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 March 31, 2003
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Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the transition period from to
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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
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(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 May 14, 2003, Issuer had
outstanding 2,000,603 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
March 31, December 31,
2003 2002
---------------- -----------------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 3,887,980 $ 3,035,084
Due from Clearing Brokers 789,344 559,303
Securities Owned:
U.S. government and agency obligations, at market value 100,325 320,103
State and municipal obligations, at market value 1,058,407 757,450
Corporate bonds and other securities, at market value 651,392 705,967
Nonmarketable securities, at fair value 62,873 72,725
Rebate Receivable 1,115,000 964,000
Representative Loans 458,259 547,914
Furniture, Fixtures and Leasehold Improvements, at cost, net of accumulated
depreciation of $3,060,538 and $2,944,342, respectively 458,790 574,986
Deferred Tax Assets, net of valuation allowances of $3,064,146 and $4,119,640,
respectively 815,659 -
Other Assets 663,749 637,924
---------------- -----------------
Total assets $ 10,061,778 $ 8,175,456
================ =================
LIABILITIES and STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, not yet purchased, at market value $ 81,501 $ 143,205
Accrued compensation 1,952,937 1,694,183
Accounts payable and accrued expenses 2,848,113 2,269,672
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Total liabilities 4,882,551 4,107,060
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Subordinated liabilities 2,500,000 2,500,000
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Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value; authorized 7,000,000 shares, issued and
outstanding 1,856,053 and 1,798,224 shares, respectively 186 180
Additional paid-in capital 16,121,449 16,226,346
Unearned Stock Compensation (264,570) (283,409)
Accumulated deficit (13,177,838) (14,374,721)
---------------- -----------------
Total stockholders' equity 2,679,227 1,568,396
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Total liabilities and stockholders' equity $ 10,061,778 $ 8,175,456
================ =================
See Notes to Consolidated Financial Statements
2
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
March 31,
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2003 2002
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(Unaudited)
Revenues:
Principal transactions, net $ 159,631 $ (206,475)
Commissions 4,247,980 5,461,709
Investment banking - 342,982
Other income 593,187 682,934
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5,000,798 6,281,150
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Expenses:
Employee compensation and benefits 3,324,228 5,238,041
Promotion and advertising 74,141 95,375
Clearance and execution charges 110,747 167,394
Occupancy and communications 787,656 1,114,898
Professional fees 140,958 129,675
Interest (14,206) 18,354
Other 178,644 500,209
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4,602,168 7,263,946
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Income (loss) before income
tax benefit 398,630 (982,796)
Income tax benefit 798,253 323,790
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Net income (loss) $ 1,196,883 $ (659,006)
=============== ==============
Basic and diluted earnings (loss)
per common share $ 0.64 $ (0.35)
=============== ==============
Weighted-average shares outstanding 1,874,817 1,894,569
=============== ==============
See Notes to Consolidated Financial Statements
3
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the three months ended March 31, 2003
(Unaudited)
Common Stock Additional Unearned
----------------------------- Paid-in Stock Accumulated
Shares Par Value Capital Compensation Deficit Total
-------------- ------------- ------------- --------------- -------------- --------------
Stockholders' equity,
January 1, 2003 1,798,224 $ 180 $ 16,226,346 $ (283,409) (14,374,721) $ 1,568,396
Stock issuances and
amortization of unearned
stock compensation 97,961 10 265,908 6,339 - 272,257
Stock forfeitures (40,132) (4) (370,805) 12,500 - (358,309)
Net income - - - - 1,196,883 1,196,883
------------- ------------ ------------ -------------- ------------- -------------
Stockholders' equity,
March 31, 2003 1,856,053 $ 186 $ 16,121,449 $ (264,570) $ (13,177,838) $ 2,679,227
============= ============ ============ =============== ============== =============
See Notes to Consolidated Financial Statements
4
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
--------------------------------------
2003 2002
------------------- -----------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 1,196,883 $ (659,006)
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Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation 116,196 163,882
Amortization - 24,166
Deferred income taxes (815,659) (406,652)
Decrease in nonmarketable securities 9,852 282,662
Noncash compensation (86,052) 270,096
(Increase) in securities owned, at market value (26,604) (173,438)
(Increase) decrease in receivable from clearing brokers (230,041) 2,860,496
(Increase) decrease in other assets (25,825) 10,777
(Increase) in rebate receivable (151,000) (70,000)
Decrease in representative loans 89,655 336,323
(Decrease) in securities sold, not yet purchased, at market value (61,704) (18,679)
Increase (decrease) in accrued compensation 258,754 (46,360)
Increase in accounts payable and accrued expenses 578,441 33,981
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Total adjustments (343,987) 3,267,254
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Net cash provided by operating activities 852,896 2,608,248
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Cash flows from investing activities:
Purchase of furniture, fixtures and leasehold improvements - (33,200)
Acquisition of other businesses, net of cash - (62,540)
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Net cash used in investing activities - (95,740)
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Cash flows from financing activities:
Subordinated liabilities - 2,500,000
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Net cash provided by financing activities - 2,500,000
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Net increase in cash and cash equivalents 852,896 5,012,508
Cash and cash equivalents, beginning of period 3,035,084 972,086
------------------- -----------------
Cash and cash equivalents, end of period $ 3,887,980 $ 5,984,594
=================== =================
Supplemental disclosures of consolidated cashflow information:
Interest paid $ 807 $ 1,681
Income taxes paid $ 6,192 $ 7,776
Supplemental disclosures of noncash investing and financing activities:
Common stock awards, net of forfeitures $ (86,052) $ 270,095
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"), 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"). 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-month period ended March
31, 2003 are not necessarily indicative of the results that may be expected
for the full year ending December 31, 2003. 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, 2002.
For comparability, certain balances in the Consolidated Statement of Cash
Flows for the three-month period ended March 31, 2002 have been
reclassified, where appropriate, to conform to the financial statement
presentation used at March 31, 2003.
The Company has elected, in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-based
Compensation, to apply the current accounting rules under Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for options to purchase ownership interests granted to employees
and, accordingly, is presenting the disclosure-only information as required
by SFAS No. 123. Had compensation costs 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 earnings per common share for the three-months
ended March 31, 2003 would have been as follows:
---------------------------------------------------------------------------
Net income - as reported $ 1,196,883
Deduct: Total stock based
employee compensation expense
determined under the fair value
based method (439,250)
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Net income - pro forma $ 757,633
===========================================================================
Basic and diluted income per
common share - as reported $ 0.64
Basic and diluted income per
common share - pro forma $ 0.40
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2. Income Taxes
The entities comprising the Company, other than VentureHighway, file
consolidated federal income tax returns but separate state income tax
returns. VentureHighway filed a final federal income tax return on a
stand-alone basis during 2002.
In recognition of the uncertainty regarding the ultimate amount of future
income tax benefits to be derived from net operating loss carryforwards and
other temporary differences, the Company has recorded a valuation allowance
of $3,064,146 at March 31, 2003 and $4,119,640 at December 31, 2002.
The Company has a federal net operating loss carryforward of approximately
$3,100,000 available to offset taxable income through 2022.
6
KIRLIN HOLDING CORP. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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-month period ended March 31, 2002, potential common shares have not
been included in the computation of diluted EPS since the effect would be
antidilutive.
4. Contingencies
In July 2002, the NASD notified Kirlin that it had made a preliminary
determination to recommend that disciplinary action be brought against
Kirlin and three of its current or former employees, including the
president of the Company and Co-Chief Executive Officer of Kirlin, as a
result of the sale of certain fixed income securities to clients of Kirlin
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): sales of
unregistered securities stemming from the sale of these securities in
smaller denominations, placement of false and misleading advertising
relating to these securities, charging of markups on the sale of the
securities in excess of NASD policy allegedly in the amount of
approximately $1,420,000 and in violation of securities laws allegedly in
the amount of approximately $44,000, failure to maintain inventory sheets
as distributed to certain employees in connection with the sale of the
securities, and failure to establish and enforce supervisory procedures to
assure compliance with federal laws and NASD rules to prevent the
aforementioned potential violations. In March 2003 the NASD initiated this
disciplinary action against Kirlin and two employees seeking the imposition
of sanctions, restitution and costs. The Company cannot predict the outcome
of the disciplinary action at this time and is unable to determine whether
this matter will have a material adverse effect on the consolidated
financial condition of the Company.
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 and former employees. It is the opinion of management, based upon
its evaluation of each of these matters and the reserves established by the
Company, that the resolution of all claims presently pending will not have
a material adverse effect on the consolidated financial condition of the
Company.
7
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," "it is
the opinion of management" 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, 2002. 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, 2002 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:
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, investment banking 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 additional valuation allowances against its
deferred tax assets, which would result in additional income tax
expense. During the period the valuation allowance related to
Company's deferred tax asset related to its net operating loss
carryforwards and other temporary differences was changed to
approximately 79% from 100%. This change arose due to the developments
during the first four-months of 2003, including the recordation of
income from operations for the quarter ended March 31, 2003 and the
expected results for the three-month period ended June 30, 2003.
Management believes that the Company is prepared to return to
long-term profitability as a result of its decision to return to its
core business of retail brokerage, investent and merchant banking, and
money management. As a result, the Company has reduced its expenses by
eliminating personnel (including members of senior management of
Kirlin Securities who received fixed salaries) and reducing its real
estate and operational costs, such as eliminating non-productive
branch offices. In addition, the Company is confident that the
imposition of an annual account maintenance fee by Kirlin Securities
will achieve increased revenue of approximately $800,000 per year.
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
8
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. The Company's review of existing claims,
arbitrations, and unpaid settlements at March 31, 2003 resulted in an
accrued liability of $257,000.
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 clears 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.
Results of Operations
Principal transactions, net for the three-month period ended March 31, 2003
increased 177% to $159,631 from $(206,475) in 2002. The increase is primarily
attributable to an unrealized loss during the three-month period ended March 31,
2002 in the value of warrants the Company received in connection with its
investment banking activities. To a lesser extent the increase is attributable
to an increase in revenue related to equity and fixed income business for which
the Company maintained an inventory.
9
Commissions for the three-month period ended March 31, 2003 decreased 22.2%
to $4,247,980 from $5,461,709 in 2002. The decrease is primarily attributable to
the Company's decreased business in equity securities, unit trusts, and mutual
funds, which are bought and sold on an agency basis for which the Company
receives a commission. The decrease is also attributable to the absence in 2003
of the commissions related to a debt conversion the Company participated during
the three-month period ended March 31, 2002.
Investment banking for the three-month period ended March 31, 2003 was $0
as compared to $342,984. During the three-month period ended March 31, 2003 the
Company did not generate any investment banking fees.
Other income for the three-month period ended March 31, 2003 decreased
13.1% to $593,187 from $682,934 in 2002. The decrease is primarily attributable
to the decreases in transactional and account balance rebates the Company is
entitled to from its clearing broker and earnout payment income the Company is
entitled to receive from GMST World Markets, Inc. offset by an increase in
consulting income related to investment banking.
Employee compensation and benefits for the three-month period ended March
31, 2003 decreased 36.5% to $3,324,228 from $5,238,041 in 2002. 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 decrease
during the three-month period ended March 31, 2003 is also reflective of the
reduction of base salary by the Company's Chief Executive Officer and its
President by 68% and by its Chief Financial Officer by 35%. Other key management
personnel also agreed to reduce their base salaries. In addition the Chief
Executive Officer and President of the Company reduced the variable portion of
their base salary by 100% during the three-month period ended March 31, 2003.
Finally, the Company's roster of employees decreased which caused a decrease in
base salaries and commission payouts related to its deferred plans.
Promotion and advertising for the three-month period ended March 31, 2003
decreased 22.3% to $74,141 from $95,375 in 2002 as a result of the Company's
decrease in car allowances arising from the termination of certain employees as
well as a decrease in promotional material expenses. The Company expects to
increase its expenditures for promotion and advertising in future periods.
Clearance and execution charges for the three-month period ended March 31,
2003 decreased 33.8% to $110,747 from $167,394 in 2002 primarily as a result of
lower ticket volume.
Occupancy and communications costs for the three-month period ended March
31, 2003 decreased 29.4% to $787,656 from $1,114,898 in 2002. This decrease is
primarily a result of the move of one of the Company's branch offices to smaller
and less expensive office space, reduction of depreciation expense related to
assets that fully depreciated in the prior year, completion of the furniture
financing related to the Company's Corporate offices in the prior year,
reduction of communication and telephone expenses due to a reduction of the
number of employees as compared to the prior year. As part of the Company's long
distance telephone contract it received a credit for telephone expenses during
the three-month period ended March 31, 2003.
Professional fees for the three-month period ended March 31, 2003 increased
8.7% to $140,958 from $129,675 in 2002. The increase is reflective of legal fees
related to the Company's vacated office space in San Diego. In December 2001 the
Company's sub-tenant abandoned the San Diego office space and stopped paying
rent to the Company. Based on the nature of the sub-tenant's relationship with
the Company's landlord, the Company decided to stop paying rent as well. The
Company's landlord pursued legal action and during the three-month period ended
March 31, 2003 the court ruled in favor of the landlord. The Company has not
been informed of the amount of the final judgment, however, the Company believes
such amount will not have a material adverse effect on the consolidated
financial condition of the Company.
10
Interest expense for the three-month period ended March 31, 2003 decreased
177% to $(14,206) from $18,354 in 2002. Interest expense decreased primarily due
to the reversal of accrued interest related to Kirlin Securities' deferred
commission plan due to the termination of employment of certain registered
representatives. 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 a clearing broker 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-month period ended March 31, 2003 decreased
64.3% to $178,644 from $500,209 in 2002 primarily as a result of no new accruals
for customer arbitrations and reversal of prior accruals which arose due to the
Company satisfying unpaid awards for less than the awarded amount and receipt of
a promissory note for the partial reimbursement of two customer settlements.
Shareholder administration expenses and franchise taxes decreased due to lower
than expected expenses which resulted in lower incurred charges. Additionally,
general office expenses have decreased due to the decrease in the number of
employees, however, during February 2003 the Company entered into a new two year
licensing agreement with an outside vendor to provide trade compliance
monitoring support on all executed trades at a cost of approximately $4,000 per
month. The Company may terminate this agreement with sixty days written notice.
Income tax benefit for the three-month period ended March 31, 2003 was
$798,253 as compared to $323,790 for the three-month period ended March 31,
2002. For the three-month period ended March 31, 2003 the valuation allowance
related to Company's deferred tax assets related to its net operating loss
carryforwards and other temporary differences was changed to approximately 79%
from 100% as a result of events giving rise to greater expectation of a return
to long-term profitability.
Net income of $1,196,883 for the three-month period ended March 31, 2003
compares to net loss of $659,006 for the three-month period ended March 31,
2002. This resulted primarily from the change in revenues and expenses discussed
above.
Liquidity and Capital Resources
At March 31, 2003, approximately 64% of the Company's assets were comprised
of cash and highly liquid securities.
Cash and cash equivalents amounted to $3,887,980 at March 31, 2003 as
compared to $3,035,084 at December 31, 2002. This increase is reflective of the
collection of a new annual maintenance fee on client accounts that was collected
during March 2003.
Due from Clearing Brokers amounted to $789,344 at March 31, 2003 as
compared to $559,303 at December 31, 2002. This 41.1% increase is primarily
attributable to increased receivables related to agency commissions owed to the
Company at the end of the quarter.
Securities Owned at March 31, 2003 were $1,872,997 as compared to
$1,856,245 at December 31, 2002. This line item is basically unchanged, however,
the increase in U.S. government and agency obligations held in inventory for
resale to its customers was offset by the decrease in state and municipal
obligations securities held in inventory with respect to the Company's syndicate
activities.
Rebate Receivable amounted to $1,115,000 at March 31, 2003 as compared to
$964,000 at December 31, 2002. This 15.7% increase is reflective of the rebate
the Company is entitled to receive from its clearing broker as provided in the
clearing agreement. The clearing broker will rebate, in amounts and at dates
specified in the agreement, 50% of the clearing fees and other items (as
defined) up to a maximum of $2,500,000. The rebate is supposed to be paid by the
clearing broker in the amount of $250,000 on March 31, 2003 and up to maximum
installments of $62,500 at the end of each subsequent calendar quarter through
March 31, 2005, at which time the balance will be payable. The Company is
11
presently working with the clearing broker to receive the $250,000 that was owed
to the Company on March 31, 2003, which in turn will be paid to the clearing
broker to satisfy the March 31, 2003 payment under the subordinated loan
agreement.
Representative Loans at March 31, 2003 amounted to $458,259 as compared to
$547,914 at December 31, 2002. This 16.4% decrease is reflective of the net
change resulting from the disbursement of new loans provided to registered
representatives as part of the Company's recruitment efforts net of the
amortization, collections, and write-offs related to loans disbursed in the
current and prior years. A majority of the loans will be forgiven based on the
recipient's production or employment through a specific time period. The Company
amortizes the principal amount of the loan over the performance period or the
employment period, whichever is shorter.
Furniture, Fixtures and Leasehold improvements, net, at March 31, 2003,
decreased to $458,790 as compared to $574,986 at December 31, 2002. This 20.2%
decrease primarily results from the depreciation of fixed assets during the
first quarter of 2003.
Deferred Tax Assets, net at March 31, 2003 amounted to $815,659 as compared
to $0 at December 31, 2002. During the year the Company changed its valuation
allowance to approximately 79% from 100% related to its deferred tax assets
related to its net operating loss carryforwards and other temporary differences
as a result of events giving rise to greater expectation of a return to
long-term profitability. At March 31, 2003 the deferred tax assets amount to
approximately $3,900,000 and the recorded valuation allowance amounts to
approximately $3,100,000. If the Company continues to be profitable then it
anticipates being able to use the entire deferred tax asset.
Other assets increased by 4.1% to $663,747 at March 31, 2003, from $637,924
at December 31, 2002. The increase is attributable to the increase in
commissions due the Company related to the sale of unit investment trusts, the
net increase in receivables related to three legal matters whereby the
receivable that existed at December 31, 2002 related to one matter was satisfied
and a new receivable was established for two other matters. The increase is also
attributable to the increase in accrued interest related to fixed income
security positions held in inventory, increase in mutual fund commissions that
were collected entirely during April 2003, offset by a decrease in the rent
deposit related to one of the Company's leases which was forfeited as part of
the early termination of that lease.
Securities sold, not yet purchased amounted to $81,501 at March 31, 2003 as
compared to $143,205 at December 31, 2002. Management monitors these positions
on a daily basis and covers short positions when deemed appropriate.
Accrued compensation was $1,952,937 at March 31, 2003 as compared to
$1,694,183 at December 31, 2002, a 15.3% 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
2002.
Accounts payable and accrued expenses at March 31, 2003 were $2,848,113 as
compared to $2,269,672 at December 31, 2002. This 25.5% increase is primarily
attributable to the collection in March 2003 of the annual maintenance fee
charged to client accounts and the recordation on the Company's Statement of
Financial Condition of an offsetting liability. The income related to the annual
maintenance fee will be recognized monthly as the annual fee is amortized. The
above increase is offset by a decrease in the accrued liability related to
existing claims, arbitrations and unpaid settlements, which decreased due to the
payment of some settlement amounts and the reversal of prior accruals due to the
Company satisfying unpaid awards for less than the awarded amount. This line
item also increased due to the rent accrual related to the Company's vacated
office space in San Diego, which is described in the previous discussion
regarding Professional Fees in Results of Operations. The increase is also
attributable to the override payments to be made to the former owners of
Princeton Securities, where the Company is required to pay an override on the
commissions generated by the representatives directly hired as part of the
transaction through March 2003. The final payment is expected to be made during
May 2003, however, accrued amounts related to one of the former owners is being
withheld due to a disagreement over amounts owed to the Company and its
attorneys in relation to GMST World Market's arbitration. Accounts payable and
12
accrued expenses include a deposit collected by the Company during March 2003
under an engagement to underwrite an initial public offering of a
bio-pharmaceutical Company, which was subsequently aborted. The Company is
presently analyzing the expenses incurred related to this engagement, and any
funds that remain after the deduction of such expenses will be returned. To a
lesser extent this line item increased due to the increase in payables related
to the Company's general business.
Subordinated liability at March 31, 2003 and December 31, 2003 amounted to
$2,500,000. During March 2002, Kirlin Securities received from its clearing
broker a $2,500,000 three-year subordinated loan and calls for payments over
various periods of time during this three-year period. The Company is presently
working with the clearing broker to pay the $250,000 that was owed on March 31,
2003, which payment will be made from the funds received from the clearing
broker under the rebate agreement.
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 had 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 Securities 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 relating to these securities; (iii) charging of markups
on the sale of the securities in excess of NASD policy allegedly in the amount
of approximately $1,420,000 and in violation of securities laws allegedly in the
amount of approximately $44,000; (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. In March 2003 the NASD initiated this disciplinary action
against Kirlin Securities and two of its employees seeking the imposition of
sanctions, restitution and costs. The Company cannot predict the outcome of the
disciplinary action at this time and is unable to determine whether this matter
will have a material adverse effect on the consolidated financial condition of
the Company
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 and former employees. It is
the opinion of management, based upon its evaluation of each of these matters
and the reserves established by the Company, that the resolution of all claims
presently pending 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. The
Company, however, continues to explore the possibility of a financing to assist
it in pursuing its plans for growth.
Consolidated Contractual Obligations and Lease Commitments
The table below summarizes information about our consolidated contractual
obligations as of March 31, 2003 and the effects these obligations are expected
to have on our consolidated liquidity and cash flow in future years. This table
13
does not include any projected payment amounts related to the Company's
potential exposure to arbitrations and other legal matters.
2007 and
Total 2003 2004 2005 2006 thereafter
------------ ------------- ------------- ------------- ----------- -------------
Equipment Lease
obligations $ 208,517 $ 122,551 $ 51,906 $ 22,614 $ 11,446 $ -
Office Lease obligations 2,180,958 953,696 837,293 309,486 80,483 -
Employment contract
obligations 4,366,833 816,500 782,000 755,000 755,000 1,258,333
------------ ------------ ------------- ------------- ----------- -------------
$ 6,756,308 $ 1,892,747 $ 1,671,199 $ 1,087,100 $ 846,929 $ 1,258,333
============ ============ ============= ============= =========== =============
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our 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 our 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 risk relates to the risk of fluctuating values based on market prices
without action on our part. Our 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 our 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.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the filing of this report, an evaluation
of the effectiveness of the Company's disclosure controls and procedures was
made under the supervision and with the participation of the Company's
management, including the chief executive officer and chief financial officer.
Based on that evaluation, the CEO and CFO concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
14
PART II: OTHER INFORMATION
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
Number Sold Price Afforded to Exemption from Exercise or
Date of Sale Titel of Security or forfeited Purchasers Registration Claimed Conversions
- ----------------- ----------------- --------------- ------------------------- --------------------- ----------------------
1/2/03 Options to 8,992 Options granted under 4(2) Fully exercisable
purchase 1996 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 $3.484 per share.
- ----------------- ----------------- --------------- ------------------------- --------------------- ----------------------
1/2/03 Options to 13,354 Options granted under 4(2) Fully exercisable
purchase 1996 Stock Plan - no commencing 1/2/06
Common Stock cash consideration until 10 years from
received by the Company. date of grant, at an
exercise price of
$2.80 per share.
ITEM 5: OTHER INFORMATION
On April 9, 2003, the Company was advised by Nasdaq that the Company was
not in compliance with Marketplace Rule 4310(c)(2)(B), which requires the
Company to have a minimum of $2,500,000 in stockholders' equity or $35,000,000
market value of listed securities or $500,000 of net income from continuing
operations for the most recently completed fiscal year or two of the three most
recently completed fiscal years. On April 29, 2003 the Company submitted a
letter to Nasdaq providing information regarding the financial situation of the
Company and which concluded that the Company would report stockholders' equity
in excess of $2,500,000 at March 31, 2003.
On May 1, 2003, Nasdaq informed the Company that based on its review of
this information, it had determined to grant the Company the ability to regain
compliance by filing a Form 10-Q with the SEC on or before May 20, 2003
demonstrating compliance with all continued listing requirements set forth in
the Nasdaq Marketplace Rules.
Based on the information provided in this Form 10-Q, the Company believes
it has demonstrated compliance with the Marketplace Rules.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) Reports on Form 8-K
None
15
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: May 15, 2003 By: /s/ Anthony J. Kirincic
-----------------------------------
Anthony J. Kirincic
President
Dated: May 15, 2003 By: /s/ Barry E. Shapiro
-----------------------------------
Barry E. Shapiro
Chief Financial Officer
(and principal accounting officer)
16
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: May 15, 2003 /s/ David O. Lindner
-----------------------------------
David O. Lindner
Chief Executive Officer
Dated: May 15, 2003 /s/ Barry E. Shapiro
-----------------------------------
Barry E. Shapiro
Chief Financial Officer
17
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, David O. Lindner, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Kirlin Holding Corp.;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days of the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and to the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. the registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003 /s/ David O. Lindner
-----------------------------------
David O. Lindner
Chief Executive Officer
18
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Barry E. Shapiro, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Kirlin Holding Corp.;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days of the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and to the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. the registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003 /s/ Barry E. Shapiro
-----------------------------------
Barry E. Shapiro
Chief Financial Officer
19