation deductions
|
|
|
36
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,269
|
|
|
|
77,567
|
|
|
|
80,836
|
|
|
Statutory
federal income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
income tax benefit
|
|
|
1,111
|
|
|
|
26,373
|
|
|
|
27,484
|
|
|
Research
and development and other credits
|
|
|
|
|
|
|
1,848
|
|
|
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111
|
|
|
|
28,221
|
|
|
|
29,332
|
|
|
Valuation
Allowance
|
|
|
(1,111
|
)
|
|
|
(28,221
|
)
|
|
|
(29,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Based upon Kent International’s and the
Company’s operating history, which includes continuous operating losses
(excluding extraordinary gains) in each of the last five years and the Company’s
assessment of Kent International’s and the Company’s ability to achieve future
taxable income, a 100% valuation allowance has been established for Kent
International’s and the Company’s deferred tax assets. Approximately
$76 million of the $80 million operating loss carryforward expires between 2008
and 2014.
The Tax
Reform Act of 1986 contained provisions that may limit the NOL and credit
carryforwards available to be used in any given year upon the occurrence of
certain events, including significant changes in ownership of a company of
greater than 50% within a three year period which results in an annual
limitation on the Company’s ability to utilize its NOLs and tax credit
carryforwards from tax periods prior to the ownership change.
NOTE
8 - OPERATING LEASES
Kent
International leases an automobile under an operating lease agreement that
expires in 2008. The automobile lease expense for the Company and its
subsidiaries totaled $28,869 and $38,001 during 2007 and 2006,
respectively. The following is a schedule of future minimum rental
payments required under the operating lease agreements:
The
Company and Kent International had leased office space at 376 Main Street,
Bedminster, New Jersey from an unaffiliated company for $3,600 per month
($43,200 annually). In order to reduce costs, the Company terminated
this lease effective September 30, 2007. The Company’s administrative
offices are now located at 211 Pennbrook Road, Far Hills, New
Jersey. Total rent expense totaled $35,400 and $43,200 in 2007 and
2006, respectively.
NOTE
9 – COMPENSATION CONTRACTS AND POST-EMPLOYMENT BENEFITS
Paul O.
Koether’s employment agreement ("Agreement") pursuant to which Mr. Koether
serves as the Company's Chairman is for a three year term at an annual salary of
$240,000 ("Base Salary"); this term is automatically extended one day for each
day elapsed after December 1, 2002. Mr. Koether may terminate his
employment after a change of control for good reason in accordance with certain
provisions of the Agreement, at which time he would be paid the greater of the
(i) Base Salary payable under the Agreement through the expiration date of the
Agreement or (ii) an amount equal to three times the average annual Base Salary
paid to him during the preceding five years. In the event of Mr.
Koether's death during the term of the Agreement, his beneficiary shall be paid
a death benefit equal to three years Base Salary, payable in 36 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 75 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 75.
Bryan P.
Healey’s employment agreement (the “Healey Agreement”) pursuant to which Mr.
Healey serves as the Company’s Chief Financial Officer is for a two year term at
an annual salary of $140,000 (“Healey Base Salary”), this term is automatically
extended one day for each day elapsed after May 15, 2007. The Healey
Base Salary will increase to $156,000 annually effective January 1,
2008. In the event of Mr. Healey’s death during the term of the
Healey Agreement, his beneficiary shall be paid a death benefit equal to his
then current annual salary in equal monthly installments for the remainder of
the term of the Healey Agreement. Should Mr. Healey become disabled
during the term of the Healey Agreement, Mr. Healey shall be paid such benefits
to which he is entitled under the terms of such long-term insurance as the
Company has provided him or 80% of his salary for the remainder of the two year
term of the Healey Agreement, whichever is greater, in accordance with his
regular payment schedule.
The
Company has accrued approximately $685,000 as of December 31, 2007 for post
employment benefits related to Mr. Koether’s contract. The Company
charged approximately $41,000 and $38,000 to operations for post employment
benefit accruals in 2007 and 2006, respectively.
401(K)
Plan
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 ($15,500 in 2007
and $15,000 in 2006). 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 were no
employer matching contributions in 2007 or 2006.
NOTE
10 – STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 500,000 shares of preferred stock without par
value, which may be issued with various terms in one or more series, as the
Board of Directors may determine. No preferred stock has been issued as of
December 31, 2007.
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 December 31, 2007, 102,352
shares under this plan had been repurchased, canceled and returned to the status
of authorized but unissued shares.
Stock
Options
On
November 25, 2005, shareholders of the Company approved the 2005 Stock Option
Plan making a total of 400,000 common stock options available for
issuance. Subsequently, 300,000 options were awarded to Dr. Qun Yi
Zheng, the former President of Kent, on the same date. 33,000 of
these options were immediately exercisable with an additional 33,000 becoming
exercisable on the first eight anniversaries of the grant date. On
August 31, 2007, the effective date of Dr. Zheng’s resignation, the 66,000
common stock options that had become exercisable were forfeited as were the
234,000 options that were still unexercisable. At December 31, 2007,
the Company had no common stock options outstanding.
A summary
of the status of the 2005 Stock Option Plan and changes during the years ended
December 31, 2007 and 2006 is presented below:
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2007
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2006
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Weighted-
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Weighted-
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Average
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Range
of
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Average
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Range
of
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Exercise
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Exercise
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Exercise
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Exercise
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Shares
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Price
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Price
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Shares
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Price
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Price
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Options
outstanding at the beginning of the year
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300,000
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$
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3.00
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$
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3.00
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300,000
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$
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3.00
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$
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3.00
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Forfeited
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(300,000
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)
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3.00
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3.00
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-
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-
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-
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Options
outstanding at the end of the year
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-
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-
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-
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300,000
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$
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3.00
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$
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3.00
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Options
exercisable at the end of the year
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-
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-
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-
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66,000
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$
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3.00
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$
|
3.00
|
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Stock
Based Compensation
The
Company did not record stock-based compensation expense for the year ended
December 31, 2007 as no options were earned during this period; however,
approximately $36,000 in stock-based compensation expense was recorded for the
year ending December 31, 2006. The Company recorded stock based
compensation expense during 2006 for the options granted to the former President
in December 2005. The options granted had an exercise price greater
than the market price of the Company’s stock on the grant date. For
purposes of calculating the compensation cost consistent with SFAS No. 123(R),
"
Share-Based Payment
,",
the fair value of the option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions used: no
dividend yield; expected volatility of 29 percent; risk free interest rate of
4.37 percent; and weighted average expected life of 7 years.
NOTE 11 -
RELATED PARTY
TRANSACTIONS
The
Company receives a monthly management fee of $21,000 from Kent International for
management services. These services include, among other things,
preparation of periodic and other filings with the Securities and Exchange
Commission, evaluating merger and acquisition proposals, providing internal
accounting services and shareholder relations. This arrangement may
be terminated at will by either party. The monthly management fee
revenue and offsetting expense is eliminated during
consolidation. The Company is the beneficial owner of approximately
53.25% of Kent International’s outstanding Common Stock at December 31,
2007. Paul O. Koether, Chairman of the Company is also the Chairman
of Kent International and the beneficial owner of approximately 56.17% of the
Company’s outstanding common stock. Bryan P. Healey, Chief Financial
Officer and Director of the Company is also the Chief Financial Officer and
Director of Kent International and the son-in-law of Paul O.
Koether.
The
Company and its consolidated subsidiaries reimburse an affiliate, Bedminster
Management Corp., for the allocated direct cost of group health insurance and
office supplies. These reimbursements were approximately $83,000 and $78,000 in
the years ended December 31, 2007 and 2006, respectively. Bedminster
Management Corp. facilitates the allocation of certain central administrative
costs on a cost reimbursement basis and is owned equally by Kent, Kent
International and T.R. Winston & Company, LLC.
NOTE
12 – SEPARATION AGREEMENT
Effective
August 31, 2007, the Company, Kent International, and their subsidiaries and
affiliates entered into a separation and general release agreement (the
"Agreement") with Dr. Qun Yi Zheng. Until that date, Dr. Zheng was
the Company’s President and Kent International’s President and a member of Kent
International’s Board of Directors.
The terms
of the Agreement stipulate that Kent International will:
|
1.
|
release
Dr. Zheng from his obligations under his employment agreement dated
November 1, 2005;
|
|
2.
|
allow
Dr. Zheng to continue to have the use of a Mercedes Benz automobile and
automobile insurance until February 23,
2008;
|
|
3.
|
pay
Dr. Zheng a lump sum severance of
$130,000;
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|
4.
|
assign
to Dr. Zheng all present contracts with Schering-Plough totaling
approximately $6,000 together with any related
liabilities.
|
In
return, Dr. Zheng agreed that he would resign effective August 31, 2007 from
employment and from all officer and directorship positions in the Company, Kent
International and their subsidiaries and affiliates.
NOTE
13 - TRANSFER OF PATENT RIGHTS
On
September 15, 2006, Kent International entered into an asset purchase option
agreement to transfer certain patent rights to Accuthera, Inc., a Colorado
corporation, for $50,000 paid on September 15, 2006, and an additional $300,000
payable within the following thirty-six (36) months. These patents
were previously recorded on the Kent International’s books at a zero carrying
value. The agreement stipulates that Accuthera, Inc. can terminate
the agreement at any time within the thirty-six (36) month period at which time
the patent rights would revert back to Kent International without any additional
payment. Kent International has not recorded revenue or a
corresponding receivable for the additional payment as its receipt is believed
to be uncertain.
NOTE 14 -
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 $2,459,59
4
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.