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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-25336
KIRLIN HOLDING CORP.
(Name of small business issuer in its charter)
Delaware 11-3229358
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6901 Jericho Turnpike, Syosset, New York 11791
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (800) 899-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.0001 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and will not be contained, to the best of
issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]
The information required in Part III by Items 9, 10, 11 and 12 is
incorporated by reference to the issuer's proxy statement in connection with the
Annual Meeting of Shareholders to be held in June 1996 which will be filed by
the issuer within 120 days after the close of its fiscal year.
State issuer's revenues for its most recent fiscal year: $16,505,554.
As of March 14, 1997, the aggregate market value of the issuer's Common
Stock (based on its reported last sale price on the Nasdaq SmallCap Market) held
by non-affiliates of the issuer was $5,923,300. At March 14, 1997, 1,302,330
shares of issuer's Common Stock were outstanding.
1
PART I
ITEM 1. BUSINESS.
General
Kirlin Holding Corp. (the "Company") is a holding company engaged in
securities brokerage, securities trading and investment banking through Kirlin
Securities, Inc. ("Kirlin"), its operating subsidiary. Kirlin is registered as a
broker-dealer and investment advisor with the Securities and Exchange Commission
("Commission") and is a member firm of the National Association of Securities
Dealers, Inc. ("NASD") and the Securities Investor Protection Corporation
("SIPC"). Kirlin is a full service retail-oriented brokerage firm, specializing
in the trading and sale of fixed income securities, including collateralized
mortgage obligations, corporate and municipal bonds, and government and
government agency securities and, to a lesser extent, mutual funds and equity
securities, which are offered and sold through Kirlin's sales force to its
customers. At December 31, 1996, the Company maintained over 14,000 retail
customer accounts, which held over $645 million in assets. The Company's
revenues are generated primarily from principal trading activities and brokerage
transactions. Kirlin is currently licensed to conduct activities as a
broker-dealer in the District of Columbia and in 34 states, and operates
primarily from its headquarters in Syosset, New York, as well as three branch
offices located in California and New Jersey.
The Company was incorporated under the laws of the State of Delaware on
July 28, 1994 to serve as a holding company for Kirlin. Kirlin was incorporated
under the laws of the State of Delaware on January 6, 1988 and became a
wholly-owned subsidiary of the Company on October 20, 1994. All references to
the Company, unless the context requires otherwise, refers to the Company and
Kirlin.
On January 18, 1995, the Company completed an initial public offering
of its common stock, $.0001 par value, selling 402,330 shares at $10 per share
and raising net proceeds of $3,241,589.
Principal Transactions
Most of the Company's revenues in the last several years (59.6% in
1994, 57.4% in 1995 and 71.1% in 1996) have been derived from principal trading
activities, consisting principally of fixed income securities, including
corporate debt, United States government and government agency securities,
collateralized mortgage obligations and municipal bonds. As a principal, the
Company buys and sells securities, both for proprietary trading and, more
significantly, to facilitate sales to its retail customers and other dealers.
These securities are purchased in secondary markets or from the underwriters of
new issues. In particular, the Company's principal trading focus and retail
sales have concentrated on collateralized mortgage obligations. The Company has
attempted to and will continue to diversify its business in the fixed income
markets. Principal transactions with customers are effected at a net price equal
to the current inter-dealer price plus or minus a mark-up or mark-down within
the guidelines of applicable securities regulations.
The Company also engages in proprietary trading, including
market-making, in an attempt to realize trading gains. The Company's trading
activities as a principal require the commitment of capital and create an
opportunity for profits and risk of loss due to trading strategies and market
fluctuations. Trading profits or losses depend upon, among other things, the
skills of the Company's employees engaged in trading, the capital allocated to
securities positions, the financial condition and business prospects of
particular issuers and general trends in the securities markets. At March 14,
1997, the Company made a market in the equity securities of 20 companies.
Commission Business
A significant portion of the Company's revenues are derived from
commissions generated by its brokerage activities in which the Company buys and
sells securities for its customers from other dealers on an agency basis, and
charges its customers a commission for its services. The largest portion of the
Company's commission revenue is derived from brokerage transactions involving
mutual fund securities. The Company
2
currently has agreements with 48 mutual fund management companies pursuant to
which the Company sells shares in approximately 100 mutual funds. Mutual fund
commissions are derived from standard dealers' discounts which range from
approximately 1% to 8% of the purchase price of the shares depending upon the
terms of the dealer agreement and the size of the transaction. In addition, most
funds permit the Company to receive additional periodic fees based upon the
customer's investment maintained in particular funds. To a lesser extent, the
Company's commission business also involves brokerage transactions in exchange
listed and over-the-counter corporate securities for its customers. To date, the
Company's activities in this area have been limited.
Money Management
In the latter half of 1996, the Company launched a Managed Asset
Portfolio Program ("MAPP") to manage the financial assets of its clients, for
which it receives a quarterly management fee based upon the value of assets
under management.
Investment Banking
Investment banking revenue is derived principally from underwriting
fees, commissions and expense allowances in connection with underwriting
activities. To date, the Company's investment banking activities have consisted
of co-underwriting an initial public offering and acting as co-placement agent
in a private placement in 1996, co-underwriting an initial public offering and
acting as the placement agent in two private placements in 1995, and acting as
placement agent in private placements in 1994 and 1993. The Company also
participates as a member of the underwriting syndicate and selling group member
from time to time in unit trust and equity offerings. The Company believes that
investment banking activities present significant opportunities for its
business. The extent of the Company's underwriting activities is dependent upon
its net capital position prior to making a commitment to purchase securities,
its retail distribution capabilities and market conditions for public offerings.
Although the Company does not currently anticipate that underwriting
will be the primary focus of its business, its expansion in this area involves
certain risks. Because underwriting syndicates commit to purchase securities at
a discount from the initial public offering price, underwriters are exposed to
substantial losses in the event that the securities cannot be sold or must be
sold below syndicate cost. In the last several years, investment banking firms
have increasingly underwritten corporate offerings with fewer syndicate
participants and, in many cases, without a syndicate. In such cases, the
underwriter assumes a larger part or all of the risk of an underwriting
transaction. Under federal securities laws, other laws and court decisions with
respect to underwriter's liability and limitations on indemnification by
issuers, an underwriter is exposed to substantial potential liability for
misstatements or omissions of material facts in prospectuses or other
communications with respect to securities offerings.
As a complement to its investment banking business, the Company also
engages in merchant banking activities. From time to time the Company is
presented with opportunities to invest, through debt or equity or combination of
both, in other companies in a variety of industries. Such investments are
speculative and involve a high degree of risk for which the Company may receive
significant profits, but no assurance can be given that such will be the case.
Merchant banking investments typically are of a longer term nature than the
Company's trading activities and therefore increase the Company's exposure to
market risks and restrict the use of the Company's capital for longer periods of
time. At December 31, 1996, the Company had approximately $550,000 of its
capital in two companies in connection with this activity.
Clearing Broker
The Company does not hold any funds or securities of its customers. The
Company currently utilizes, on a fully disclosed basis, the services of
Correspondent Services Corporation, a wholly-owned subsidiary of PaineWebber
Incorporated, as its clearing broker, which, on a fee basis, processes all
securities transactions for the Company and the accounts of its customers.
Customer accounts are protected through the Securities Investor Protection
Corporation for up to $500,000, of which coverage for cash balances is limited
to $100,000, and additional protection is provided through Aetna Casualty and
Surety Co. for an additional $5,000,000 per
3
regular account, $10,000,000 per individual retirement account and $50,000,000
per resource management account and business services account. The services of a
clearing broker include billing and credit control, and receipt, custody and
delivery of securities, for which the Company pays a portion of the commissions
it receives from customer transactions. The clearing broker in effect provides a
"back office" for the Company's brokerage activities, freeing the Company from
the need and expense of creating its own such capability. Pursuant to the terms
of the Company's agreement with its clearing broker, the Company has agreed to
indemnify and hold its clearing broker harmless from certain liabilities and
claims, including claims arising from the transactions of its customers. In the
event that customers fail to pay for their purchases or fail to supply the
securities that they have sold, and the clearing broker satisfies customer
obligations, the Company would be obligated to indemnify the clearing broker for
any resulting losses. The Company, to date, has not experienced any material
losses as a result of the failure of its customers to satisfy their obligations.
Government Regulation
The securities business is subject to extensive and frequently changing
federal and state laws and substantial regulation under such laws by the
Commission, various state agencies and self-regulatory organizations, such as
the NASD and the Municipal Securities Rulemaking Board ("MSRB"). Kirlin is
registered as a broker-dealer and investment advisor with the Commission and is
a member firm of the NASD. Much of the regulation of broker-dealers has been
delegated to self-regulatory organizations, principally the NASD (which also
enforces the rules of the MSRB with respect to the Company), which has been
designated by the Commission as the Company's primary regulator. The NASD adopts
rules, which are subject to approval by the Commission, that govern its members
and conducts periodic examinations of member firms' operations. Securities firms
are also subject to regulation by state securities administrators in those
states in which they conduct business.
Broker-dealers are subject to regulations which cover all aspects of
the securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure of securities firms, record keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the Commission and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The Commission,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer, its
officers or employees. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the integrity of the
securities markets. The Company believes it is currently in compliance with all
such regulations governing its business.
As a registered broker-dealer and a member firm of the NASD, Kirlin is
subject to the Commission's net capital rule. The net capital rule, which
specifies minimum net capital requirements for registered brokers and dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. Net capital is essentially defined as net worth (assets
minus liabilities), plus qualifying subordinated borrowings and less certain
mandatory deductions that result from excluding assets not readily convertible
into cash and from valuing certain other assets, such as a firm's positions in
securities, conservatively. Among these deductions are adjustments in the market
value of securities to reflect the possibility of a market decline prior to
disposition. As of December 31, 1996, Kirlin had total net capital of
$2,277,715, or $2,027,715 in excess of minimum net capital requirements under
the aggregate indebtedness method of calculation.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the Commission and other regulatory bodies
and ultimately may require its liquidation. The net capital rule also prohibits
payments of dividends, redemption of stock and the prepayment or payment in
respect of principal of subordinated indebtedness if net capital, after giving
effect to the payment, redemption or repayment, would be less than specified
percentages of the minimum net capital requirement (120%). Compliance with the
net capital rule could limit those operations of Kirlin that require the
intensive use of capital, such as underwriting and trading activities, and also
could restrict the Company's ability to withdraw capital from Kirlin, which in
turn, could limit the Company's ability to pay dividends, repay debt and redeem
or purchase shares of its outstanding capital stock.
4
Kirlin is registered as an investment adviser with the Commission and
the State of New York. As an investment adviser, Kirlin is subject to the
requirements of the Investment Advisers Act of 1940 and the Commission's
regulations thereunder, as well as state securities laws and regulations. Such
requirements relate to, among other things limitations on the ability to charge
performance-based or non-refundable fees to clients, record-keeping and
reporting requirements, disclosure requirements, limitations on principal
transactions between an adviser or its affiliates and advisory clients, as well
as general anti-fraud prohibitions.
Competition
The Company encounters intense competition in all aspects of its
business and competes directly with other securities firms, a significant number
of which offer their customers a broader range of financial services, have
greater capital and other resources and may have greater operating efficiencies
than the Company. In addition to competition from firms currently in the
securities business, recently there has been increasing competition from other
sources, such as commercial banks and insurance companies offering financial
services, and from other investment alternatives. Competition among financial
services firms for professional personnel is intense. As part of the Company's
growth strategy, it intends to recruit established registered representatives,
expand its investment banking business, increase its activity in the equity,
municipal bonds and taxable fixed-income securities markets and develop a
merchant banking capability. However, it faces competition in all of these areas
from other firms that have established reputations, long-standing relationships
with clients and substantially greater capital resources.
Marketing and Advertising
The Company has pursued an aggressive marketing and advertising program
since 1989. The Company has advertised itself and its product line in order to
get a direct response from listeners. The Company also uses image advertising to
promote the name and background of the Company, which it believes has increased
the Company's visibility. The Company's advertising program has proven to be
very successful in the building of a larger customer base. The Company's primary
advertising focus has been on major radio stations, and, to a lesser extent,
newspapers in New York, New Jersey, Connecticut, and California. The Company has
also used television advertising in the New York City metropolitan area on a
limited basis. The Company allocates its advertising budget according to
economic conditions and the products available. The advertising program of the
Company is heavily regulated by the NASD.
Personnel
At March 14, 1997, the Company had 161 full-time employees, including
125 registered representatives. The Company's sales force primarily serves
retail customers and, to a lesser extent, institutional investors. None of the
Company's personnel is covered by a collective bargaining agreement. The Company
considers its relationships with its employees to be good.
Trademark
The Company is the owner of the registered service mark known as "The
Triple Play(R)". Such mark is used to promote the Company's products which it
believes embody the three main objectives of a fixed individual investor -
growth, income and safety.
ITEM 2. PROPERTIES.
The principal executive offices of the Company and Kirlin are located
at 6901 Jericho Turnpike, Syosset, New York 11791 where the Company leases
approximately 12,800 square feet of office space at a base rent of approximately
$200,000 per year with annual increases of 3.5%. The initial term of the lease
expires in September 1999, with one option to renew for an additional five-year
period. The Company also operates the following branch offices:
5
Approximate
Approximate Annual
Office Location Square Footage Lease Rental Expiration
- --------------- -------------- ------------ -----------
400 South El Camino Real 3,500 $78,000 April 2000
San Mateo, California
4370 La Jolla Village Drive 2,300 $56,000 December 1998
San Diego, California
2001 Route 46 2,900 $68,000 June 2001
Parsippany, New Jersey
ITEM 3. LEGAL PROCEEDINGS.
The Company's business involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied customers for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. The Company does not presently maintain an errors
and omissions insurance policy insuring it against these risks. In the normal
course of the Company's business, the Company from time to time is involved in
lawsuits and arbitrations brought by its customers. It is the opinion of
management that the resolution of all proceedings presently pending will not
have a material adverse effect on the consolidated financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to the completion of the Company's initial public offering on
January 18, 1995, there was no established public trading market for the
Company's Common Stock. The Company's Common Stock commenced quotation on the
Nasdaq SmallCap Market on January 19, 1995. The following table sets forth, for
the periods indicated, the high and low bid prices for the Common Stock as
reported by the Nasdaq SmallCap Market (representing interdealer quotations
which do not include retail markups, markdowns or commissions):
Period High($) Low($)
Fiscal 1996
Fourth Quarter 9.75 9.50
Third Quarter 9.875 9.125
Second Quarter 9.50 6.75
First Quarter 7.00 4.75
Fiscal 1995
Fourth Quarter 7.00 4.50
Third Quarter 7.75 6.75
Second Quarter 9.00 7.50
First Quarter 10.25 9.75
6
On March 19, 1997, the last sale price of the Common Stock as reported
by the Nasdaq SmallCap Market was $9.25. On March 19, 1997, there were 84
holders of record of the Company's Common Stock and, the Company believes,
approximately 730 beneficial owners of the Company's Company Stock.
Prior to April 14, 1994, Kirlin had elected to be treated as an S
corporation for income tax purposes under the Internal Revenue Code. As an S
corporation, Kirlin made cash distributions to its stockholders in the amount of
their proportionate share of the tax payments due with respect to Kirlin's
taxable income. Since April 14, 1994, Kirlin has been treated as a C corporation
and has not made any similar cash distributions.
The Company does not anticipate paying cash or other dividends in the
foreseeable future. The payment of dividends, if any, in the future is within
the discretion of the Board of Directors and will depend upon the Company's
earnings, its capital requirements and financial condition, and other relevant
factors. The Company presently intends to retain all earnings in the foreseeable
future for the Company's continued growth. The Company's ability to pay
dividends in the future also may be restricted by Kirlin's obligation to comply
with the net capital requirements imposed on broker-dealers under regulations
and rules promulgated by both the Commission and the NASD.
Recent Sales of Unregistered Securities
During the year ended December 31, 1996, the Company made the following
sales of unregistered securities:
Consideration received
and description of
underwriting or other Exemption If option, warrant or
discounts to market from convertible security,
Number price afforded to registration terms of exercise
Date of sale Title of Security Sold purchasers claimed or conversion
- ------------- -------------------- -------- ----------------------- ------------- ------------------------
1/96 - 12/96 options to purchase 351,950 options granted - no 4(2) exercisable for either
Common Stock consideration received 5 or 10 years from
granted to by Company until date of grant with
employees, directors exercise vesting from 1 to 5
and consultants years at exercise
prices ranging from
$5.00 to $5.50
7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
When used in this Form 10-KSB and in future filings by the Company with
the Commission, the words or phrases "will likely result, " "management expects"
or "the Company expects," "will continue," "is anticipated," "estimated" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company has no obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
Overview
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the notes presented
following the consolidated financial statements. The discussion of results,
causes and trends should not be construed to imply any conclusion that such
results or trends will necessarily continue in the future.
The Company's revenues are generated primarily from principal trading
activities and brokerage transactions. As a principal, the Company buys and
sells securities, both for proprietary trading and, more significantly, to
facilitate sales to its retail customers and other dealers. These securities are
purchased in secondary markets or from the underwriters of new issues. Principal
transactions with customers are effected at a net price equal to the current
interdealer price plus or minus a mark-up or mark-down within the guidelines of
applicable securities regulations. The revenues derived from the Company's
transactions as principal reflect realized and unrealized gains and losses on
such transactions. Revenues from principal transactions are primarily derived
from trading fixed income securities, which may be purchased from and/or sold to
other dealers or retail clients. In addition, revenues from principal
transactions also reflect gains and/or losses derived from writing and
purchasing option contracts. As part of the Company's growth strategy, it
intends to increase its principal trading activities in equity securities,
primarily in securities of the Company's investment banking clients. As a result
of its principal trading activities, the amount of the Company's liabilities and
assets can vary widely from period-to-period.
Revenues from brokerage transactions, in which the Company buys and
sells securities for its customers on an agency basis, are primarily derived
from commissions charged to customers for purchasing mutual fund securities and,
purchasing and selling equity securities.
In the latter half of 1996, the Company introduced a Managed Asset
Portfolio Program to manage the financial assets of its clients, for which it
receives a quarterly management fee based upon the value of assets under
management.
The Company pays its brokers commissions equal to varying percentages
of gross commissions and mark-ups and mark-downs in connection with the
purchases and sales of securities on behalf of its customers. The Company pays
its traders a salary plus a percentage of net gains derived from trading
activities. In addition, the Company pays ticket charges to its clearing broker
for the processing of security transactions. The Company maintains inventories
of securities in order to facilitate sales to customers. In this regard, the
Company pays interest on the securities held in inventory since substantially
all of its securities are purchased on margin through its clearing broker. The
Company has expended and intends to continue to expend funds to aggressively
promote the Company and its product line.
8
The Company is directly affected by general economic conditions, interest
rates and market conditions. All of these factors may have an impact on it's
principal trading and overall business volume. The Company's costs associated
with occupancy, communications and equipment costs are relatively fixed and, in
periods of reduced volume, can have an adverse effect on earnings.
The following table shows each specified item as a dollar amount and as a
percentage of revenues in each fiscal period, and should be read in conjunction
with the Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-KSB:
Years ended December 31,
1996 1995
------------------------ -----------------------
Revenues:
Principal transactions net................ $ 11,743,255 71.1% $ 5,857,242 57.4%
Commissions.............................. 4,354,436 26.4% 4,052,232 39.7%
Other income.............................. 407,863 2.5% 299,547 2.9%
----------- -------- -------------- --------
Total revenues . . . . . . . . . . . . 16,505,554 100.0% 10,209,021 100.0%
----------- -------- -------------- --------
Expenses:
Employee compensation and benefits........ 10,122,437 61.3% 6,229,367 61.0%
Promotion and advertising................. 1,254,504 7.6% 914,555 9.0%
Clearance and execution charges........... 837,055 5.1% 699,303 6.9%
Occupancy and communications.............. 1,573,768 9.5% 1,105,629 10.8%
Professional fees......................... 216,090 1.3% 246,241 2.4%
Interest.................................. 535,713 3.2% 205,939 2.0%
Other..................................... 575,643 3.5% 255,849 2.5%
----------- -------- -------------- --------
Total expenses . . . . . . . . . . . . 15,115,210 91.5% 9,656,883 94.6%
----------- -------- -------------- --------
Net income before income tax provision............... 1,390,344 8.4% 552,138 5.4%
Provision for income taxes........................... 754,566 4.6% 211,602 2.1%
----------- -------- -------------- --------
Net income........................................... $ 635,778 3.8% $ 340,536 3.3%
=========== ======== ============== ========
Results of Operations
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Total revenues for the year ended December 31, 1996 increased 61.7% to
$16,505,554 from 10,209,021 in 1995. This increase is attributable to income
generated from the Company's investment banking activities and retail brokerage
activities, which is reflective of general market conditions.
Employee compensation and benefits in 1996 increased 62.5% to $10,122,437
from $6,229,367 in 1995. This increase is primarily due to an increase in
commission payments to the Company's traders and registered representatives as a
result of higher revenues, however the percentage of total revenues was
consistent between both years.
Promotion and advertising in 1996 increased 37.2% to $1,254,504 from
$914,555 in 1995 primarily as a result of the Company's planned increase of
advertising expenditures, concentrated in television advertising for fixed
income securities and radio advertising in conjunction with the establishment of
a branch office in New Jersey.
Clearance and execution charges in 1996 increased 19.7% to $837,055 from
$699,303 in 1995. The increase is the result of higher ticket volume.
9
Occupancy and communications costs in 1996 increased 42.3% to $1,573,768
from $1,105,629 in 1995. This increase is a result of the establishment and
operations of branch offices.
Professional fees in 1996 decreased 12.2% to $216,090 from $246,241 in 1995
primarily as a result of a shift of work performed by outside consultants to
internal professional staff.
Interest expense in 1996 increased 160% to $535,713 from $205,939 in 1995
as a result of larger inventory positions purchased on margin, which are held at
the clearing broker and charged interest.
Other expenses in 1996 increased 125% to $575,643 from $255,849 in 1995
primarily as a result of an increase in general office expenses due to the
establishment of branch offices, the increase in the size of existing offices,
as well as an expense related to a settlement with a customer.
Income tax provision for the year ended December 31, 1996 was $754,566 as
compared to $211,602 for the year ended December 31, 1995 as a result of, among
other things, a non-cash charge related to the transfer of stock amongst the
executive officers of the Company and a lesser utilization of the Company's net
operating loss carryforward in 1996 as compared to 1995.
Net income of $635,778 for the year ended December 31, 1996 compares to net
income of $340,536 for the year ended December 31, 1995 primarily as a result of
increased revenues in 1996.
Effects of Inflation; Fluctuations in Interest Rates
The Company's business is affected by the rate of inflation. Inflation or
inflationary fears, which results in higher interest rates, may have an adverse
impact upon the securities markets and on the value of securities held in
inventory, thereby adversely affecting the Company's financial position and
results of operations. Because the Company's business is currently weighted
toward fixed income securities, factor's affecting fixed income securities (in
particular, changes in interest rates) that may have a lessor impact on more
diversified securities firms could have a substantial adverse impact on the
business of the Company.
Liquidity and Capital Resources
Securities owned, at market value, at December 31, 1996 were $13,634,348 as
compared to $8,763,309 at December 31, 1995. This 55.6% increase is attributable
to an improved retail marketplace for fixed income and equity securities, which
increased the Company's need to maintain securities in inventory for resale to
its customers. To a significant extent, the Company's inventory requirements for
securities is market driven, with a more active market and greater sales
necessitating higher inventory levels. Approximately 85.2% of the Company's
assets at December 31, 1996 were comprised of cash and highly liquid securities.
Furniture, fixtures and leasehold improvements, net, at December 31, 1996,
increased to $691,124 as compared to $484,096 at December 31, 1995. This 42.8%
increase results primarily from additional computer hardware, office furniture,
and leasehold improvements purchased in connection with the establishment of a
branch office on the east coast, conversion of the Company's operational and
computer system, and renovation of the Corporate office's conference and seminar
rooms.
Deferred tax asset at December 31, 1996, decreased 100% as compared to
$124,384 at December 31, 1995. This decrease reflects the adjustment for the
current period's earnings.
Other assets increased to $637,066 at December 31, 1996, from $234,504 at
December 31, 1995, a 172% increase. This increase is primarily attributable to
interest receivable on inventory held, advances to registered representatives,
and an interest bearing promissory note related to one of the Company's
investment banking undertakings.
10
Securities sold short amounted to $2,019,664 at December 31, 1996 as
compared to $1,504,437 at December 31, 1995. Management monitors these positions
on a daily basis and covers short positions when deemed appropriate. A portion
of the short position at December 31, 1996 was covered during the subsequent
month.
Payable to clearing broker amounted to $4,586,717 at December 31, 1996 as
compared to $2,266,722 at December 31, 1995. This 102% increase is a result of
increased inventory purchases on margin.
Accrued compensation was $1,174,706 at December 31, 1996 as compared to
$407,623 at December 31, 1995, a 188% increase attributable to increased
revenues upon which commission income to registered representatives is based.
Accounts payable and accrued expenses were $649,556 at December 31, 1996 as
compared to $411,045 at December 31, 1995, a 58% increase attributable to
accrued promotion, general office expenses, and an accrued expense related to a
settlement with a customer.
Income Taxes Payable were $582,514 at December 31, 1996 as compared to
December 31, 1995. This increase is comprised of current taxes payable
reflective of the adjustment for the current period's earnings and deferred
income taxes payable resulting from unrealized appreciation on securities
positions.
The Company, as guarantor of its customer accounts to its clearing broker,
is exposed to off-balance-sheet risks in the event that its customers do not
fulfill their obligations with the clearing broker. In addition, to the extent
the Company maintains a short position in certain securities, it is exposed to a
further off-balance-sheet market risk, since the Company's ultimate obligation
may exceed the amount recognized in the financial statements.
The Company believes its financial resources will be sufficient to fund the
Company's operations and capital requirements for the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS.
Index to Consolidated Financial Statements: Page
----
Report of Goldstein Golub Kessler & Company, P.C.
on the Consolidated Financial Statements as of
December 31, 1996 and for the year then ended.................F-1
Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995.......................................F-2 - F3
Consolidated Statements of Income for the years ended
December 31, 1996 and 1995............................................F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1996 and 1995.................F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995......................................F-6
Notes to the Consolidated Financial Statements..................F-7 - F13
11
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Kirlin Holding Corp.
We have audited the accompanying consolidated statements of financial condition
of Kirlin Holding Corp. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kirlin Holding
Corp. and Subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 13, 1997
F-1
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1996 1995
---------- ---------
ASSETS
Cash (Note 1) $ 75,304 $ 179,944
Securities Owned, at market value (Note 2):
U.S. government and agency obligations 2,153,235 3,059,289
State and municipal obligations 4,654,466 688,374
Corporate bonds and other securities 6,826,647 5,015,643
Furniture, Fixtures and Leasehold Improvements,
at cost, net of accumulated depreciation and
amortization of $511,096 and $340,208,
respectively (Note 1) 691,124 484,096
Deferred Tax Asset (Note 8) - 124,384
Other Assets 637,066 234,504
----------- ----------
Total Assets $15,037,842 $9,786,234
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased,
at market value (Note 2) $ 2,019,664 $1,504,437
Payable to clearing broker (Note 1) 4,586,717 2,266,722
Accrued compensation payable 1,174,706 407,623
Accounts payable and accrued expenses 649,556 411,045
Income taxes payable 582,514 -
------------ ----------
Total liabilities 9,013,157 4,589,827
============ ==========
See Notes to Financial Statements
F-2
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
Commitments (Note 6)
Stockholders' Equity (Note 3):
Common stock - $.0001 par value;
authorized 15,000,000 shares,
issued and outstanding 1,302,330 shares 130 130
Additional paid-in capital 5,522,036 5,329,536
Retained earnings (accumulated deficit) 502,519 (133,259)
----------- ----------
Stockholders' equity 6,024,685 5,196,407
----------- ----------
Total Liabilities and Stockholders' Equity $15,037,842 $9,786,234
----------- -----------
See Notes to Financial Statements
F-3
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1996 1995
---------- -----------
Revenue:
Principal transactions, net (Notes 1 and 2) $11,743,255 $ 5,857,243
Commissions 4,354,436 4,052,232
Other income 407,863 299,546
------------- ------------
16,505,554 10,209,021
------------- ------------
Expenses:
Employee compensation and benefits 10,122,437 6,229,367
Promotion and advertising (Note 1) 1,254,504 914,555
Clearance and execution charges 837,055 699,303
Occupancy and communications 1,573,768 1,105,629
Professional fees 216,090 246,241
Interest 535,713 205,939
Other 575,643 255,849
----------- ------------
15,115,210 9,656,883
----------- ------------
Income before provision for income taxes 1,390,344 552,138
Provision for income taxes (Note 8) 754,566 211,602
----------- ------------
Net income $ 635,778 $ 340,536
=========== ============
Net income per common share (Note 9) $ .42 $ .26
=========== ============
Weighted average common shares
outstanding (Note 9) 1,302,330 1,306,879
=========== ============
See Notes to Financial Statements
F-4
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
(Accumulated
Additional Deficit)
Common Stock Paid-in Retained
Shares Par Value Capital Earnings Total
---------------------- ---------- ----------- ------------
Stockholders' equity at
January 1, 1995 1,400,000 $140 $2,050,813 $(473,795) $1,577,158
Contributions of common
stock (500,000) (50) 50 - -
Issuance of common stock 402,330 40 3,241,549 - 3,241,589
Compensation related to
issuance of stock options - - 37,124 - 37,124
Net income - - - 340,536 340,536
----------- ----- ------------ ---------- ------------
Stockholders' equity at
December 31, 1995 1,302,330 130 5,329,536 (133,259) 5,196,407
Compensation related to the
sale of stock by a principal
stockholder - - 192,500 - 192,500
Net income - - - 635,778 635,778
----------- ----- ---------- --------- ----------
Stockholders' equity at
December 31, 1996 1,302,330 $130 $5,522,036 $ 502,519 $6,024,685
=========== ===== ========== ========= ==========
See Notes to Financial Statements
F-5
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1996 1995
----------- -----------
Cash flows from operating activities:
Net income $ 635,778 $ 340,536
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 170,888 122,581
Amortization/retirement of stock options - 37,124
Deferred income taxes 322,920 211,602
Noncash compensation 192,500 -
(Increase) decrease in operating assets:
Securities owned, at market value (4,871,042) (6,966,047)
Other assets (402,562) 38,261
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased,
at market value 515,227 1,297,262
Payable to clearing broker 2,319,995 1,361,107
Accrued compensation 767,083 240,277
Accounts payable and accrued expenses 238,511 (228,182)
Income taxes payable 383,978 -
------------ -----------
Total adjustments (362,502) (3,886,015)
------------ -----------
Net cash provided by (used in)
operating activities 273,276 (3,545,479)
Cash flows used in investing activity -
purchase of furniture, fixtures
and leasehold improvements (377,916) (340,796)
Cash flows provided by financing activity -
issuance of common stock - 4,023,300
------------ ----------
Net increase (decrease) in cash (104,640) 137,025
Cash at beginning of year 179,944 42,919
------------ ----------
Cash at end of year $ 75,304 $ 179,944
============ ==========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 535,713 $ 205,939
=========== ==========
Income taxes $ 47,759 $ 5,376
=========== ==========
See Notes to Financial Statements
F-6
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include the accounts of Kirlin
Holding Corp. and its wholly owned subsidiary, Kirlin Securities, Inc.
(collectively the "Company"). The Company, through Kirlin Securities, Inc.
("Kirlin"), is a full-service, retail-oriented brokerage firm specializing in
the trading and sale of fixed income securities, including collateralized
mortgage obligations, corporate and municipal bonds, and government and
government agency securities and, to a lesser extent, mutual funds and equity
securities. The Company's only activities have been through Kirlin. All material
intercompany transactions and balances have been eliminated in consolidation.
Kirlin has offices in New York, New Jersey and California.
Kirlin is registered as a broker-dealer with the Securities and Exchange
Commission and is a member of the National Association of Securities Dealers,
Inc.
Kirlin does not carry accounts for customers or perform custodial functions
related to customers' securities. Kirlin introduces all of its customer
transactions, which are not reflected in these financial statements, to its
clearing broker, which maintains the customers' accounts and clears such
transactions. Additionally, this clearing broker provides the clearing and
depository operations for Kirlin's proprietary securities transactions. These
activities may expose the Company to off-balance-sheet risk in the event that
customers do not fulfill their obligations with the clearing broker, as Kirlin
has agreed to indemnify the clearing broker for any resulting losses.
At December 31, 1996, the payable to clearing broker in the consolidated
statement of financial condition is for the Company's net acquisition of
securities and is collateralized by securities owned by the Company.
Substantially all securities owned reflected on the consolidated statement of
financial condition are positions held by the clearing broker.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits.
Securities transactions, commission revenue and commission expenses are
recorded on a trade-date basis. Unrealized gains and losses on securities
transactions are included in principal transactions in the consolidated
statement of income.
The financial statements have been prepared in conformity with generally
accepted accounting principles which require the use of estimates by management.
Furniture and fixtures are depreciated on a straight-line basis over the
economic useful lives of the assets, not exceeding seven years. Leasehold
improvements are amortized over the lesser of their economic useful lives or the
expected term of the related lease.
Kirlin expenses the costs of advertising the first time the advertising
takes place. Advertising expense was approximately $1,053,000 and $813,000 for
the years ended December 31, 1996 and 1995, respectively.
Management does not believe that any recently issued, but not yet
effective, accounting standards, if currently adopted, would have a material
effect on the accompanying consolidated financial statements.
F-7
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED:
Securities sold, not yet purchased, are stated at market value and
consistent of the following:
December 31, 1996 1995
------------ -----------
U.S. government and agency obligations $ 4,705 $ 358,443
State and municipal obligations 820,676 94,291
Corporate bonds and other securities 1,194,283 1,051,703
------------ -----------
$2,019,664 $1,504,437
============ ===========
Securities sold, not yet purchased, represent obligations of Kirlin to
deliver specified securities by purchasing the securities in the market at
prevailing market prices. Accordingly, these transactions result in off-balance-
sheet market risk as Kirlin's ultimate obligation may exceed the amount
recognized in the financial statements.
Securities owned and securities sold, not yet purchased, are stated at
quoted market values. Included in securities owned at December 31, 1996 and 1995
are investment securities not readily marketable amounting to approximately
$896,000 and $747,000, respectively (15% and 14%, respectively, of stockholders'
equity) which have been valued at fair value as determined by management based
on a percentage of the market value of the underlying securities. The resulting
unrealized gains and losses are reflected in principal transactions.
3. STOCKHOLDERS' EQUITY:
The Company has authorized 1,000,000 shares of preferred stock, par value
$.0001 per share. No shares have been issued as of December 31, 1996.
In August 1994, the Company adopted the 1994 Stock Plan ("1994 Plan")
covering 600,000 shares of the Company's common stock pursuant to which
officers, directors, key employees and consultants of the Company are eligible
to receive incentive or nonqualified stock options, stock appreciation rights,
restricted stock awards, deferred stock, stock reload options and other
stock-based awards.
F-8
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the 1996 and 1995 activity in the Company's
stock options:
Shares Exercise Price
------------- ----------------
Balance at January 1, 1995 294,350 $7.50 - $11.00
Options granted during the year 54,500 $8.25 - $10.00
Options canceled during the year (111,500) $7.50
------------- ---------------
Balance at December 31, 1995 237,350 $8.25 - $11.00
Options granted during the year 351,950 $5.00 - $ 5.50
Options canceled during the year (36,500) $5.00 - $10.00
------------ ---------------
Balance at December 31, 1996 552,800 $5.00 - $11.00
============ ===============
Under the 1994 Plan, 189,000 shares have been granted to officers of the
Company at exercise prices ranging from $5.50 to $11.00 per share. Such options
vest over periods of up to five years. The amortization of the difference
between the exercise price of the options and the market value at the date of
grant, $37,124, was charged to compensation expense during the year ended
December 31, 1995.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation." Accordingly, no compensation costs have been recognized for the
options granted. Had compensation cost been determined based on the fair value
at the date of grant consistent with the provisions of SFAS No. 123, the
Company's net income and income per common share would have been as follows:
Year ended December 31, 1996 1995
------------- -------------
Net income - as reported $635,778 $340,536
Net income - pro forma 517,278 312,036
Income per common share - as reported .42 .26
Income per common share - pro forma .35 .24
------------- -------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: expected
volatility of 40%, risk-free interest rate of approximately 7% and expected
option lives of six years.
The pro forma disclosures are not likely to be representative of the
effects on reported net income for future periods.
F-9
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 1996, the Company adopted the 1996 Stock Plan ("1996 Plan")
covering 1,000,000 shares of common stock pursuant to which officers, directors,
key employees and consultants are eligible to receive incentive ornonqualified
stock options, stock appreciation rights, restricted stock awards, deferred
stock, stock reload options and other stock-based awards. At December 31, 1996,
no common stock or options had been issued pursuant to the 1996 Plan. In January
1995, the Company consummated its public offering in which it raised $3,241,589
in proceeds, net of offering costs, through the sale of 402,330 shares of its
common stock. Upon this consummation, officers of the Company contributed to the
Company, in the aggregate, 500,000 shares of the Company's common stock which
they owned. Additionally, 40,233 options to purchase shares of common stock of
the Company were granted to Kirlin which acted as the Company's underwriter.
4. NET CAPITAL REUIREMENT:
As a registered broker-dealer, Kirlin is subject to the Securities and
Exchange Commission's Uniform Net Capital Rule 15c3-1, which requires the
maintenance of minimum net capital. Kirlin computes its net capital under the
aggregate indebtedness method permitted by Rule 15c3-1, which requires that
Kirlin maintain minimum net capital, as defined, of 6-2/3% of aggregate
indebtedness, as defined, or $250,000, whichever is greater. Additionally, the
ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15-to- 1.
At December 31, 1996 and 1995, Kirlin had net capital, as defined, of
$2,277,715 and $2,091,422, respectively, which exceeded the minimum net capital
requirements by $2,027,715 and $1,841,422, respectively. Kirlin's ratio of
aggregate indebtedness to net capital was .95-to-1 and .37-to-1 at December 31,
1996 and 1995, respectively.
5. RETIREMENT AND SAVINGS PLAN:
Kirlin sponsors a Retirement and Savings Plan for all full-time employees
over the age of 19 pursuant to Section 401(k) of the Internal Revenue Code.
Kirlin matches 50% of each participant's contribution up to $1,000 per
participant per year. Kirlin's contributions to the plan for the years ended
December 31, 1996 and 1995 were $70,267 and $53,247, respectively.
6. COMMITMENTS:
Kirlin leases office space at several locations under noncancelable leases
expiring at various times through June 30, 2001. The minimum annual rental
payments for these leases are as follows:
Year ending December 31,
1997 $ 460,642
1998 430,533
1999 326,327
2000 94,149
2001 34,020
----------- ----------------
$1,345,671
================
The leases contain provisions for escalations based on increases in certain
costs incurred by the lessor. Kirlin has the option to renew two of these leases
for an additional five-year period. Rent expense was $463,407 and $333,538 for
the years ended December 31, 1996 and 1995, respectively.
F-10
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS:
The Company's activities include the purchase and sale of stock options and
warrants. Stock options and warrants give the buyer the right to purchase or
sell securities at a specific price until a specified expiration date. These
financial instruments are used to conduct trading activities and manage market
risk.
The Company may receive warrants as part of its underwriting activities.
See Note 2 for fair value methodology.
Such transactions may result in credit exposure in the event the
counterparty to the transaction is unable to fulfill its contractual
obligations. Substantially all of the stock options and warrants are traded on
national exchanges, which can be subject to market risk in the form of price
fluctuations.
The following summarizes financial instruments held at December 31, 1996
and 1995:
Average
Market
Notional Value for
Amount Market Value the Year
----------------- ------------------- -------------------
1996 1995 1996 1995 1996 1995
----------------- ------------------- -------------------
Stock options
and warrants:
Assets $1,133,660 $679,198 $230,574 $615,469 $638,786 $147,649
Liabilities 365,668 693,698 91,653 273,267 123,423 35,159
---------- -------- -------- ------- -------- --------
Net revenue from principal transactions consists of fixed income and equity
activities.
8. INCOME TAXES:
The Company files consolidated federal income tax returns and separate
Company state income tax returns.
The provision for income taxes consists of:
Year ended December 31 1996 1995
Current:
Federal $295,106 -
State 136,540 -
----------- -----
431,646 -
----------- -----
Deferred:
Federal 238,538 $156,810
State 84,382 54,792
---------- --------
322,920 211,602
---------- --------
$754,566 $211,602
========== ========
F-11
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes for the years ended December 31, 1996 and
1995 differs from the amount computed using the federal statutory rate of 34% as
a result of the following:
1996 1995
------------ ------------
Tax at federal statutory rate 34% 34 %
State income taxes 9 8
Nondeductible expenses 6 -
Other 5 (4)
------------ ------------
54% 38 %
============ ============
The deferred tax asset (liability) results from the following:
1996 1995
------------ -----------
Net operating loss carryforward - $176,154
Unrealized appreciation on investment
securities not readily marketable $(263,388) (51,770)
Other temporary differences 64,852
------------ -----------
$(198,536) $124,384
============ ===========
9. EARNINGS PER SHARE:
Net income per common share is based on the weighted average number of
shares outstanding for each period. For the year ended December 31, 1996,
primary and fully diluted net income per common share have been calculated using
the modified treasury stock method since options to purchase common stock have a
dilutive effect. For the year ended December 31, 1995, options to purchase
common stock have been excluded from the computation of weighted average shares
outstanding since their inclusion would have an antidilutive effect. Accounting
Principles Board Opinion No. 15, "Earnings per Share," limits the assumed
repurchase of shares under the treasury stock method to 20% of the shares
outstanding. Any excess proceeds from the assumed exercise of options are
assumed to be invested in U.S. government securities or commercial paper.
Therefore, net income is adjusted for assumed interest income, net of applicable
income taxes for purposes of these calculations. The weighted average number of
shares of common stock outstanding and adjusted net income for primary and
F-12
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fully diluted net income per common share for the year ended December 31, 1996
are as follows:
Primary Fully Diluted
Net Income Net Income
Per Per
Common Share Common Share
------------- --------------
Net income $ 635,778 $ 635,778
Plus: Estimated proceeds from investment
in U.S. government securities or
commercial paper, net of taxes 56,233 47,638
----------- ----------
Net income used in calculation $ 692,011 $ 683,416
=========== ==========
Weighted average number of shares
outstanding 1,302,330 1,302,330
Plus: Net effect of dilutive stock options
based on the modified treasury
stock method using the average
market price of common stock 332,567 332,567
---------- ----------
Total shares used in calculation 1,634,897 1,634,897
========== ==========
Primary and fully diluted net income
per common share $ 0.42 $ 0.42
========== ==========
F-13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As reported in the Company's Current Report on Form 8-K, dated
October 3, 1995, as amended by an Amendment dated October 6, 1995, on September
28, 1995, the Company dismissed Coopers & Lybrand L.L.P. and subsequently
engaged Goldstein Golub Kessler & Company, P.C. as its new independent
accountants for its fiscal year ending December 31, 1995. The report of Coopers
& Lybrand L.L.P. on the Company's consolidated financial statements for either
of the two fiscal years ended December 31, 1993 and 1994, respectively, did not
contain an adverse opinion or disclaimer of opinion, nor was it modified or
qualified as to uncertainty, audit scope or accounting principles. The decision
to dismiss Coopers & Lybrand L.L.P. and engage Goldstein Golub Kessler &
Company, P.C. was made by the Board of Directors of the Company. During the two
fiscal years ended December 31, 1993 and 1994, respectively, and through the
date of termination (September 28, 1995), there were no disagreements with
Coopers & Lybrand L.L.P. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 9, 10, 11 and 12 is
incorporated by reference to the information included in the Company's
definitive proxy statement in connection with the Annual Meeting of Stockholders
to be held on June 20, 1997.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Filed.
See Exhibit Index appearing later in this Report.
(b) Reports on Form 8-K.
None.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KIRLIN HOLDING CORP.
(Registrant)
Dated: March 28, 1997
By:/s/ Anthony J. Kirincic
-------------------------
Name: Anthony J. Kirincic
Title: President
In accordance with the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ------------------------- -------------------------- ----------------
Chairman of the Board of
Directors and Chief Executive
Officer (Principal Executive
/s/ David O. Lindner Officer) March 28, 1997
- ------------------------
David O. Lindner
Director, President and Chief
Financial Officer (Principal
/s/ Anthony J. Kirincic Financial Officer) March 28, 1997
- ------------------------
Anthony J. Kirincic
/s/ Robert A. Paduano Director March 28, 1997
- -----------------------
Robert A. Paduano
Controller (Principal
/s/ Barry Shapiro Accounting Officer) March 28, 1997
- -----------------------
Barry Shapiro
/s/ Edward J. Casey
- ----------------------
Edward J. Casey Director March 28, 1997
26
EXHIBIT INDEX
Incorporated
Exhibit By Reference No. in
Number Description from Document Document Page
- -------- ------------------------------------------ ------------- ----------- ------
3.1 Certificate of Incorporation A 3.1
3.1.1 Certificate of Correction to Certificate of A 3.1.1
Incorporation, dated July 29, 1994
3.2 Amended and Restated By-Laws A 3.2
4.1 Form of Common Stock Certificate A 4.1
4.2 Form of Underwriter's Purchase Option, A 4.2
dated January 18, 1995, by and between the
Registrant and Kirlin Securities, Inc.
10.1 Employment Agreement, dated January 1, A 10.1
1994, between Kirlin Securities, Inc. and
David O. Lindner
10.1.1 Schedule of Omitted Documents in the form A 10.1.1
of Exhibit 10.1, including material detail to
which such documents differ from Exhibit
10.1
10.2 1994 Stock Plan A 10.2
10.3 Clearing Agreement between Kirlin A 10.3
Securities, Inc. and Clearing Services
10.4 Stock Option Agreement, dated August 1, A 10.4
1994, between the Registrant and David O.
Lindner
10.4.1 Schedule of Omitted Documents in the form A 10.4.1
of Exhibit 10.4, including material detail in
which such documents differ from Exhibit
10.4
10.5 Lease Agreement, dated May 23, 1994, A 10.5
between Kirlin Securities, Inc. and BBRG,
Inc.
10.6 Stock Option Agreement, dated January 12, B 10.6
1996, between the Registrant and David O.
Lindner
10.6.1 Schedule of Omitted Documents in the form B 10.6.1
of Exhibit 10.6, including material detail in
which such documents differ from Exhibit
10.6
10.7 Stock Option Agreement, dated January 12, B 10.7
1996, between the Registrant and Barry
Shapiro
27
10.7.1 Schedule of Omitted Document in the form B 10.7.1
of Exhibit 10.7, including material detail in
which such document differs from Exhibit
10.7
10.8 Stock Option Agreement, dated January 12, B 10.8
1996, between the Registrant and Edward J.
Casey
10.9 Indemnification Agreement, dated November B 10.9
14, 1995, between the Registrant and
Edward J. Casey
21 List of Subsidiaries -- -- Filed
Herewith
27 Financial Data Schedule (12/31/96) -- -- Filed
Herewith
- ---------------------
A. Registrant's Form SB-2 Registration Statement (No. 33-84512), declared
effective November 14, 1994.
B. Registrant's Form 10-KSB for the fiscal year ended December 31, 1995.
28