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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d)
- --- of the Securities Act of 1934
For the quarterly period ended June 30, 2002
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Transition report pursuant to Section 13 or 15(d)
- --- of the Securities Act of 1934
For the transition period from __________ to ___________________
Commission File number 0-25336
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KIRLIN HOLDING CORP.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 11-3229358
- ------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6901 Jericho Turnpike, Syosset, New York 11791
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(Address of Principal Executive Offices)
(800) 899-9400
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(Registrant's Telephone Number Including Area Code)
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Check whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
State the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date: At August 5, 2002,
Issuer had outstanding 14,907,346 shares of Common Stock, par value $.0001 per
share.
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, December 31,
2002 2001
----------------- ------------------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 4,294,389 $ 972,086
Due from Clearing Broker 2,314,032 3,119,154
Securities Owned:
U.S. government and agency obligations, at market value 210,411 161,376
State and municipal obligations, at market value 157,148 1,161,195
Corporate bonds and other securities, at market value 1,448,793 415,812
Nonmarketable securities, at fair value 178,420 607,249
Furniture, Fixtures and Leasehold Improvements, at cost, net of accumulated
depreciation of $2,656,353 and $2,331,207, respectively 826,014 1,084,821
Income taxes receivable 1,213,881 -
Deferred Tax Assets 2,737,993 3,457,855
Intangible Assets, net of accumulated amortization of $195,833 and $75,000,
respectively 1,304,167 775,000
Goodwill 836,747 1,395,417
Other Assets 2,855,104 1,724,991
----------------- ------------------
Total assets $ 18,377,099 $ 14,874,956
================= ==================
LIABILITIES and STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, not yet purchased, at market value $ 2,364,961 $ 224,371
Accrued compensation 2,162,637 2,113,287
Accounts payable and accrued expenses 1,807,806 1,767,104
----------------- ------------------
Total liabilities 6,335,404 4,104,762
----------------- ------------------
Subordinated liabilities 2,500,000 -
----------------- ------------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value; authorized 40,000,000 shares, issued and
outstanding 14,729,852 and 14,902,488 shares, respectively 1,473 1,490
Additional paid-in capital 16,372,330 16,635,220
Unearned Stock Compensation (262,083) (294,433)
Accumulated deficit (6,570,025) (5,572,083)
----------------- ------------------
Total stockholders' equity 9,541,695 10,770,194
----------------- ------------------
Total liabilities and stockholders' equity $ 18,377,099 $ 14,874,956
================= ==================
See Notes to Consolidated Financial Statements
2
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statements of Operations
Three-Months Ended Six-Months Ended
June 30, June 30,
---------------------------------- --------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ----------------
(Unaudited) (Unaudited)
Revenues:
Principal transactions, net $ (50,221) $ 2,273,632 $ (256,696) $ 4,730,469
Commissions 4,508,480 2,488,552 9,970,189 5,649,750
Merchant Banking - 38,400 - 86,547
Investment Banking 563,329 - 906,311 -
Other income 577,576 299,888 1,260,510 633,582
Increase in value attributable to subsidiaries - 113,413 - 453,378
---------------- ---------------- ---------------- ----------------
5,599,164 5,213,885 11,880,314 11,553,726
---------------- ---------------- ---------------- ----------------
Expenses:
Employee compensation and benefits 3,852,393 3,848,260 9,090,434 8,751,399
Promotion and advertising 107,209 367,839 202,584 640,087
Clearance and execution charges 134,029 457,537 301,422 799,400
Occupancy and communications 978,293 1,288,078 2,093,192 2,549,353
Professional fees 356,824 332,462 486,499 657,132
Interest (21,147) 20,515 (2,793) 43,484
Other 743,940 399,358 1,244,148 869,538
---------------- ---------------- ---------------- ----------------
6,151,541 6,714,049 13,415,486 14,310,393
---------------- ---------------- ---------------- ----------------
Loss before income tax benefit and minority interest
in loss of subsidiaries (552,377) (1,500,164) (1,535,172) (2,756,667)
Income tax benefit 213,440 497,656 537,230 788,841
---------------- ---------------- ---------------- ----------------
Loss before minority interest in loss of subsidiaries (338,937) (1,002,508) (997,942) (1,967,826)
Minority interest in loss of subsidiaries - 98,899 - 294,057
---------------- ---------------- ---------------- ----------------
Net loss $ (338,937) $ (903,609) $ (997,942) $ (1,673,769)
================ ================ ================ ================
Basic loss per common share $ (0.02) $ (0.07) $ (0.07) $ (0.13)
================ ================ ================ ================
Diluted loss per common share $ (0.02) $ (0.07) $ (0.07) $ (0.13)
================ ================ ================ ================
See Notes to Consolidated Financial Statements
3
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 30, 2002
(Unaudited)
Common Stock Additional Unearned
----------------------------- Paid-in Stock Accumulated
Shares Par Value Capital Compensation Deficit Total
-------------- ------------- ------------- --------------- -------------- --------------
Stockholders' equity,
January 1, 2002 14,902,488 $ 1,490 $ 16,635,220 $ (294,433) (5,572,083) $ 10,770,194
Stock issuances 665,890 67 632,783 13,767 - 646,617
Stock forfeitures (224,526) (23) (287,235) 18,583 - (268,675)
Repurchases and
retirement of stock (614,000) (61) (608,438) - - (608,499)
Net loss - - - - (997,942) (997,942)
-------------- ------------- ------------- --------------- -------------- --------------
Stockholders' equity,
June 30, 2002 14,729,852 $ 1,473 $ 16,372,330 $ (262,083) $ (6,570,025) $ 9,541,695
============== ============= ============= =============== ============== ==============
See Notes to Consolidated Financial Statements
4
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
--------------------------------------
2002 2001
------------------- -----------------
(Unaudited)
Cash flows from operating activities:
Net loss $ (997,942) $ (1,673,769)
------------------- -----------------
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation 325,146 370,391
Amortization 120,833 121,070
Deferred income taxes 719,862 (1,191,231)
Investment by minority shareholders - 389,436
Minority interest in loss of subsidiaries - (294,057)
Noncash compensation 377,942 354,277
Loss on disposal of fixed assets - 104,846
Decrease in receivable from clearing brokers 805,122 935,853
(Increase) in securities owned, at market value (77,968) (664,859)
Decrease (increase) in nonmarketable securities 428,828 (6,786)
(Increase) in income taxes receivable (1,213,881) -
(Increase) decrease in other assets (1,130,113) 1,183,945
Increase in securities sold, not yet purchased, at market value 2,140,590 219,335
Increase (decrease) in accrued compensation 49,350 (508,254)
Increase in accounts payable and accrued expenses 40,702 54,398
------------------- -----------------
Total adjustments 2,586,413 1,068,364
------------------- -----------------
Net cash provided by (used in) operating activities 1,588,471 (605,405)
------------------- -----------------
Cash flows from investing activities:
Purchase of furniture, fixtures and leasehold improvements (66,339) (174,475)
Acquisition of other businesses, net of cash (91,330) (123,155)
------------------- -----------------
Net cash used in investing activities (157,669) (297,630)
------------------- -----------------
Cash flows from financing activities:
Subordinated liabilities 2,500,000 600,000
Repurchases of stock (608,499) -
------------------- -----------------
Net cash provided by financing activities 1,891,501 600,000
------------------- -----------------
Net increase (decrease) in cash and cash equivalents 3,322,303 (303,035)
Cash and cash equivalents, beginning of period 972,086 579,652
------------------- -----------------
Cash and cash equivalents, end of period $ 4,294,389 $ 276,617
=================== =================
Supplemental disclosures of consolidated cashflow information:
Interest paid $ 3,507 $ 14,483
Income taxes paid $ 7,776 $ 22,145
Supplemental disclosures of noncash investing and financing activities:
Common stock awards, net of forfeitures $ 377,942 $ 354,277
See Notes to Consolidated Financial Statements
5
KIRLIN HOLDING CORP. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Kirlin
Holding Corp. and its wholly owned subsidiaries, Kirlin Securities,
Inc. ("Kirlin"), Greenleaf Management Corp. ("Greenleaf"), its former
majority-owned subsidiary, GMST World Markets, Inc. ("GMST") (formerly
First Long Island Securities, Inc.), and its majority-owned (63.7%)
subsidiary, VentureHighway.com Inc. ("VentureHighway") (collectively,
the "Company"). VentureHighway's consolidated financial statements
include the accounts of Princeton Investments Holding Corp. ("PIHC")
and Princeton Securities Corporation ("Princeton"). During the year
ended December 31, 2001, the Company's percentage ownership of capital
stock of GMST ranged from approximately 61% to 5%. All material
intercompany transactions and balances have been eliminated in
consolidation.
The Company's principal subsidiary, Kirlin, is a full-service,
retail-oriented brokerage firm specializing in the trading and sale of
both equity and fixed income securities, including mutual funds. Kirlin
also offers a managed asset portfolio program to manage the financial
assets of its clients.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
as required by generally accepted accounting principles for annual
financial statements. In the opinion of management of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation have been included. The operations for the
three and six-month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
2. Income Taxes
The Company files consolidated federal income tax returns and separate
Company state income tax returns. VentureHighway files federal income
tax returns on a stand-alone basis.
3. Earnings Per Share
The Company follows SFAS No. 128, Earnings Per Share, which provides
for the calculation of "basic" and "diluted" earnings per share
("EPS"). Basic EPS includes no dilution and is computed by dividing
income or loss available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflect
the potential dilution that could occur through the effect of common
shares issuable upon exercise of stock options and warrants and
convertible securities. For the three and six-month periods ended June
30, 2002 and 2001, potential common shares have not been included in
the computation of diluted EPS since the effect would be antidilutive.
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations:
6
Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------------- -------------- -----------
Three months ended June 30, 2002:
Basic and diluted EPS:
Loss available to
common stockholders $ (338,937) 14,986,855 $ (0.02)
================ ============== ===========
Three months ended June 30, 2001:
Basic and diluted EPS:
Loss available to
common stockholders $ (903,609) 13,214,163 $ (0.07)
================ ============== ===========
Six months ended June 30, 2002:
Basic and diluted EPS:
Loss available to
common stockholders $ (997,942) 15,071,231 $ (0.07)
================ ============== ===========
Six months ended June 30, 2001:
Basic and diluted EPS:
Loss available to
common stockholders $ (1,673,769) 13,068,070 $ (0.13)
================ ============== ===========
4. Goodwill
The Company is adopting the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangibles as of
January 1, 2002. Accordingly, goodwill will no longer be amortized.
Instead it will be tested for impairment annually. As a result of the
adoption, approximately $560,000 was re-classified from goodwill to
intangible assets, which will continue to be amortized. The Company
performed a test for impairment as of June 30, 2002, which indicated
that the balance of goodwill was not impaired. Amortization expense on
goodwill during the three and six-month periods ended June 30, 2001
amounted to $19,062 and $121,070, respectively. Had such expense not
been recorded the Company's results of operations and loss per common
share would have been as follows:
7
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
---------------- ----------------
Reported net loss $ (903,609) $ (1,673,769)
Add back: Goodwill
amortization 19,062 121,070
---------------- ---------------
Adjusted net loss $ (884,547) $ (1,552,699)
================ ===============
Basic and diluted loss per common
share
Reported net loss $ (0.07) $ (0.13)
Add back: Goodwill
amortization 0.00 0.01
---------------- ----------------
Adjusted net loss $ (0.07) $ (0.12)
================ ================
During the six-months ended June 30, 2002, the Company made payments of
contingent consideration of approximately $91,000 under the terms of
the acquisition of Princeton. Such payments are included in intangible
assets.
5. Contingencies
In July 2002, Kirlin Securities was notified by the NASD that it has
made a preliminary determination to recommend that disciplinary action
be brought against Kirlin Securities and three of its current or former
employees, including Anthony Kirincic, President of the Company and
Co-Chief Executive Officer of Kirlin Securities, as a result of the
sale of certain fixed income securities to clients of Kirlin Securities
from November 1995 to 1998. Certain of these securities were issued in
$250,000 denominations. The NASD informed Kirlin that the potential
violations of the NASD Conduct Rules and/or Federal securities laws
relate to the following (all of which activity occurred prior to 1999):
(i) sales of unregistered securities stemming from the sale of these
securities in smaller denominations; (ii) placement of false and
misleading advertising as a result of non-differentiating
advertisements for securities of different issuers; (iii) charging of
markups on the sale of the securities in excess of NASD policy; (iv)
failure to maintain inventory sheets as distributed to certain
employees in connection with the sale of the securities; and (v)
failure to establish and enforce supervisory procedures to assure
compliance with federal laws and NASD Rules to prevent the
aforementioned potential violations.
Kirlin Securities has been offered the opportunity to file a submission
with the NASD, if the matter is not otherwise resolved, indicating why
an action should not be brought for some or all of the alleged
violations. The Company cannot predict the outcome of the disciplinary
action at this time if it were brought and is unable to determine
whether this matter will have a material adverse effect on the
consolidated financial condition of the Company.
8
On January 4, 2001, International Assets Advisory Corporation ("IAAC"),
initiated an arbitration proceeding before the NASD against Kirlin
Securities, GMST World Markets, Princeton Securities, Gerard A.
Mastrianni, Stephen Joseph Taormina, (two officers of GMST World
Markets), David O. Lindner, and Anthony J. Kirincic (two officers of
Kirlin Securities and of the Company) (collectively the "Respondents").
IAAC alleges that Kirlin Securities and Princeton Securities
participated in a conspiracy, along with the other Respondents, to raid
IAAC employees, engage in unfair competition, misappropriate IAAC's
trade secrets, induce IAAC employees to breach a fiduciary duty
purportedly owed to IAAC, interfere with IAAC business relationships
and convert assets of IAAC. IAAC is seeking an unspecified amount of
damages. Kirlin Securities and Princeton Securities have filed an
answer with the NASD vigorously denying the allegations contained in
IAAC's statement of claim. On December 10, 2001, Kirlin and Princeton
(together with respondents Lindner and Kirincic) filed a motion to
dismiss IAAC's Statement of Claim. This motion was denied in March
2002. The hearing on this matter is presently scheduled for November
2002. The Company is being indemnified with respect to this matter by
GMST and its principal stockholders. While the Company cannot predict
the outcome of the arbitration at this time, it is the opinion of
management that the resolution of this claim will not have a material
adverse effect on the consolidated financial condition of the Company.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Forward-Looking Statements
When used in this Form 10-Q 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. These risks are included in "Item 1: Business," "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
"Exhibit 99: Risk Factors" included in Form 10-K for the year ended December 31,
2001. 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
Critical Accounting Policies
An understanding of our accounting policies is necessary for a complete
analysis of our results, financial position, liquidity and trends. Note 1 to our
consolidated financial statements filed with our Annual Report on Form 10-K for
the year ended December 31, 2001 includes a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. We focus your attention on the following which provides a
brief discussion of the more significant accounting policies and methods used by
us:
Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results
could differ from those estimates.
Valuation of Investments. The major portion of the Company's
securities owned and securities sold, not yet purchased, are
stated at quoted market values. Included in securities owned
are stock warrants and investments in privately held companies
not readily marketable, which have been valued at fair value
as determined by management. The warrants are valued based on
a percentage of the market value of the underlying securities.
The resulting unrealized gains and losses are reflected in
principal transactions and merchant banking income. The
liquidation of the Company's position could result in
substantial differences from the market and fair value prices
used in the financial statements.
Impairment of Deferred Tax Assets. The carrying value of the
Company's net deferred tax assets assumes that it will be able
to generate future taxable income, based on estimates and
assumptions. If these estimates and assumptions change in the
future, the Company may be required to record valuation
allowances against its deferred tax assets, which would result
in additional income tax expense.
10
Impairment of Goodwill. On January 1, 2002, the Company
adopted Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," which requires the
Company to analyze goodwill on a periodic basis. No impairment
charges related to goodwill have been recorded in connection
with the adoption of this accounting standard. If the
assumptions used in analyzing goodwill for impairment at
January 1, 2002 change in the future, the Company may be
required to record an impairment charge.
Clearing Agreements. The Company's retail oriented brokerage
firm does not carry accounts for customers or perform
custodial functions related to customers' securities. The
Company's broker-dealer introduces all of its customer
transactions, which are not reflected in the financial
statements, to its clearing brokers, which maintain the
customers' accounts and clear such transactions. Additionally,
the clearing brokers provide the clearing and depository
operations for the broker dealer'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 brokers, as the
broker-dealer has agreed to indemnify the clearing brokers for
any resulting losses. The Company will record a loss from a
client transaction when information becomes available to
management that allows it to estimate its impact on the
Company's financial statements.
Market, Credit, and Liquidity Risk. The Company's investing
and underwriting activities often involve the purchase, sale
or short sale of securities as principal. Such activities
subject our capital to significant risks from markets that may
be characterized by relative illiquidity or may be
particularly susceptible to rapid fluctuation in liquidity.
Such market conditions could limit the Company's ability to
resell securities purchased or to purchase securities sold
short. These activities subject our capital to significant
risks, including market, credit counterparty and liquidity
risks. Market risks relates to the risk of fluctuating values
based on market prices without action on our part. The
Company's primary credit risk is settlement or counterparty
risk, which relates to whether a counterparty will fulfill its
contractual obligations, such as delivery of securities or
payment of funds. Liquidity risk relates to the Company's
inability to liquidate assets or redirect the deployment of
assets contained in illiquid investments. In addition, our
market and liquidity risks and risks associated with asset
revaluation are increased because these risks for us are
concentrated. The areas related to the above risks are valued
based on listed market prices, where possible. If listed
market prices are not available then these items are carried
at fair value as determined by management, with related
unrealized gains and losses recognized in the statement of
operations. Actual results could differ from the values used
in these financial statements.
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 claims, lawsuits and arbitrations
brought by its customers. The Company consults its attorneys
in order to estimate amounts that should be reflected in the
Company's financial statements relating to pending or
threatened claims. If pending or threatened claims result in
damages to be paid by the Company, these amounts could be
different from the amounts previously estimated and reflected
in the Company's financial statements.
11
Results of Operations
Principal transactions, net for the three and six-month periods ended
June 30, 2002 decreased to $(50,221) and $(256,696), respectively, from the
comparable periods in 2001. The decrease is primarily attributable to a change
from principal business to commission business identified in the next paragraph
as well as a decrease in the value of warrants the Company received in
connection with its investment banking activities.
Commissions for the three and six-month periods ended June 30, 2002
increased 81.2% and 76.5%, respectively, to $4,508,480 and $9,970,189 from the
comparable periods in 2001. The increase is primarily attributable to a change
from the amount of principal business to commission business the Company does,
which reduced the Company's exposure to market risk. Commission business is
comprised of equity securities, unit trusts, and mutual funds, which, except for
equity securities for which the Company maintains an inventory, are bought and
sold on an agency basis for which the Company receives a commission.
Investment banking for the three and six-month periods ended June 30,
2002 was $563,329 and $906,311 as a result of fees the Company generated from
acting as the underwriter for an initial public offering and as a placement
agent related to a debt conversion.
There was no merchant banking for the three and six-month periods ended
June 30, 2002. This line item changes as a result of changes in the value of the
underlying investments.
Other income for the three and six-month periods ended June 30, 2002
increased 92.6% and 99%, respectively, to $577,576 and $1,260,510 from the
comparable periods in 2001. The increase is primarily attributable to the
increases in transactional and account balance rebates the Company is entitled
to from its clearing broker, consulting income related to its investment banking
area, and earnout payment income the Company is entitled to as a result of the
sale of Company's majority interest in GMST World Markets, Inc. during December
2001.
Increase in value attributable to subsidiaries for the three and
six-month periods ended June 30, 2002 was $0 as compared to $113,413 and
$453,378 from the comparable periods in 2001. This line item changes based on
the value of the Company's investment in its subsidiaries. During the past
quarter none of the Company's subsidiaries had any changes which affected this
line item.
Employee compensation and benefits for the three and six-month periods
ended June 30, 2002 increased 0.1% and 3.9%, respectively, to $3,852,393 and
$9,090,434 from the comparable periods in 2001. Since employee compensation
related to the Company's retail brokerage traders and registered representatives
is directly related to revenue they generate, a portion of employee compensation
follows the change in the Company's revenues. The results are reflective of the
compensation costs directly related to the increase in commission structure for
its registered representatives and branch managers which was initiated during
September 2001, as well as the compensation costs directly related to the hiring
of additional personnel following the acquisition of certain assets of a retail
oriented brokerage firm during August 2001.
Promotion and advertising for the three and six-month periods ended
June 30, 2002 decreased 70.9% and 68.4%, respectively, to $107,209 and $202,584
from the comparable periods in 2001 primarily as a result of the Company's
decrease in advertising expenditures related to Kirlin Securities' radio
campaign and due to the expiration of VentureHighway's advertising commitment
during December 2001. To a lesser extent this line item decreased due to the
promotional expenses related to GMST, which was sold during December 2001.
12
Clearance and execution charges for the three and six-month periods
ended June 30, 2002 decreased 70.7% and 62.3%, respectively, to $134,029 and
$301,422 from the comparable periods in 2001 primarily as a result of the change
in clearing brokers during October 2001 which resulted in reduced fees.
Occupancy and communications costs for the three and six-month periods
ended June 30, 2002 decreased 24.1% and 17.9%, respectively, to $978,293 and
$2,093,192 from the comparable periods in 2001. This decrease is primarily a
result of the elimination of these costs directly related to VentureHighway
which is in the process of being dissolved and the sale of the Company's
majority interest in GMST during December 2001.
Professional fees for the three and six-month periods ended June 30,
2002 increased 7.4% and decreased 26%, respectively, to $356,824 and $486,499
from the comparable periods in 2001. The increase during the three-month period
ended June 30, 2002 is reflective of a lawsuit initiated by the Company against
former representatives as well as legal consultation related to customer
arbitrations the Company has been named, which is being handled by outside
counsel. The decrease during the six-month period ended June 30, 2002 is
reflective of non-recurring legal fees as well as the shift of legal work being
performed internally by the Company.
Interest expense for the three and six-month periods ended June 30,
2002 decreased 203% and 106%, respectively, to $(21,147) and $(2,793) from the
comparable periods in 2001. Interest expense decreased primarily due to the
reversal of accrued interest related to Kirlin Securities' deferred commission
plan due to certain representatives not being employed by the Company anymore.
To a lesser extent interest expense decreased as a result of a reduction of
inventory positions purchased on margin and securities sold short, which are
held at clearing brokers and charged interest. The Company seeks to minimize its
cash balances and withdraws cash for operations from its trading accounts as
needed. To the extent necessary, inventory positions are utilized as collateral
for such withdrawals.
Other expenses for the three and six-month periods ended June 30, 2002
increased 86.3% and 43.1%, respectively, to $743,940 and $1,244,148 from the
comparable periods in 2001 as a result of general office expenses related to the
to the acquisition of certain assets of a retail oriented brokerage firm during
August 2001 which resulted in an increase in the number of branch offices
operated by the Company, settlement of customer arbitrations, and amortization
expenses related to the intangible assets in connection to the acquisition of
two retail oriented brokerage firms in prior years.
Income tax benefit for the three and six-month periods ended June 30,
2002 were $213,440 and $537,230, respectively, which is reflective of the
benefit the Company is entitled to based on its operations during the past
quarter.
Net loss of $338,937 and $997,942 for the three and six-month periods
ended June 30, 2002 compares to net loss of $903,609 and $1,673,769 for the
three and six-month periods ended June 30, 2001. This resulted primarily from
the change in revenues and expenses discussed above.
13
Liquidity and Capital Resources
At June 30, 2002, approximately 38% of the Company's assets were
comprised of cash and highly liquid securities.
Cash and cash equivalents amounted to $4,294,389 at June 30, 2002 as
compared to $972,086 at December 31, 2001. This increase is reflective of the
movement of cash from the Company's trading accounts, which were accounted for
in the "Due from Clearing Brokers" line item, to other financial institutions.
Additionally, this line item is reflective of the $2,500,000 subordinated loan
Kirlin Securities received from its clearing broker during March 2002.
Due from Clearing Brokers amounted to $2,314,032 at June 30, 2002 as
compared to $3,119,154 at December 31, 2001. This 25.8% decrease is primarily
attributable to the movement of cash out of the Company's trading accounts as
discussed in the previous paragraph.
Securities owned at June 30, 2002 were $1,994,772 as compared to
$2,345,632 at December 31, 2001. This 15% decrease is primarily attributable to
the decrease in the value of positions held in relation to its merchant banking
and investment banking activities.
Furniture, Fixtures and Leasehold improvements, net, at June 30, 2002,
decreased to $826,014 as compared to $1,084,821 at December 31, 2001. This 23.9%
decrease primarily results from the depreciation of fixed assets during the past
quarter.
Income taxes receivable at June 30, 2002 amounted to $1,213,881 and is
reflective of the receivable the Company is expecting from its carryback tax
return filed in relation to the year ended December 31, 2001.
Deferred tax asset at June 30, 2002 amounted to $2,737,993 as compared
to $3,457,855 at December 31, 2001. The deferred tax asset is reflective of the
income tax benefit resulting from the net operating loss which arose during the
six-month period ended June 30, 2002, net unrealized depreciation in the value
of certain security positions in the Company's merchant banking portfolio and
investment accounts, and temporary differences related to taxable loans utilized
for recruiting.
Intangible assets, net at June 30, 2002 amounted to $1,304,167 as
compared to $775,000 at December 31, 2001. This 68.3% increase primarily results
from certain assets related to the acquisition of Princeton Securities
previously reflected as goodwill now being reflected as intangible assets offset
by the amortization of these intangible assets as well as the intangible assets
related to certain assets acquired during August 2001 under an agreement with
M.S. Farrell & Co., a retail-oriented brokerage and investment banking firm.
This change is reflective of the adoption of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangibles. The Company continues to pay
additional purchase payments for Princeton Securities, which will increase the
value of this line.
Goodwill, net at June 30, 2002 amounted to $836,747 as compared to
$1,395,417 at December 31, 2001. This 40% decrease primarily relates to the
change in intangible assets identified in the previous paragraph.
Other assets increased by 65.5% to $2,855,104 at June 30, 2002, from
$1,724,991 at December 31, 2001. The change in other assets is primarily
attributable to the Investment Banking fees of approximately $1,000,000 the
Company was owed at June 30, 2002 relating to the underwriting of an initial
public offering at the end of the second quarter, unit investment trust
commissions owed to the Company, and consulting income generated by the
Company's investment banking area offset by a decrease in outstanding loans. To
a lesser extent the change in other assets is reflective of the decrease in
prepaid restricted stock, the reduction of prepaid operating expenses, and the
receipt of the 2001 earnout payment the Company is entitled to as result of its
sale of its majority interest in GMST during December 2001.
Securities sold short amounted to $2,364,961 at June 30, 2002 as
compared to $224,371 at December 31, 2001. The increase is reflective of the
over allotment of shares and warrants related to the initial public offering
which took place at the end of the second quarter. The underwriting agreement
allowed the Company to oversell the offering with the ability to cover this over
allotment by the prices offered in the initial public offering. The Company
covered this over allotment in the subsequent month. Management monitors these
positions on a daily basis and covers short positions when deemed appropriate.
14
Accrued compensation was $2,162,637 at June 30, 2002 as compared to
$2,113,287 at December 31, 2001, a 2.3% increase. The revenues upon which
commission income to registered representatives is based directly affect this
line item, which was higher at the end of the current quarter as compared to
2001.
Accounts payable and accrued expenses at June 30, 2002 were $1,807,806
as compared to $1,767,105 at December 31, 2001. This 2.3% increase is
attributable to payables related to the Company's general business.
Subordinated liabilities amounted to $2,500,000 at June 30, 2002. This
line item did not exist at December 31, 2001. During March 2002, Kirlin
Securities received from its clearing broker a $2,500,000 three-year
subordinated loan. Pursuant to the provisions of the loan agreement, principal
payments due under the loan are basically offset by an amount equal to 50% of
the clearing fees and other items that Kirlin is obligated to pay to the
clearing broker under the clearing agreement, over a three-year period ending on
February 28, 2005.
The Company, as guarantor of its customer accounts to its clearing
brokers, is exposed to off-balance-sheet risks in the event that its customers
do not fulfill their obligations with the clearing brokers. 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.
In July 2002, Kirlin Securities was notified by the NASD that it has
made a preliminary determination to recommend that disciplinary action be
brought against Kirlin Securities and three of its current or former employees,
including Anthony Kirincic, President of the Company and Co-Chief Executive
Officer of Kirlin Securities, as a result of the sale of certain fixed income
securities to clients of Kirlin Securities from November 1995 to 1998. Certain
of these securities were issued in $250,000 denominations. The NASD informed
Kirlin that the potential violations of the NASD Conduct Rules and/or Federal
securities laws relate to the following (all of which activity occurred prior to
1999): (i) sales of unregistered securities stemming from the sale of these
securities in smaller denominations; (ii) placement of false and misleading
advertising as a result of non-differentiating advertisements for securities of
different issuers; (iii) charging of markups on the sale of the securities in
excess of NASD policy; (iv) failure to maintain inventory sheets as distributed
to certain employees in connection with the sale of the securities; and (v)
failure to establish and enforce supervisory procedures to assure compliance
with federal laws and NASD Rules to prevent the aforementioned potential
violations.
Kirlin Securities has been offered the opportunity to file a submission
with the NASD, if the matter is not otherwise resolved, indicating why an action
should not be brought for some or all of the alleged violations. The Company
cannot predict the outcome of the disciplinary action at this time if it were
brought and is unable to determine whether this matter will have a material
adverse effect on the consolidated financial condition of the Company.
15
On January 4, 2001, International Assets Advisory Corporation ("IAAC"),
initiated an arbitration proceeding before the NASD against Kirlin Securities,
GMST World Markets, Princeton Securities, Gerard A. Mastrianni, Stephen Joseph
Taormina, (two officers of GMST World Markets), David O. Lindner, and Anthony J.
Kirincic (two officers of Kirlin Securities and of the Company) (collectively
the "Respondents"). IAAC alleges that Kirlin Securities and Princeton Securities
participated in a conspiracy, along with the other Respondents, to raid IAAC
employees, engage in unfair competition, misappropriate IAAC's trade secrets,
induce IAAC employees to breach a fiduciary duty purportedly owed to IAAC,
interfere with IAAC business relationships and convert assets of IAAC. IAAC
is seeking an unspecified amount of damages. Kirlin Securities and Princeton
Securities have filed an answer with the NASD vigorously denying the allegations
contained in IAAC's statement of claim. On December 10, 2001, Kirlin and
Princeton (together with respondents Lindner and Kirincic) filed a motion to
dismiss IAAC's Statement of Claim. This motion was denied in March 2002. The
hearing on this matter is presently scheduled for November 2002. The Company is
being indemnified with respect to this matter by GMST and its principal
stockholders. While the Company cannot predict the outcome of the arbitration at
this time, it is the opinion of management that the resolution of this claim
will not have a material adverse effect on the consolidated financial condition
of the Company.
The Company believes its financial resources will be sufficient to fund
the Company's operations and capital requirements for the foreseeable future.
16
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In July 2002, Kirlin Securities was notified by the NASD that
it has made a preliminary determination to recommend that disciplinary
action be brought against Kirlin Securities and three of its current or former
employees, including Anthony Kirincic, President of the Company and Co-Chief
Executive Officer of Kirlin Securities, as a result of the sale of certain fixed
income securities to clients of Kirlin Securities from November 1995 to 1998.
Certain of these securities were issued in $250,000 denominations. The NASD
informed Kirlin that the potential violations of the NASD Conduct Rules and/or
Federal securities laws relate to the following (all of which activity occurred
prior to 1999): (i) sales of unregistered securities stemming from the sale of
these securities in smaller denominations; (ii) placement of false and
misleading advertising as a result of non-differentiating advertisements for
securities of different issuers; (iii) charging of markups on the sale of the
securities in excess of NASD policy; (iv) failure to maintain inventory sheets
as distributed to certain employees in connection with the sale of the
securities; and (v) failure to establish and enforce supervisory procedures to
assure compliance with federal laws and NASD Rules to prevent the aforementioned
potential violations.
Kirlin Securities has been offered the opportunity to file a
submission with the NASD, if the matter is not otherwise resolved, indicating
why an action should not be brought for some or all of the alleged violations.
The Company cannot predict the outcome of the disciplinary action at this time
if it were brought and is unable to determine whether this matter will have a
material adverse effect on the consolidated financial condition of the Company.
ITEM 2: SALES OF UNREGISTERED SECURITIES
- ----------------- ---------------- --------------- ------------------------- --------------------- ----------------------
Consideration Received
and Description of If Option, Warrant
Underwriting or Other or Convertible
Discounts to Market Security, Terms of
Title of Number Sold Price Afforded to Exemption from Exercise or
Date of Sale Security or forfeited Purchasers Registration Claimed Conversions
- ----------------- ---------------- --------------- ------------------------- --------------------- ----------------------
4/1/02 Options to 75,962 Options granted under 4(2) Fully exercisable
purchase 1994 Stock Plan - no upon grant for a
Common Stock cash consideration period of 10 years
received by the Company. from date of grant,
at an exercise price
of $0.7983 per share.
4/1/02 Options to 25,000 Options granted under 4(2) Fully exercisable
purchase 1994 Stock Plan to upon grant for a
Common Stock consultant - no cash period of 5 years
consideration received from date of grant,
by the Company. at an exercise price
of $0.94 per share.
4/1/02 Options to 53,559 Options granted under 4(2) Fully exercisable
purchase 1994 Stock Plan - no commencing 4/1/05
Common Stock cash consideration until 10 years from
received by the Company. date of grant, at an
exercise price of
$0.9496 per share.
6/28/02 Options to 30,000 Options granted under 4(2) Fully exercisable
purchase 1994 Stock Plan to upon grant for a
Common Stock directors - no cash period of 10 years
consideration received from date of grant,
by the Company. at an exercise price
of $0.76 per share.
17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June
28, 2002. At the meeting the directors nominated for election, David O. Lindner
and Edward J. Casey, were each re-elected to a three year term expiring in 2005
with 10,189,895 and 10,194,665 shares, respectively, voted in favor of their
election and 49,473 and 44,703 shares, respectively, withheld authority to vote.
The term of office of Harold Paul and Martin Schacker will expire at the Annual
Meeting of Stockholders held in 2003 and the terms of office of Anthony J.
Kirincic and John Milcetich will expire at the Annual Meeting of Stockholders
held in 2004.
ITEM 5: OTHER INFORMATION
On July 30, 2002, the Company was advised by Nasdaq that the
closing bid price for the Company's Common Stock was less than $1.00 for 30
consecutive business days and the Common Stock was subject to delisting from the
Nasdaq National Market if the closing bid price did not reach $1.00 for ten
consecutive business days by October, 28, 2002. The Company intends to take one
or more actions to maintain listing on Nasdaq, including exercising its ability
to phase down to the Nasdaq SmallCap Market, which provides the Company with
lengthier core periods in which to regain compliance with the $1.00 minimum bid
price requirement. (The SmallCap Market would extend the Company's time to
regain the $1.00 minimum bid price requirement until January 27, 2003 and the
Company could also seek an additional 180 day grace period on the SmallCap
Market.) If the Company were to phase down to the SmallCap Market, the Company
could regain listing on the National Market provided it meets certain conditions
by July 25, 2003.
On August 8, 2002, the Company was reminded by Nasdaq that, effective
November 1, 2002, one of the minimum standards to maintain listing on the Nasdaq
National Market will be changed from a $4 million minimum net tangible assets
standard to a $10 million minimum stockholders' equity standard. As indicated in
this report, at June 30, the Company met the existing standard, but would not
have met the new standard. Unless the Company has a minimum stockholders' equity
of at least $10 million after November 1, 2002, the Company will need to phase
down to the Nasdaq SmallCap market, which has a lower $2.5 million stockholders'
equity standard.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.24.2 Schedule of Omitted Documents in the Form of
Exhibit 10.24, including material detail in
which such document differs from Exhibit
10.24.
10.25.2 Schedule of Omitted Documents in the Form of
Exhibit 10.25, including material detail in
which such document differs from Exhibit
10.25.
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kirlin Holding Corp.
--------------------
(Registrant)
Dated: August 14, 2002 By: /s/ Anthony J. Kirincic
--------------------------
Anthony J. Kirincic
President
Dated: August 14, 2002 By: /s/ Barry E. Shapiro
--------------------------
Barry E. Shapiro
Chief Financial Officer
(and principal accounting officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kirlin Holding Corp. (the "Company")
on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), each of the undersigned,
in the capacities and on the dates indicated below, hereby certifies pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of
the Company.
Dated: August 14, 2002 /s/ David O. Lindner
--------------------------
David O. Lindner
Chief Executive Officer
Dated: August 14, 2002 /s/ Barry E. Shapiro
--------------------------
Barry E. Shapiro
Chief Financial Officer
19