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 September 30, 2004
------------------
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to ______________________
Commission File number 0-25336
KIRLIN HOLDING CORP.
--------------------
(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)
- --------------------------------------------------------------------------------
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 November 9, 2004, Issuer
had outstanding 2,013,164 shares of Common Stock, par value $.0001 per share.
KIRLIN HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS:
Cash $ 1,052,171 $ 3,032,931
Due from Clearing Brokers 2,291,365 3,175,650
Securities Owned:
U.S. government and agency obligations, at market value 84,639 53,532
State and municipal obligations, at market value 329,641 283,101
Corporate bonds and other securities, at market value 4,824,258 3,008,844
Non-marketable securities, at fair value 100,690 130,044
Rebate Receivable 1,583,118 1,241,000
Representative Loans 57,716 136,341
Furniture, Fixtures and Leasehold Improvements, at cost, net of
accumulated depreciation and amortization of
$2,604,154 and $2,963,955, respectively 102,833 142,498
Deferred Tax Assets, net of valuation allowances of $1,083,292
and $1,425,043, respectively 1,844,604 2,165,805
Other Assets 531,479 850,669
------------ ------------
Total assets $ 12,802,514 $ 14,220,415
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, not yet purchased, at market value $ 43,352 $ 123,972
Accrued compensation 923,734 1,892,160
Accounts payable and accrued expenses 3,242,636 4,180,279
------------ ------------
Total liabilities 4,209,722 6,196,411
------------ ------------
Subordinated Borrowings 1,875,000 2,062,500
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.0001 par value; authorized 15,000,000 and
7,000,000 shares, respectively, issued and outstanding
2,012,743 and 2,036,853 shares, respectively 201 204
Additional paid-in capital 16,610,488 16,644,939
Unearned stock compensation (47,917) (106,002)
Accumulated deficit (9,844,980) (10,577,637)
------------ ------------
Total stockholders' equity 6,717,792 5,961,504
------------ ------------
Total liabilities and stockholders' equity $ 12,802,514 $ 14,220,415
============ ============
See Notes to Condensed Consolidated Financial Statements
2
KIRLIN HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
2004 2003 2004 2003
------------- --------------- ------------- ---------------
(Unaudited) (Unaudited)
Revenues:
Principal transactions, net $ 505,722 $ 178,477 $ 685,894 $ 597,720
Commissions 2,659,942 6,235,518 12,920,747 16,143,441
Merchant banking -- (29,752) -- (29,752)
Investment banking -- 133,195 273,226 598,195
Other income 738,837 700,015 2,204,774 2,029,486
------------ ------------ ------------ ------------
Total revenues 3,904,501 7,217,453 16,084,641 19,339,090
------------ ------------ ------------ ------------
Expenses:
Employee compensation and benefits 2,359,391 4,569,500 10,433,377 12,387,762
Promotion and advertising 82,345 51,059 195,880 167,917
Clearance and execution charges 78,831 154,076 340,235 407,806
Occupancy and communications 466,208 798,057 1,482,568 2,451,753
Professional fees 165,154 175,614 489,011 533,960
Interest 11,949 (5,318) 24,500 (11,404)
Other 738,773 360,051 1,980,174 876,172
------------ ------------ ------------ ------------
Total expenses 3,902,651 6,103,039 14,945,745 16,813,966
------------ ------------ ------------ ------------
Income before income tax (provision) benefit 1,850 1,114,414 1,138,896 2,525,124
Income tax (provision) benefit (151,323) 139,623 (406,239) 1,445,614
------------ ------------ ------------ ------------
Net (loss) income $ (149,473) $ 1,254,037 $ 732,657 $ 3,970,738
============ ============ ============ ============
Basic (loss) earnings per common share (See Note 2) $ (0.09) $ 0.78 $ 0.44 $ 2.47
============ ============ ============ ============
Weighted-average shares outstanding (See Note 2) 1,684,120 1,613,421 1,660,658 1,605,641
============ ============ ============ ============
Diluted (loss) earnings per common share (See Note 2) $ (0.09) $ 0.53 $ 0.31 $ 1.89
============ ============ ============ ============
Weighted-average shares of common stock and common stock
equivalents outstanding (See Note 2) 1,684,120 2,372,210 2,355,458 2,101,427
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements
3
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine-Months Ended September 30, 2004
(Unaudited)
Common Stock Additional Unearned
----------------------- Paid-in Stock Accumulated
Shares Par Value Capital Compensation Deficit Total
--------- --------- ------------ ------------ ------------ -----------
Stockholders' equity at January 1,
2004 2,036,853 $ 204 $ 16,644,939 $(106,002) $(10,577,637) $ 5,961,504
Issuance of restricted stock to
employees under stock plans 8,759 1 36,200 (25,000) -- 11,201
Exercise of stock options 15,000 2 21,748 -- -- 21,750
Issuance of stock to employees under
deferred commission plan 79,470 7 581,144 -- -- 581,151
Amortization of unearned stock
compensation -- -- -- 68,571 -- 68,571
Forfeitures of restricted stock by
employees (11,354) (1) (99,498) 14,514 -- (84,985)
Forfeitures of stock by employees
under deferred commission plan (100,985) (10) (465,210) -- -- (465,220)
Repurchases and retirements of stock (15,000) (2) (108,835) -- -- (108,837)
Net income -- -- -- -- 732,657 732,657
---------- ----- ------------ --------- ------------ -----------
Stockholders' equity at September
30, 2004 2,012,743 $ 201 $ 16,610,488 $ (47,917) $ (9,844,980) $ 6,717,792
========== ===== ============ ========= ============ ===========
See Notes to Condensed Consolidated Financial Statements
4
KIRLIN HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------
2004 2003
-------------------- --------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 732,657 $ 3,970,738
-------------------- --------------------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 113,394 285,264
Deferred income taxes 321,201 (1,409,014)
Decrease (increase) in nonmarketable securities 29,354 (57,987)
Non-cash compensation 110,718 241,097
(Gain) loss on disposal of furniture and fixtures (17,751) 53,178
Decrease (increase) in operating assets:
Due from clearing brokers 884,285 (1,854,169)
Securities owned, at market value (1,893,061) 570,133
Rebate receivable (342,118) (123,000)
Representative loans 78,625 288,198
Other assets 340,618 80,146
(Decrease) increase in operating liabilities:
Securities sold, not yet purchased, at market value (80,620) (1,699)
Accrued compensation (968,426) 513,289
Accounts payable and accrued expenses (937,643) 23,181
-------------------- --------------------
Total adjustments (2,361,424) (1,391,383)
-------------------- --------------------
Net cash (used in) provided by operating activities (1,628,767) 2,579,355
-------------------- --------------------
Cash flows from investing activities:
Purchase of furniture, fixtures and leasehold improvements (80,978) -
Proceeds from sale of furniture and fixtures 3,572 17,500
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Net cash (used in) provided by investing activities (77,406) 17,500
-------------------- --------------------
Cash flows from financing activities:
Proceeds from excerise of stock options 21,750 -
Repayment of subordinated borrowings (187,500) (375,000)
Repurchase of common stock (108,837) -
-------------------- --------------------
Net cash used in financing activities (274,587) (375,000)
-------------------- --------------------
Net (decrease) increase in cash (1,980,760) 2,221,855
Cash at beginning of year 3,032,931 3,035,084
-------------------- --------------------
Cash at end of period $ 1,052,171 $ 5,256,939
==================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 152,667 $ 23,201
Income taxes $ 130,333 $ 7,020
See Notes to Condensed Consolidated Financial Statements
5
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND STOCK-BASED COMPENSATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with U.S. 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 nine-month period
ended September 30, 2004 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 2004. 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, 2003.
As permitted under Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", which amended SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company has elected to continue to follow the intrinsic
value method in accounting for its stock-based employee compensation
arrangements as defined in Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees", and the related
interpretations including Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation", an interpretation of APB No. 25. No stock-based
employee compensation cost is reflected in operations, as all options
granted by the Parent to employees of the Company under those plans had an
exercise price equal to or greater than the market value of the underlying
common stock at the date of grant.
The following summary illustrates the effect on net income as if the
Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------------
2004 2003 2004 2003
----------- ------------- ----------- -------------
Net (loss) income - as reported $ (149,473) $ 1,254,037 $ 732,657 $ 3,970,738
Deduct: Total stock based employee compensation expense
determined under the fair value based method (100,545) (128,229) (301,634) (384,687)
----------- ------------- ----------- -------------
Proforma net (loss) income $ (250,018) $ 1,125,808 $ 431,023 $ 3,586,051
=========== ============= =========== =============
Basic (loss) earnings per common share as reported $ (0.09) $ 0.78 $ 0.44 $ 2.47
Proforma basic (loss) earnings per common share $ (0.15) $ 0.70 $ 0.26 $ 2.23
Diluted (loss) earnings per common share as reported $ (0.09) $ 0.53 $ 0.31 $ 1.89
Proforma diluted (loss) earnings per common share $ (0.15) $ 0.47 $ 0.18 $ 1.71
6
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. EARNINGS (LOSS) 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 stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects 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 nine-month periods ended September 30, 2004, potential
common shares amounted to 1,654,132 and 733,317, respectively, and for the
three- and nine-month periods ended September 30, 2003, potential common
shares amounted to 896,014 and 962,597, respectively, and have not been
included in the computation of diluted EPS since the effect would be
antidilutive.
In connection with the audit of the Company's consolidated financial
statements for the year ended December 31, 2003 it was determined that the
earnings per share calculation should be changed in order to exclude
nonvested and contingently returnable shares in the Company's restricted
and deferred commission plans from the basic earnings per share
calculation and a modification of those shares in the calculation of
diluted earnings per share. This change resulted in different basic and
diluted earnings per share amounts for the three- and nine-month periods
ended September 30, 2003 than previously reported.
The following table sets forth the components of basic and diluted
earnings (loss) per share for the three- and nine-month periods ended
September 30, 2004 and 2003, respectively:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ------------- ----------- -------------
Numerator:
Net (loss) income $ (149,473) $ 1,254,037 $ 732,657 $ 3,970,738
=========== ============= =========== =============
Denominator:
Weighted average shares outstanding 1,684,120 1,613,421 1,660,658 1,605,641
Effect of dilutive securities:
Stock options -- 376,573 315,717 181,653
Nonvested stock -- 382,216 379,083 314,133
----------- ------------- ----------- -------------
Denominator for diluted (loss) earnings per
share - weighted average shares of common
stock and common stock equivalents after
assumed conversions 1,684,120 2,372,210 2,355,458 2,101,427
=========== ============= =========== =============
7
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. CONTINGENCIES
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.
4. STOCKHOLDERS' EQUITY
On June 24, 2004, the stockholders approved the amendment to the
certificate of incorporation to increase the authorized number of shares
of Common Stock by an additional 8,000,000 shares of Common Stock to
15,000,000 shares of Common Stock.
During the three- and nine-month periods ended September 30, 2004, the
Company granted options to purchase 20,065 and 70,580 shares,
respectively, of common stock at an exercise price between $3.55 and
$10.80 per share. Such options vest over periods of up to 10 years and are
exercisable at various dates through March 31, 2014.
8
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, 2003. 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, 2003 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 consolidated 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 increase
valuation allowances against its deferred tax assets, which would result
in additional income tax expense. At September 30, 2004, the valuation
allowance was approximately 37% of the Company's deferred tax assets
related to its net operating loss carryforwards and other temporary
differences.
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 relate 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 consolidated statement of operations.
Actual results could differ from the values used in these consolidated
financial statements.
9
Contingencies. 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 consolidated 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 consolidated financial
statements. The Company's review of existing claims, arbitrations and
unpaid settlements at September 30, 2004 resulted in an accrued liability
in the amount of approximately $925,000.
OVERVIEW
The following discussion and analysis should be read in conjunction with
the Company's condensed consolidated financial statements and the notes
presented following the condensed consolidated financial statements. The
discussion of results, causes and trends should not be construed to imply any
conclusion that such results or trends will necessarily continue in the future.
The Company's revenues during the nine-month period ended September 30,
2004 were generated primarily from brokerage transactions. Revenues from
brokerage transactions result in the Company earning commissions charged to
customers for purchasing and selling securities and is comprised of equity
securities, unit trusts, and mutual funds. To a lesser extent, the Company's
revenues were generated from principal trading activities. As a principal, the
Company buys and sells securities, both for proprietary trading and, more
significantly, to facilitate sales to its retail customers and other dealers.
Principal transactions with customers are effected at a net price equal to the
current interdealer price plus or minus a mark-up or mark-down within the
guidelines of applicable securities regulations. As a result of its principal
trading activities, the amount of the Company's liabilities and assets can vary
widely from period-to-period.
The Company pays its registered representatives commissions equal to
varying percentages of gross commissions and mark-ups and mark-downs in
connection with the purchases and sales of securities on behalf of its
customers. In addition, the Company pays ticket charges to its clearing brokers
for the processing of security transactions. The Company maintains some
inventories of securities in order to facilitate sales to customers. In this
regard, the Company may pay interest on the securities held in inventory since
its securities can be purchased on margin through its clearing brokers.
The Company is directly affected by general economic conditions, interest
rates and market conditions. All of these factors have an impact on its
principal trading and overall business volume. The Company's costs associated
with occupancy, communications and equipment costs are relatively fixed and, in
periods of reduced revenues, can have an adverse effect on earnings.
The following table shows each specified item as a dollar amount and as a
percentage of revenues for the three- and nine-month periods ended September 30,
2004 and 2003, respectively, and should be read in conjunction with the
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q:
10
Three-Months Ended September 30, Nine-Months Ended September 30,
--------------------------------------------- --------------------------------------------------
2004 2003 2004 2003
----------------------- -------------------- ------------------------ ------------------------
Revenues:
Principal transactions, net $ 505,722 13.0% $ 178,477 2.5% $ 685,894 4.3% $ 597,720 3.1%
Commissions 2,659,942 68.1% 6,235,518 86.4% 12,920,747 80.3% 16,143,441 83.5%
Merchant banking -- -- (29,752) (0.4)% -- -- (29,752) (0.2)%
Investment banking -- -- 133,195 1.8% 273,226 1.7% 598,195 3.1%
Other income 738,837 18.9% 700,015 9.7% 2,204,774 13.7% 2,029,486 10.5%
----------- ------ ----------- ------ ------------ ------ ------------ -----
Total revenues 3,904,501 100.0% 7,217,453 100.0% 16,084,641 100.0% 19,339,090 100%
----------- ------ ----------- ------ ------------ ------ ------------ -----
Expenses:
Employee compensation
and benefits 2,359,391 60.4% 4,569,500 63.3% 10,433,377 64.9% 12,387,762 64.1%
Promotion and advertising 82,345 2.1% 51,059 0.7% 195,880 1.2% 167,917 0.9%
Clearance and execution
charges 78,831 2.0% 154,076 2.1% 340,235 2.1% 407,806 2.1%
Occupancy and
communications 466,208 11.9% 798,057 11.1% 1,482,568 9.2% 2,451,753 12.7%
Professional fees 165,154 4.2% 175,614 2.4% 489,011 3.0% 533,960 2.8%
Interest 11,949 0.3% (5,318) (0.1)% 24,500 0.2% (11,404) (0.1)%
Other 738,773 18.9% 360,051 5.0% 1,980,174 12.3% 876,172 4.5%
----------- ------ ----------- ------ ------------ ------ ------------ -----
Total expenses 3,902,651 99.8% 6,103,039 84.5% 14,945,745 92.9% 16,813,966 87.0%
----------- ------ ----------- ------ ------------ ------ ------------ -----
Income before income tax 1,850 0.0% 1,114,414 15.5% 1,138,896 7.1% 2,525,124 13.0%
(provision) benefit
Income tax (provision) benefit (151,323) (3.9)% 139,623 1.9% (406,239) (2.5)% 1,445,614 7.5%
----------- ------ ----------- ------ ------------ ------ ------------ -----
Net (loss) income $ (149,473) (3.7)% $ 1,254,037 17.4% $ 732,657 4.6% $ 3,970,738 20.5%
=========== ====== =========== ====== ============ ====== ============ =====
RESULTS OF OPERATIONS
Revenues
Principal transactions, net for the three- and nine-month periods ended
September 30, 2004 increased to $505,722 and $685,894, respectively, from the
comparable periods in 2003. The increase is primarily attributable to gains in
the Company's investment account and to a lesser extent gains related to equity
and fixed income business for which the Company maintained an inventory during
the three- and nine-month periods ended September 30, 2003. Principal
transactions, net for the three-month period ended September 30, 2004 consisted
of gains in the Company's investment account of approximately $403,000 and
trading gains of approximately $103,000. Principal transactions, net for the
nine-month period ended September 30, 2004 consisted of gains in the Company's
investment account of approximately $614,000 and trading gains of approximately
$72,000.
Commissions for the three- and nine-month periods ended September 30, 2004
decreased 57.3% to $2,659,942 and decreased 20% to $12,920,747, respectively,
from the comparable periods in 2003. The change during the quarter is primarily
attributable to the Company's decreased business in equity and fixed income
securities, mutual funds, and unit investment trusts, which the Company believes
was due to sluggish market conditions. Additionally, after the August 2004
commission period, the Company closed its San Francisco branch office, which
contributed to the decrease in commissions. Commissions for the three-month
period ended September 30, 2004 consisted of agency commissions of approximately
$2,153,000, syndicate commissions of approximately $65,000 and mutual fund,
variable annuity, life insurance and managed money commissions of approximately
$442,000. Commissions for the nine-month period ended September 30, 2004
consisted of agency commissions of approximately $11,067,000, syndicate
commissions of approximately $517,000 and mutual fund, variable annuity, life
insurance and managed money commissions of approximately $1,337,000.
11
There was no investment banking activity during the three-month period
ended September 30, 2004. Investment banking for the nine-month period ended
September 30, 2004 decreased 54.3% to $273,226. During the nine-month period
ended September 30, 2004 the Company acted as the placement agent for one
private placement.
Other income for the three- and nine-month periods ended September 30,
2004 increased 5.5% to $738,837 and increased 8.6% to $2,204,774, respectively,
from the comparable periods in 2003. The increase during the three-month period
ended September 30, 2004 is primarily attributable to a settlement the Company
received from a lawsuit it commenced, gain from the sale of furniture and
fixtures and increase in rebates the Company is entitled to receive from its
clearing broker under its clearing agreement offset by a decrease in the annual
account maintenance fee which is recognized monthly as the annual fee is
amortized and a decrease in consulting fees. The decrease in fees related to the
annual maintenance fee is due to a change in business mix that eliminated
smaller accounts, which resulted in a fewer number of accounts available to
bill. The increase during the nine-month period ended September 30, 2004 results
from two additional months of annual maintenance fee income during 2004 as
compared to 2003 since this fee was instituted during March 2003. Other income
for the three-month period ended September 30, 2004 consisted of transactional
and account balance rebates of approximately $526,000, maintenance fee income of
approximately $170,000, and other income for approximately $43,000. Other income
for the nine-month period ended September 30, 2004 consisted of transactional
and account balance rebates of approximately $1,618,000, maintenance fee income
of approximately $530,000, and other income of approximately $57,000.
Expenses
--------
Employee compensation and benefits for the three- and nine-month periods
ended September 30, 2004 decreased 48.4% to $2,359,391 and 15.8% to $10,433,377,
respectively, from the comparable periods in 2003. 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. As stated in the "Commissions"
section in the Revenue section of this management's discussion and analysis,
after the August 2004 commission period, the Company closed its San Francisco
branch office. This office closure contributed to the decrease in compensation.
The reversal of nonvested deferred and restricted compensation expenses during
the current period arising from the termination of employees contributed to the
decrease in this line item. The above factors represent items which contributed
to the decrease in compensation, however, the items to be discussed below caused
an offset to these decreases. During June 2004, the Company changed its benefit
contribution policy to include all employees participating in the medical
insurance plan which resulted in an increased monthly expense of approximately
$8,000. Prior to June 2004, the benefit contribution was only given to
non-highly compensated employees. Hiring and training expense increased due to
the hiring of an executive search firm to recruit and hire a retail sales
director during the current period. The expense related to loan write-off's, net
of collections related to representative terminations was higher during the
current period, which contributed to the change in compensation. Finally,
salaries are higher during the current period due to prior year reductions
arising in the first quarter of 2003 of base salary by the Company's Chief
Executive Officer and its President by 68% and by its Chief Financial Officer by
35%. During that time period 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 salaries by
100% during this period. The salary reductions amounted to approximately
$117,000. These reductions were not continued in 2004.
12
Promotion and advertising for the three- and nine-month periods ended
September 30, 2004 increased 61.3% to $82,345 and 16.7% to $195,880,
respectively, from the comparable periods in 2003. The increase during the three
and nine-month periods ended September 30, 2004 results from an increase in
meals and travel expenses related to prospective business as well as planning,
operating and training meetings. Additionally, the increase during the
nine-month period ended September 30, 2004 is offset by the decrease in car
allowances arising from the termination of certain employees during the
comparable period during 2003.
Clearance and execution charges for the three- and nine-month periods
ended September 30, 2004 decreased 48.8% to $78,831 and 16.6% to $340,235,
respectively, from the comparable periods in 2003. The decrease is a result of a
lower ticket volume.
Occupancy and communications costs for the three- and nine-month periods
ended September 30, 2004 decreased 41.6% to $466,208 and 39.5% to $1,482,568,
respectively, from the comparable periods in 2003. This decrease is primarily a
result of the closing of the San Francisco office in the current year and the
closing of the New York City, Fort Lauderdale and Red Bank offices in the prior
year which resulted in the reduction of rent and depreciation expense during the
three and nine-month periods ended September 30, 2004 as compared to the same
period in 2003. Rent decreased approximately $262,000 and $578,000,
respectively, and depreciation expense inclusive of disposals decreased
approximately $25,000 and $226,000, respectively.
Professional fees for the three- and nine-month periods ended September
30, 2004 decreased 6% to $165,154 and 8.4% to $489,011, respectively, from the
comparable periods in 2003. The decrease is reflective of non-recurring legal
fees in the prior periods as it related to certain customer arbitrations,
regulatory matters related to potential violations of NASD Conduct Rules and/or
Federal securities laws and legal fees related to the Company's vacated office
space in San Diego. In the current periods this line item reflects an increase
in fees related to strategic business consulting fees to increase the Company's
revenues and expand its business lines.
Interest expense for the three- and nine-month periods ended September 30,
2004 increased 325% to $11,949 and 315% to $24,500, respectively, from the
comparable periods in 2003. Interest for the three and nine-month periods ended
September 30, 2004 relates to securities located in the Company's trading and
investment accounts purchased on margin and securities sold short, which are
held at a clearing broker and charged interest. The increase for the nine-month
period ended September 30, 2004 compared to the same period in 2003 results from
the forfeiture of non-vested deferred commission interest during 2003 upon the
termination of representatives.
Other expenses for the three- and nine-month periods ended September 30,
2004 increased 105% to $738,773 and 126% to $1,980,174, respectively, from the
comparable periods in 2003 primarily as a result of customer expenses, which
includes existing claims, arbitrations and unpaid settlements. Other expenses
for the three-month period ended September 30, 2004 consisted of municipal
syndicate participation losses of approximately $39,000, clearing broker
non-trade processing costs of approximately $6,000, office insurance (property,
casualty, and umbrella) related to each office, directors and officers insurance
and automobile insurance of approximately $30,000, directors fees of
approximately $8,000, regulatory listing, registration and assessment expenses
of approximately $104,000, customer expenses of approximately $428,000, and
general office expenses of approximately $124,000. Other expenses for the
nine-month period ended September 30, 2004 consisted of municipal syndicate
participation losses of approximately $150,000, clearing broker non-trade
processing costs of approximately $33,000, office insurance (property, casualty,
and umbrella) related to each office, directors and officers insurance and
automobile insurance of approximately $106,000, directors fees of approximately
$23,000, regulatory listing, registration and assessment expenses of
approximately $232,000, customer expenses of approximately $980,000, general
office expenses of approximately $399,000, and a receivable write-off of
approximately $57,000.
Income tax provision for the three-month period ended September 30, 2004
was $151,323 as compared to the income tax benefit of $139,623 for the
three-month period ended September 30, 2003 and the income tax provision for the
nine-month period ended September 30, 2004 was $406,239 as compared to the
income tax benefit of $1,445,614 for the nine-month period ended September 30,
2003. At September 30, 2004 the Company's valuation allowance was approximately
37% of the Company's gross deferred tax assets (which relate to its net
operating loss carryforwards and other temporary differences) based upon the
Company's estimation of future taxable income, which directly effects the income
tax provision/benefit amount.
13
Net loss of $149,473 and net income of $732,657 for the three- and
nine-month periods ended September 30, 2004, respectively, compares unfavorably
to net income of $1,254,037 and $3,970,738 for the three and nine-month periods
ended September 30, 2003. Overall this resulted primarily from a decrease in
revenues, an increase in customer expenses offset by a reduction in occupancy
and communication charges, and a change in the income tax (provision) benefit.
On a pretax basis, the Company recorded income of $1,850 and $1,138,896 for the
three- and nine-month periods ended September 30, 2004, respectively, as
compared to $1,114,414 and $2,525,124 for the three- and nine-month periods
ended September 30, 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, approximately 63% of the Company's assets were
comprised of cash and highly liquid securities.
Cash amounted to $1,052,171 at September 30, 2004 as compared to
$3,032,931 at December 31, 2003. This decrease is reflective of disbursements
for additional purchases of securities, disbursements related to the resolution
of three NASD matters, disbursements to registered representatives related to
the Company's deferred commission plan, and disbursements related to prior year
accruals offset by the collection of the annual maintenance fee on client
accounts.
Due from Clearing Brokers amounted to $2,291,365 at September 30, 2004 as
compared to $3,175,650 at December 31, 2003. This 27.8% decrease is primarily
attributable to monies owed on security positions purchased on margin in the
Company's investment account, which are netted against amounts otherwise due
from clearing brokers. These securities are reflected in the "Securities Owned"
line item in the condensed consolidated statement of financial condition.
Securities Owned at September 30, 2004 were $5,339,228 as compared to
$3,475,521 at December 31, 2003. This increase is primarily reflective of the
increase in equity securities maintained in both the Company's investment and
trading accounts.
Rebate Receivable amounted to $1,583,118 at September 30, 2004 as compared
to $1,241,000 at December 31, 2003. This 27.6% increase is reflective of the
rebate the Company is entitled to receive from its clearing broker as provided
in the clearing agreement. The Company generated income and fees which increased
this line item by $529,618 offset by the collection of $187,500 of this rebate
receivable. 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
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.
Representative Loans at September 30, 2004 amounted to $57,716 as compared
to $136,341 at December 31, 2003. This 57.7% decrease is reflective of the
forgiveness, amortization and write-off of some of the 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 September 30,
2004, decreased to $102,833 as compared to $142,498 at December 31, 2003. This
27.8% decrease results from depreciation, write-off's specifically related to
the furniture, fixtures and leasehold improvements located in the San Francisco
office which was closed after the August 2004 commission period, offset by the
purchase of furniture, fixtures and leasehold improvements.
14
Deferred Tax Assets, net at September 30, 2004 amounted to $1,844,604 as
compared to $2,165,805 at December 31, 2003. The deferred tax assets changed
during the period due to the expected utilization of the Company's net operating
loss carryforward and other temporary differences which resulted in a decrease
in its valuation allowance. At September 30, 2004, the valuation allowance is
approximately 37% of 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 September 30,
2004, the deferred tax assets amount to approximately $2,928,000 and the
recorded valuation allowance amounted to approximately $1,083,000. If the
Company continues to be profitable then it anticipates being able to use a
substantial portion of the deferred tax assets.
Other assets decreased by 37.5% to $531,479 at September 30, 2004, from
$850,669 at December 31, 2003. The net decrease is primarily attributable to
receipt of a clearing broker conversion cost reimbursement receivable, receipt
of unit investment trust commission receivables related to the Company's retail
activities, and a decrease in prepaid expenses and deposits related to the
Company's general operations, partially offset by two loans made to a potential
investment banking client. Other assets at September 30, 2004 consisted of a
loan to a potential investment banking client of $100,000, unit investment trust
and mutual fund commissions receivable of approximately $49,000, prepaid
expenses of approximately $117,000, rent and other deposits inclusive of a
letter of credit deposit of approximately $210,000, and other assets of
approximately $55,000. Other assets at December 31, 2003 consisted of clearing
broker conversion cost reimbursement receivable of $300,000, unit investment
trust and mutual fund commissions receivable of approximately $108,000, prepaid
expenses of approximately $146,000, rent deposits inclusive of a letter of
credit deposit of approximately $224,000, and other assets of approximately
$73,000.
Securities sold, not yet purchased amounted to $43,352 at September 30,
2004 as compared to $123,972 at December 31, 2003. Management monitors these
positions on a daily basis and covers short positions when deemed appropriate.
Accrued compensation was $923,734 at September 30, 2004 as compared to
$1,892,160 at December 31, 2003, a 51.2% decrease. The revenues upon which
commission income to registered representatives and the revenues upon which
other compensation is based directly affect this line item, which was lower at
the end of the current quarter as compared to 2003. Additionally, this line item
decreased due to payment during January 2004 of the accrued bonuses accrued at
December 31, 2003. Finally, this line item decreased due to the deferred
commission payout which was paid during April 2004.
Accounts payable and accrued expenses at September 30, 2004 were
$3,242,636 as compared to $4,180,279 at December 31, 2003, a 22.4% decrease. The
decrease is primarily attributable to the payments related to the resolution of
three NASD matters offset by the increase in the accrued liability related to
existing claims, arbitrations and unpaid settlements as well as the collection
in March 2004 of the annual maintenance fee charged to client accounts and the
recording of an offsetting liability in the Company's consolidated statement of
financial condition. The income related to the annual maintenance fee will be
recognized monthly as the annual fee is amortized. Additionally, this line item
decreased due to the decrease in payables related to the Company's general
business. Finally, this line item is offset by a decrease in the deferred
commission interest which was paid during April 2004. Accounts payable and
accrued expenses at September 30, 2004 consisted of accrued professional fees of
approximately $357,000, accrued communication charges of approximately $212,000,
accrued computer and copier charges of approximately $205,000, accrued
arbitration settlements of approximately $925,000, accrued lease expense of
approximately $498,000, accrued regulatory expense of approximately $29,000 and
other accounts payable and accrued expenses of approximately $1,017,000.
Accounts payable and accrued expenses at December 31, 2003 consisted of accrued
professional fees of approximately $588,000, accrued communication charges of
approximately $233,000, accrued computer and copier charges of approximately
$202,000, accrued arbitration settlements of approximately $191,000, accrued
lease expense of approximately $648,000, accrued regulatory expense of
approximately $1,250,000 and other accounts payable and accrued expenses of
approximately $1,069,000.
15
Subordinated borrowings amounted to $1,875,000 at September 30, 2004 as
compared to $2,062,500 at December 31, 2003. During March 2002, Kirlin
Securities received from its clearing broker a $2,500,000 three-year
subordinated loan that requires payments over various periods of time during
this three-year period. During the nine-month period ended September 30, 2004,
the Company repaid $187,500 of this subordinated loan back to the clearing
broker, which payment was 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 condensed consolidated
financial statements.
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 itself 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 condensed
consolidated financial condition of the Company.
The Company's operations historically have been the principal source of
cash needed by the Company's business. Retained earnings and cash generally were
sufficient to carry the Company through periods when operations used more cash
than was generated. However, the Company experienced significant losses in 2000
through 2002 and the Company sought capital from external sources. This was
provided by the $2,500,000 three-year subordinated loan Kirlin Securities
obtained from its clearing broker in 2002 and by a private placement of the
Company's securities in 2001 that raised $1,500,000.
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 September 30, 2004 and the effects these obligations are
expected to have on our consolidated liquidity and cash flow in future years.
This table does not include any projected payment amounts related to the
Company's potential exposure to arbitrations and other legal matters.
2008 and
Total 2004 2005 2006 2007 thereafter
---------- -------- ------------ ---------- ------------ -----------
Equipment lease obligations $ 370,836 $ 55,294 $ 199,407 $ 113,297 $ 2,838 $ --
Office lease obligations 1,129,623 224,746 663,402 147,492 93,983 --
Employment contract obligations 2,957,083 188,750 755,000 755,000 755,000 503,333
---------- ---------- ------------ ---------- ------------ -----------
$4,457,542 $ 468,790 $ 1,617,809 $1,015,789 $ 851,821 $ 503,333
========== ========== ============ ========== ============ ===========
16
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.
An evaluation of the effectiveness of the Company's disclosure
controls and procedures as of September 30, 2004 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, they
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. During the most recently
completed fiscal quarter, there has been no significant change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
17
PART II: OTHER INFORMATION
ITEM 2: SALES OF UNREGISTERED SECURITIES
==========================================================================================================================
CONSIDERATION
RECEIVED AND IF OPTION,
DESCRIPTION OF WARRANT OR
UNDERWRITING OR EXEMPTION CONVERTIBLE
OTHER DISCOUNTS TO FROM SECURITY, TERMS
DATE MARKET PRICE AFFORDED REGISTRATION OF EXERCISE OR
OF SALE TITLE OF SECURITY NUMBER SOLD TO PURCHASERS CLAIMED CONVERSION
- --------------------------------------------------------------------------------------------------------------------------
8/2/04 Options to purchase 10,164 Options granted under 4(2) Fully exercisable on
Common Stock 1994 Stock Plan - no date of grant for a
cash consideration period of 5 years
received by the from date of grant,
Company. at an exercise price
of $4.0145 per share.
- --------------------------------------------------------------------------------------------------------------------------
8/2/04 Options to purchase 9,901 Options granted under 4(2) Fully exercisable on
Common Stock 1994 Stock Plan - no 8/2/07, for a period
cash consideration of 5 years from date
received by the of grant, at an
Company. exercise price of
$3.55 per share.
- --------------------------------------------------------------------------------------------------------------------------
ITEM 5: OTHER INFORMATION
On June 24, 2004, the nominating committee of the board of directors
adopted and the board of directors approved the Company's nominating committee
charter, a copy of which has been filed as Exhibit 99.1 to this Form 10-Q. The
nominating committee is responsible for overseeing the selection of persons to
be nominated to serve on the Company's board of directors. The nominating
committee will consider persons identified by its members, management,
stockholders, investment bankers and others. The nominating committee also
established a method by which stockholders may propose to the nominating
committee candidates for selection as nominees for directors, which is included
as part of Exhibit 99.1 to this Form 10-Q.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) 31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32 Section 906 Certification.
99.1 Nominating Committee Charter.
(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: November 12, 2004 By: /s/ Anthony J. Kirincic
----------------------------------
Anthony J. Kirincic
President
Dated: November 12, 2004 By: /s/ Barry E. Shapiro
----------------------------------
Barry E. Shapiro
Chief Financial Officer
(and principal accounting officer)
19