-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OW51Txic/Ui6HG5UIaf9AI8bCZFTdWMX/L7kD1QhhlzduECeyH1FGzin4TI7Oiow qgrBzA3p+BZqFA+iTP6tPg== 0000938492-97-000064.txt : 19970329 0000938492-97-000064.hdr.sgml : 19970329 ACCESSION NUMBER: 0000938492-97-000064 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIRLIN HOLDING CORP CENTRAL INDEX KEY: 0000930797 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 113229358 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25336 FILM NUMBER: 97567261 BUSINESS ADDRESS: STREET 1: 6901 JERICHO TURNPIKE CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 8008999400 MAIL ADDRESS: STREET 1: 6901 JERICHO TURNPIKE CITY: SYOSSET STATE: NY ZIP: 11791 10-K 1 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to Commission file number 0-25336 KIRLIN HOLDING CORP. (Name of small business issuer in its charter) Delaware 11-3229358 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6901 Jericho Turnpike, Syosset, New York 11791 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (800) 899-9400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained herein, and will not be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The information required in Part III by Items 9, 10, 11 and 12 is incorporated by reference to the issuer's proxy statement in connection with the Annual Meeting of Shareholders to be held in June 1996 which will be filed by the issuer within 120 days after the close of its fiscal year. State issuer's revenues for its most recent fiscal year: $16,505,554. As of March 14, 1997, the aggregate market value of the issuer's Common Stock (based on its reported last sale price on the Nasdaq SmallCap Market) held by non-affiliates of the issuer was $5,923,300. At March 14, 1997, 1,302,330 shares of issuer's Common Stock were outstanding. 1 PART I ITEM 1. BUSINESS. General Kirlin Holding Corp. (the "Company") is a holding company engaged in securities brokerage, securities trading and investment banking through Kirlin Securities, Inc. ("Kirlin"), its operating subsidiary. Kirlin is registered as a broker-dealer and investment advisor with the Securities and Exchange Commission ("Commission") and is a member firm of the National Association of Securities Dealers, Inc. ("NASD") and the Securities Investor Protection Corporation ("SIPC"). Kirlin is a full service retail-oriented brokerage firm, specializing in the trading and sale of fixed income securities, including collateralized mortgage obligations, corporate and municipal bonds, and government and government agency securities and, to a lesser extent, mutual funds and equity securities, which are offered and sold through Kirlin's sales force to its customers. At December 31, 1996, the Company maintained over 14,000 retail customer accounts, which held over $645 million in assets. The Company's revenues are generated primarily from principal trading activities and brokerage transactions. Kirlin is currently licensed to conduct activities as a broker-dealer in the District of Columbia and in 34 states, and operates primarily from its headquarters in Syosset, New York, as well as three branch offices located in California and New Jersey. The Company was incorporated under the laws of the State of Delaware on July 28, 1994 to serve as a holding company for Kirlin. Kirlin was incorporated under the laws of the State of Delaware on January 6, 1988 and became a wholly-owned subsidiary of the Company on October 20, 1994. All references to the Company, unless the context requires otherwise, refers to the Company and Kirlin. On January 18, 1995, the Company completed an initial public offering of its common stock, $.0001 par value, selling 402,330 shares at $10 per share and raising net proceeds of $3,241,589. Principal Transactions Most of the Company's revenues in the last several years (59.6% in 1994, 57.4% in 1995 and 71.1% in 1996) have been derived from principal trading activities, consisting principally of fixed income securities, including corporate debt, United States government and government agency securities, collateralized mortgage obligations and municipal bonds. As a principal, the Company buys and sells securities, both for proprietary trading and, more significantly, to facilitate sales to its retail customers and other dealers. These securities are purchased in secondary markets or from the underwriters of new issues. In particular, the Company's principal trading focus and retail sales have concentrated on collateralized mortgage obligations. The Company has attempted to and will continue to diversify its business in the fixed income markets. Principal transactions with customers are effected at a net price equal to the current inter-dealer price plus or minus a mark-up or mark-down within the guidelines of applicable securities regulations. The Company also engages in proprietary trading, including market-making, in an attempt to realize trading gains. The Company's trading activities as a principal require the commitment of capital and create an opportunity for profits and risk of loss due to trading strategies and market fluctuations. Trading profits or losses depend upon, among other things, the skills of the Company's employees engaged in trading, the capital allocated to securities positions, the financial condition and business prospects of particular issuers and general trends in the securities markets. At March 14, 1997, the Company made a market in the equity securities of 20 companies. Commission Business A significant portion of the Company's revenues are derived from commissions generated by its brokerage activities in which the Company buys and sells securities for its customers from other dealers on an agency basis, and charges its customers a commission for its services. The largest portion of the Company's commission revenue is derived from brokerage transactions involving mutual fund securities. The Company 2 currently has agreements with 48 mutual fund management companies pursuant to which the Company sells shares in approximately 100 mutual funds. Mutual fund commissions are derived from standard dealers' discounts which range from approximately 1% to 8% of the purchase price of the shares depending upon the terms of the dealer agreement and the size of the transaction. In addition, most funds permit the Company to receive additional periodic fees based upon the customer's investment maintained in particular funds. To a lesser extent, the Company's commission business also involves brokerage transactions in exchange listed and over-the-counter corporate securities for its customers. To date, the Company's activities in this area have been limited. Money Management In the latter half of 1996, the Company launched a Managed Asset Portfolio Program ("MAPP") to manage the financial assets of its clients, for which it receives a quarterly management fee based upon the value of assets under management. Investment Banking Investment banking revenue is derived principally from underwriting fees, commissions and expense allowances in connection with underwriting activities. To date, the Company's investment banking activities have consisted of co-underwriting an initial public offering and acting as co-placement agent in a private placement in 1996, co-underwriting an initial public offering and acting as the placement agent in two private placements in 1995, and acting as placement agent in private placements in 1994 and 1993. The Company also participates as a member of the underwriting syndicate and selling group member from time to time in unit trust and equity offerings. The Company believes that investment banking activities present significant opportunities for its business. The extent of the Company's underwriting activities is dependent upon its net capital position prior to making a commitment to purchase securities, its retail distribution capabilities and market conditions for public offerings. Although the Company does not currently anticipate that underwriting will be the primary focus of its business, its expansion in this area involves certain risks. Because underwriting syndicates commit to purchase securities at a discount from the initial public offering price, underwriters are exposed to substantial losses in the event that the securities cannot be sold or must be sold below syndicate cost. In the last several years, investment banking firms have increasingly underwritten corporate offerings with fewer syndicate participants and, in many cases, without a syndicate. In such cases, the underwriter assumes a larger part or all of the risk of an underwriting transaction. Under federal securities laws, other laws and court decisions with respect to underwriter's liability and limitations on indemnification by issuers, an underwriter is exposed to substantial potential liability for misstatements or omissions of material facts in prospectuses or other communications with respect to securities offerings. As a complement to its investment banking business, the Company also engages in merchant banking activities. From time to time the Company is presented with opportunities to invest, through debt or equity or combination of both, in other companies in a variety of industries. Such investments are speculative and involve a high degree of risk for which the Company may receive significant profits, but no assurance can be given that such will be the case. Merchant banking investments typically are of a longer term nature than the Company's trading activities and therefore increase the Company's exposure to market risks and restrict the use of the Company's capital for longer periods of time. At December 31, 1996, the Company had approximately $550,000 of its capital in two companies in connection with this activity. Clearing Broker The Company does not hold any funds or securities of its customers. The Company currently utilizes, on a fully disclosed basis, the services of Correspondent Services Corporation, a wholly-owned subsidiary of PaineWebber Incorporated, as its clearing broker, which, on a fee basis, processes all securities transactions for the Company and the accounts of its customers. Customer accounts are protected through the Securities Investor Protection Corporation for up to $500,000, of which coverage for cash balances is limited to $100,000, and additional protection is provided through Aetna Casualty and Surety Co. for an additional $5,000,000 per 3 regular account, $10,000,000 per individual retirement account and $50,000,000 per resource management account and business services account. The services of a clearing broker include billing and credit control, and receipt, custody and delivery of securities, for which the Company pays a portion of the commissions it receives from customer transactions. The clearing broker in effect provides a "back office" for the Company's brokerage activities, freeing the Company from the need and expense of creating its own such capability. Pursuant to the terms of the Company's agreement with its clearing broker, the Company has agreed to indemnify and hold its clearing broker harmless from certain liabilities and claims, including claims arising from the transactions of its customers. In the event that customers fail to pay for their purchases or fail to supply the securities that they have sold, and the clearing broker satisfies customer obligations, the Company would be obligated to indemnify the clearing broker for any resulting losses. The Company, to date, has not experienced any material losses as a result of the failure of its customers to satisfy their obligations. Government Regulation The securities business is subject to extensive and frequently changing federal and state laws and substantial regulation under such laws by the Commission, various state agencies and self-regulatory organizations, such as the NASD and the Municipal Securities Rulemaking Board ("MSRB"). Kirlin is registered as a broker-dealer and investment advisor with the Commission and is a member firm of the NASD. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally the NASD (which also enforces the rules of the MSRB with respect to the Company), which has been designated by the Commission as the Company's primary regulator. The NASD adopts rules, which are subject to approval by the Commission, that govern its members and conducts periodic examinations of member firms' operations. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers' funds and securities, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the Commission and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. The Commission, self-regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer, its officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the integrity of the securities markets. The Company believes it is currently in compliance with all such regulations governing its business. As a registered broker-dealer and a member firm of the NASD, Kirlin is subject to the Commission's net capital rule. The net capital rule, which specifies minimum net capital requirements for registered brokers and dealers, is designed to measure the general financial integrity and liquidity of a broker-dealer and requires that at least a minimum part of its assets be kept in relatively liquid form. Net capital is essentially defined as net worth (assets minus liabilities), plus qualifying subordinated borrowings and less certain mandatory deductions that result from excluding assets not readily convertible into cash and from valuing certain other assets, such as a firm's positions in securities, conservatively. Among these deductions are adjustments in the market value of securities to reflect the possibility of a market decline prior to disposition. As of December 31, 1996, Kirlin had total net capital of $2,277,715, or $2,027,715 in excess of minimum net capital requirements under the aggregate indebtedness method of calculation. Failure to maintain the required net capital may subject a firm to suspension or expulsion by the NASD, the Commission and other regulatory bodies and ultimately may require its liquidation. The net capital rule also prohibits payments of dividends, redemption of stock and the prepayment or payment in respect of principal of subordinated indebtedness if net capital, after giving effect to the payment, redemption or repayment, would be less than specified percentages of the minimum net capital requirement (120%). Compliance with the net capital rule could limit those operations of Kirlin that require the intensive use of capital, such as underwriting and trading activities, and also could restrict the Company's ability to withdraw capital from Kirlin, which in turn, could limit the Company's ability to pay dividends, repay debt and redeem or purchase shares of its outstanding capital stock. 4 Kirlin is registered as an investment adviser with the Commission and the State of New York. As an investment adviser, Kirlin is subject to the requirements of the Investment Advisers Act of 1940 and the Commission's regulations thereunder, as well as state securities laws and regulations. Such requirements relate to, among other things limitations on the ability to charge performance-based or non-refundable fees to clients, record-keeping and reporting requirements, disclosure requirements, limitations on principal transactions between an adviser or its affiliates and advisory clients, as well as general anti-fraud prohibitions. Competition The Company encounters intense competition in all aspects of its business and competes directly with other securities firms, a significant number of which offer their customers a broader range of financial services, have greater capital and other resources and may have greater operating efficiencies than the Company. In addition to competition from firms currently in the securities business, recently there has been increasing competition from other sources, such as commercial banks and insurance companies offering financial services, and from other investment alternatives. Competition among financial services firms for professional personnel is intense. As part of the Company's growth strategy, it intends to recruit established registered representatives, expand its investment banking business, increase its activity in the equity, municipal bonds and taxable fixed-income securities markets and develop a merchant banking capability. However, it faces competition in all of these areas from other firms that have established reputations, long-standing relationships with clients and substantially greater capital resources. Marketing and Advertising The Company has pursued an aggressive marketing and advertising program since 1989. The Company has advertised itself and its product line in order to get a direct response from listeners. The Company also uses image advertising to promote the name and background of the Company, which it believes has increased the Company's visibility. The Company's advertising program has proven to be very successful in the building of a larger customer base. The Company's primary advertising focus has been on major radio stations, and, to a lesser extent, newspapers in New York, New Jersey, Connecticut, and California. The Company has also used television advertising in the New York City metropolitan area on a limited basis. The Company allocates its advertising budget according to economic conditions and the products available. The advertising program of the Company is heavily regulated by the NASD. Personnel At March 14, 1997, the Company had 161 full-time employees, including 125 registered representatives. The Company's sales force primarily serves retail customers and, to a lesser extent, institutional investors. None of the Company's personnel is covered by a collective bargaining agreement. The Company considers its relationships with its employees to be good. Trademark The Company is the owner of the registered service mark known as "The Triple Play(R)". Such mark is used to promote the Company's products which it believes embody the three main objectives of a fixed individual investor - growth, income and safety. ITEM 2. PROPERTIES. The principal executive offices of the Company and Kirlin are located at 6901 Jericho Turnpike, Syosset, New York 11791 where the Company leases approximately 12,800 square feet of office space at a base rent of approximately $200,000 per year with annual increases of 3.5%. The initial term of the lease expires in September 1999, with one option to renew for an additional five-year period. The Company also operates the following branch offices: 5
Approximate Approximate Annual Office Location Square Footage Lease Rental Expiration - --------------- -------------- ------------ ----------- 400 South El Camino Real 3,500 $78,000 April 2000 San Mateo, California 4370 La Jolla Village Drive 2,300 $56,000 December 1998 San Diego, California 2001 Route 46 2,900 $68,000 June 2001 Parsippany, New Jersey
ITEM 3. LEGAL PROCEEDINGS. The Company's business involves substantial risks of liability, including exposure to liability under federal and state securities laws in connection with the underwriting or distribution of securities and claims by dissatisfied customers for fraud, unauthorized trading, churning, mismanagement and breach of fiduciary duty. The Company does not presently maintain an errors and omissions insurance policy insuring it against these risks. In the normal course of the Company's business, the Company from time to time is involved in lawsuits and arbitrations brought by its customers. It is the opinion of management that the resolution of all proceedings presently pending will not have a material adverse effect on the consolidated financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Prior to the completion of the Company's initial public offering on January 18, 1995, there was no established public trading market for the Company's Common Stock. The Company's Common Stock commenced quotation on the Nasdaq SmallCap Market on January 19, 1995. The following table sets forth, for the periods indicated, the high and low bid prices for the Common Stock as reported by the Nasdaq SmallCap Market (representing interdealer quotations which do not include retail markups, markdowns or commissions):
Period High($) Low($) Fiscal 1996 Fourth Quarter 9.75 9.50 Third Quarter 9.875 9.125 Second Quarter 9.50 6.75 First Quarter 7.00 4.75 Fiscal 1995 Fourth Quarter 7.00 4.50 Third Quarter 7.75 6.75 Second Quarter 9.00 7.50 First Quarter 10.25 9.75
6 On March 19, 1997, the last sale price of the Common Stock as reported by the Nasdaq SmallCap Market was $9.25. On March 19, 1997, there were 84 holders of record of the Company's Common Stock and, the Company believes, approximately 730 beneficial owners of the Company's Company Stock. Prior to April 14, 1994, Kirlin had elected to be treated as an S corporation for income tax purposes under the Internal Revenue Code. As an S corporation, Kirlin made cash distributions to its stockholders in the amount of their proportionate share of the tax payments due with respect to Kirlin's taxable income. Since April 14, 1994, Kirlin has been treated as a C corporation and has not made any similar cash distributions. The Company does not anticipate paying cash or other dividends in the foreseeable future. The payment of dividends, if any, in the future is within the discretion of the Board of Directors and will depend upon the Company's earnings, its capital requirements and financial condition, and other relevant factors. The Company presently intends to retain all earnings in the foreseeable future for the Company's continued growth. The Company's ability to pay dividends in the future also may be restricted by Kirlin's obligation to comply with the net capital requirements imposed on broker-dealers under regulations and rules promulgated by both the Commission and the NASD. Recent Sales of Unregistered Securities During the year ended December 31, 1996, the Company made the following sales of unregistered securities:
Consideration received and description of underwriting or other Exemption If option, warrant or discounts to market from convertible security, Number price afforded to registration terms of exercise Date of sale Title of Security Sold purchasers claimed or conversion - ------------- -------------------- -------- ----------------------- ------------- ------------------------ 1/96 - 12/96 options to purchase 351,950 options granted - no 4(2) exercisable for either Common Stock consideration received 5 or 10 years from granted to by Company until date of grant with employees, directors exercise vesting from 1 to 5 and consultants years at exercise prices ranging from $5.00 to $5.50
7 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements When used in this Form 10-KSB and in future filings by the Company with the Commission, the words or phrases "will likely result, " "management expects" or "the Company expects," "will continue," "is anticipated," "estimated" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements. Overview The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes presented following the consolidated financial statements. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. The Company's revenues are generated primarily from principal trading activities and brokerage transactions. As a principal, the Company buys and sells securities, both for proprietary trading and, more significantly, to facilitate sales to its retail customers and other dealers. These securities are purchased in secondary markets or from the underwriters of new issues. Principal transactions with customers are effected at a net price equal to the current interdealer price plus or minus a mark-up or mark-down within the guidelines of applicable securities regulations. The revenues derived from the Company's transactions as principal reflect realized and unrealized gains and losses on such transactions. Revenues from principal transactions are primarily derived from trading fixed income securities, which may be purchased from and/or sold to other dealers or retail clients. In addition, revenues from principal transactions also reflect gains and/or losses derived from writing and purchasing option contracts. As part of the Company's growth strategy, it intends to increase its principal trading activities in equity securities, primarily in securities of the Company's investment banking clients. As a result of its principal trading activities, the amount of the Company's liabilities and assets can vary widely from period-to-period. Revenues from brokerage transactions, in which the Company buys and sells securities for its customers on an agency basis, are primarily derived from commissions charged to customers for purchasing mutual fund securities and, purchasing and selling equity securities. In the latter half of 1996, the Company introduced a Managed Asset Portfolio Program to manage the financial assets of its clients, for which it receives a quarterly management fee based upon the value of assets under management. The Company pays its brokers commissions equal to varying percentages of gross commissions and mark-ups and mark-downs in connection with the purchases and sales of securities on behalf of its customers. The Company pays its traders a salary plus a percentage of net gains derived from trading activities. In addition, the Company pays ticket charges to its clearing broker for the processing of security transactions. The Company maintains inventories of securities in order to facilitate sales to customers. In this regard, the Company pays interest on the securities held in inventory since substantially all of its securities are purchased on margin through its clearing broker. The Company has expended and intends to continue to expend funds to aggressively promote the Company and its product line. 8 The Company is directly affected by general economic conditions, interest rates and market conditions. All of these factors may have an impact on it's principal trading and overall business volume. The Company's costs associated with occupancy, communications and equipment costs are relatively fixed and, in periods of reduced volume, can have an adverse effect on earnings. The following table shows each specified item as a dollar amount and as a percentage of revenues in each fiscal period, and should be read in conjunction with the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-KSB:
Years ended December 31, 1996 1995 ------------------------ ----------------------- Revenues: Principal transactions net................ $ 11,743,255 71.1% $ 5,857,242 57.4% Commissions.............................. 4,354,436 26.4% 4,052,232 39.7% Other income.............................. 407,863 2.5% 299,547 2.9% ----------- -------- -------------- -------- Total revenues . . . . . . . . . . . . 16,505,554 100.0% 10,209,021 100.0% ----------- -------- -------------- -------- Expenses: Employee compensation and benefits........ 10,122,437 61.3% 6,229,367 61.0% Promotion and advertising................. 1,254,504 7.6% 914,555 9.0% Clearance and execution charges........... 837,055 5.1% 699,303 6.9% Occupancy and communications.............. 1,573,768 9.5% 1,105,629 10.8% Professional fees......................... 216,090 1.3% 246,241 2.4% Interest.................................. 535,713 3.2% 205,939 2.0% Other..................................... 575,643 3.5% 255,849 2.5% ----------- -------- -------------- -------- Total expenses . . . . . . . . . . . . 15,115,210 91.5% 9,656,883 94.6% ----------- -------- -------------- -------- Net income before income tax provision............... 1,390,344 8.4% 552,138 5.4% Provision for income taxes........................... 754,566 4.6% 211,602 2.1% ----------- -------- -------------- -------- Net income........................................... $ 635,778 3.8% $ 340,536 3.3% =========== ======== ============== ========
Results of Operations Year Ended December 31, 1996 Compared with Year Ended December 31, 1995 Total revenues for the year ended December 31, 1996 increased 61.7% to $16,505,554 from 10,209,021 in 1995. This increase is attributable to income generated from the Company's investment banking activities and retail brokerage activities, which is reflective of general market conditions. Employee compensation and benefits in 1996 increased 62.5% to $10,122,437 from $6,229,367 in 1995. This increase is primarily due to an increase in commission payments to the Company's traders and registered representatives as a result of higher revenues, however the percentage of total revenues was consistent between both years. Promotion and advertising in 1996 increased 37.2% to $1,254,504 from $914,555 in 1995 primarily as a result of the Company's planned increase of advertising expenditures, concentrated in television advertising for fixed income securities and radio advertising in conjunction with the establishment of a branch office in New Jersey. Clearance and execution charges in 1996 increased 19.7% to $837,055 from $699,303 in 1995. The increase is the result of higher ticket volume. 9 Occupancy and communications costs in 1996 increased 42.3% to $1,573,768 from $1,105,629 in 1995. This increase is a result of the establishment and operations of branch offices. Professional fees in 1996 decreased 12.2% to $216,090 from $246,241 in 1995 primarily as a result of a shift of work performed by outside consultants to internal professional staff. Interest expense in 1996 increased 160% to $535,713 from $205,939 in 1995 as a result of larger inventory positions purchased on margin, which are held at the clearing broker and charged interest. Other expenses in 1996 increased 125% to $575,643 from $255,849 in 1995 primarily as a result of an increase in general office expenses due to the establishment of branch offices, the increase in the size of existing offices, as well as an expense related to a settlement with a customer. Income tax provision for the year ended December 31, 1996 was $754,566 as compared to $211,602 for the year ended December 31, 1995 as a result of, among other things, a non-cash charge related to the transfer of stock amongst the executive officers of the Company and a lesser utilization of the Company's net operating loss carryforward in 1996 as compared to 1995. Net income of $635,778 for the year ended December 31, 1996 compares to net income of $340,536 for the year ended December 31, 1995 primarily as a result of increased revenues in 1996. Effects of Inflation; Fluctuations in Interest Rates The Company's business is affected by the rate of inflation. Inflation or inflationary fears, which results in higher interest rates, may have an adverse impact upon the securities markets and on the value of securities held in inventory, thereby adversely affecting the Company's financial position and results of operations. Because the Company's business is currently weighted toward fixed income securities, factor's affecting fixed income securities (in particular, changes in interest rates) that may have a lessor impact on more diversified securities firms could have a substantial adverse impact on the business of the Company. Liquidity and Capital Resources Securities owned, at market value, at December 31, 1996 were $13,634,348 as compared to $8,763,309 at December 31, 1995. This 55.6% increase is attributable to an improved retail marketplace for fixed income and equity securities, which increased the Company's need to maintain securities in inventory for resale to its customers. To a significant extent, the Company's inventory requirements for securities is market driven, with a more active market and greater sales necessitating higher inventory levels. Approximately 85.2% of the Company's assets at December 31, 1996 were comprised of cash and highly liquid securities. Furniture, fixtures and leasehold improvements, net, at December 31, 1996, increased to $691,124 as compared to $484,096 at December 31, 1995. This 42.8% increase results primarily from additional computer hardware, office furniture, and leasehold improvements purchased in connection with the establishment of a branch office on the east coast, conversion of the Company's operational and computer system, and renovation of the Corporate office's conference and seminar rooms. Deferred tax asset at December 31, 1996, decreased 100% as compared to $124,384 at December 31, 1995. This decrease reflects the adjustment for the current period's earnings. Other assets increased to $637,066 at December 31, 1996, from $234,504 at December 31, 1995, a 172% increase. This increase is primarily attributable to interest receivable on inventory held, advances to registered representatives, and an interest bearing promissory note related to one of the Company's investment banking undertakings. 10 Securities sold short amounted to $2,019,664 at December 31, 1996 as compared to $1,504,437 at December 31, 1995. Management monitors these positions on a daily basis and covers short positions when deemed appropriate. A portion of the short position at December 31, 1996 was covered during the subsequent month. Payable to clearing broker amounted to $4,586,717 at December 31, 1996 as compared to $2,266,722 at December 31, 1995. This 102% increase is a result of increased inventory purchases on margin. Accrued compensation was $1,174,706 at December 31, 1996 as compared to $407,623 at December 31, 1995, a 188% increase attributable to increased revenues upon which commission income to registered representatives is based. Accounts payable and accrued expenses were $649,556 at December 31, 1996 as compared to $411,045 at December 31, 1995, a 58% increase attributable to accrued promotion, general office expenses, and an accrued expense related to a settlement with a customer. Income Taxes Payable were $582,514 at December 31, 1996 as compared to December 31, 1995. This increase is comprised of current taxes payable reflective of the adjustment for the current period's earnings and deferred income taxes payable resulting from unrealized appreciation on securities positions. The Company, as guarantor of its customer accounts to its clearing broker, is exposed to off-balance-sheet risks in the event that its customers do not fulfill their obligations with the clearing broker. In addition, to the extent the Company maintains a short position in certain securities, it is exposed to a further off-balance-sheet market risk, since the Company's ultimate obligation may exceed the amount recognized in the financial statements. The Company believes its financial resources will be sufficient to fund the Company's operations and capital requirements for the foreseeable future. ITEM 7. FINANCIAL STATEMENTS. Index to Consolidated Financial Statements: Page ---- Report of Goldstein Golub Kessler & Company, P.C. on the Consolidated Financial Statements as of December 31, 1996 and for the year then ended.................F-1 Consolidated Statements of Financial Condition as of December 31, 1996 and 1995.......................................F-2 - F3 Consolidated Statements of Income for the years ended December 31, 1996 and 1995............................................F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996 and 1995.................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995......................................F-6 Notes to the Consolidated Financial Statements..................F-7 - F13 11 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Kirlin Holding Corp. We have audited the accompanying consolidated statements of financial condition of Kirlin Holding Corp. and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kirlin Holding Corp. and Subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. GOLDSTEIN GOLUB KESSLER & COMPANY, P.C. New York, New York February 13, 1997 F-1 KIRLIN HOLDING CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1996 1995 ---------- --------- ASSETS Cash (Note 1) $ 75,304 $ 179,944 Securities Owned, at market value (Note 2): U.S. government and agency obligations 2,153,235 3,059,289 State and municipal obligations 4,654,466 688,374 Corporate bonds and other securities 6,826,647 5,015,643 Furniture, Fixtures and Leasehold Improvements, at cost, net of accumulated depreciation and amortization of $511,096 and $340,208, respectively (Note 1) 691,124 484,096 Deferred Tax Asset (Note 8) - 124,384 Other Assets 637,066 234,504 ----------- ---------- Total Assets $15,037,842 $9,786,234 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Securities sold, not yet purchased, at market value (Note 2) $ 2,019,664 $1,504,437 Payable to clearing broker (Note 1) 4,586,717 2,266,722 Accrued compensation payable 1,174,706 407,623 Accounts payable and accrued expenses 649,556 411,045 Income taxes payable 582,514 - ------------ ---------- Total liabilities 9,013,157 4,589,827 ============ ========== See Notes to Financial Statements F-2 KIRLIN HOLDING CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION Commitments (Note 6) Stockholders' Equity (Note 3): Common stock - $.0001 par value; authorized 15,000,000 shares, issued and outstanding 1,302,330 shares 130 130 Additional paid-in capital 5,522,036 5,329,536 Retained earnings (accumulated deficit) 502,519 (133,259) ----------- ---------- Stockholders' equity 6,024,685 5,196,407 ----------- ---------- Total Liabilities and Stockholders' Equity $15,037,842 $9,786,234 ----------- -----------
See Notes to Financial Statements F-3 KIRLIN HOLDING CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1996 1995 ---------- ----------- Revenue: Principal transactions, net (Notes 1 and 2) $11,743,255 $ 5,857,243 Commissions 4,354,436 4,052,232 Other income 407,863 299,546 ------------- ------------ 16,505,554 10,209,021 ------------- ------------ Expenses: Employee compensation and benefits 10,122,437 6,229,367 Promotion and advertising (Note 1) 1,254,504 914,555 Clearance and execution charges 837,055 699,303 Occupancy and communications 1,573,768 1,105,629 Professional fees 216,090 246,241 Interest 535,713 205,939 Other 575,643 255,849 ----------- ------------ 15,115,210 9,656,883 ----------- ------------ Income before provision for income taxes 1,390,344 552,138 Provision for income taxes (Note 8) 754,566 211,602 ----------- ------------ Net income $ 635,778 $ 340,536 =========== ============ Net income per common share (Note 9) $ .42 $ .26 =========== ============ Weighted average common shares outstanding (Note 9) 1,302,330 1,306,879 =========== ============
See Notes to Financial Statements F-4 KIRLIN HOLDING CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 1996 and 1995
(Accumulated Additional Deficit) Common Stock Paid-in Retained Shares Par Value Capital Earnings Total ---------------------- ---------- ----------- ------------ Stockholders' equity at January 1, 1995 1,400,000 $140 $2,050,813 $(473,795) $1,577,158 Contributions of common stock (500,000) (50) 50 - - Issuance of common stock 402,330 40 3,241,549 - 3,241,589 Compensation related to issuance of stock options - - 37,124 - 37,124 Net income - - - 340,536 340,536 ----------- ----- ------------ ---------- ------------ Stockholders' equity at December 31, 1995 1,302,330 130 5,329,536 (133,259) 5,196,407 Compensation related to the sale of stock by a principal stockholder - - 192,500 - 192,500 Net income - - - 635,778 635,778 ----------- ----- ---------- --------- ---------- Stockholders' equity at December 31, 1996 1,302,330 $130 $5,522,036 $ 502,519 $6,024,685 =========== ===== ========== ========= ==========
See Notes to Financial Statements F-5 KIRLIN HOLDING CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1996 1995 ----------- ----------- Cash flows from operating activities: Net income $ 635,778 $ 340,536 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 170,888 122,581 Amortization/retirement of stock options - 37,124 Deferred income taxes 322,920 211,602 Noncash compensation 192,500 - (Increase) decrease in operating assets: Securities owned, at market value (4,871,042) (6,966,047) Other assets (402,562) 38,261 Increase (decrease) in operating liabilities: Securities sold, not yet purchased, at market value 515,227 1,297,262 Payable to clearing broker 2,319,995 1,361,107 Accrued compensation 767,083 240,277 Accounts payable and accrued expenses 238,511 (228,182) Income taxes payable 383,978 - ------------ ----------- Total adjustments (362,502) (3,886,015) ------------ ----------- Net cash provided by (used in) operating activities 273,276 (3,545,479) Cash flows used in investing activity - purchase of furniture, fixtures and leasehold improvements (377,916) (340,796) Cash flows provided by financing activity - issuance of common stock - 4,023,300 ------------ ---------- Net increase (decrease) in cash (104,640) 137,025 Cash at beginning of year 179,944 42,919 ------------ ---------- Cash at end of year $ 75,304 $ 179,944 ============ ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 535,713 $ 205,939 =========== ========== Income taxes $ 47,759 $ 5,376 =========== ==========
See Notes to Financial Statements F-6 KIRLIN HOLDING CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include the accounts of Kirlin Holding Corp. and its wholly owned subsidiary, Kirlin Securities, Inc. (collectively the "Company"). The Company, through Kirlin Securities, Inc. ("Kirlin"), is a full-service, retail-oriented brokerage firm specializing in the trading and sale of fixed income securities, including collateralized mortgage obligations, corporate and municipal bonds, and government and government agency securities and, to a lesser extent, mutual funds and equity securities. The Company's only activities have been through Kirlin. All material intercompany transactions and balances have been eliminated in consolidation. Kirlin has offices in New York, New Jersey and California. Kirlin is registered as a broker-dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. Kirlin does not carry accounts for customers or perform custodial functions related to customers' securities. Kirlin introduces all of its customer transactions, which are not reflected in these financial statements, to its clearing broker, which maintains the customers' accounts and clears such transactions. Additionally, this clearing broker provides the clearing and depository operations for Kirlin's proprietary securities transactions. These activities may expose the Company to off-balance-sheet risk in the event that customers do not fulfill their obligations with the clearing broker, as Kirlin has agreed to indemnify the clearing broker for any resulting losses. At December 31, 1996, the payable to clearing broker in the consolidated statement of financial condition is for the Company's net acquisition of securities and is collateralized by securities owned by the Company. Substantially all securities owned reflected on the consolidated statement of financial condition are positions held by the clearing broker. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Securities transactions, commission revenue and commission expenses are recorded on a trade-date basis. Unrealized gains and losses on securities transactions are included in principal transactions in the consolidated statement of income. The financial statements have been prepared in conformity with generally accepted accounting principles which require the use of estimates by management. Furniture and fixtures are depreciated on a straight-line basis over the economic useful lives of the assets, not exceeding seven years. Leasehold improvements are amortized over the lesser of their economic useful lives or the expected term of the related lease. Kirlin expenses the costs of advertising the first time the advertising takes place. Advertising expense was approximately $1,053,000 and $813,000 for the years ended December 31, 1996 and 1995, respectively. Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements. F-7 KIRLIN HOLDING CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED: Securities sold, not yet purchased, are stated at market value and consistent of the following:
December 31, 1996 1995 ------------ ----------- U.S. government and agency obligations $ 4,705 $ 358,443 State and municipal obligations 820,676 94,291 Corporate bonds and other securities 1,194,283 1,051,703 ------------ ----------- $2,019,664 $1,504,437 ============ ===========
Securities sold, not yet purchased, represent obligations of Kirlin to deliver specified securities by purchasing the securities in the market at prevailing market prices. Accordingly, these transactions result in off-balance- sheet market risk as Kirlin's ultimate obligation may exceed the amount recognized in the financial statements. Securities owned and securities sold, not yet purchased, are stated at quoted market values. Included in securities owned at December 31, 1996 and 1995 are investment securities not readily marketable amounting to approximately $896,000 and $747,000, respectively (15% and 14%, respectively, of stockholders' equity) which have been valued at fair value as determined by management based on a percentage of the market value of the underlying securities. The resulting unrealized gains and losses are reflected in principal transactions. 3. STOCKHOLDERS' EQUITY: The Company has authorized 1,000,000 shares of preferred stock, par value $.0001 per share. No shares have been issued as of December 31, 1996. In August 1994, the Company adopted the 1994 Stock Plan ("1994 Plan") covering 600,000 shares of the Company's common stock pursuant to which officers, directors, key employees and consultants of the Company are eligible to receive incentive or nonqualified stock options, stock appreciation rights, restricted stock awards, deferred stock, stock reload options and other stock-based awards. F-8 KIRLIN HOLDING CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the 1996 and 1995 activity in the Company's stock options:
Shares Exercise Price ------------- ---------------- Balance at January 1, 1995 294,350 $7.50 - $11.00 Options granted during the year 54,500 $8.25 - $10.00 Options canceled during the year (111,500) $7.50 ------------- --------------- Balance at December 31, 1995 237,350 $8.25 - $11.00 Options granted during the year 351,950 $5.00 - $ 5.50 Options canceled during the year (36,500) $5.00 - $10.00 ------------ --------------- Balance at December 31, 1996 552,800 $5.00 - $11.00 ============ ===============
Under the 1994 Plan, 189,000 shares have been granted to officers of the Company at exercise prices ranging from $5.50 to $11.00 per share. Such options vest over periods of up to five years. The amortization of the difference between the exercise price of the options and the market value at the date of grant, $37,124, was charged to compensation expense during the year ended December 31, 1995. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based Compensation." Accordingly, no compensation costs have been recognized for the options granted. Had compensation cost been determined based on the fair value at the date of grant consistent with the provisions of SFAS No. 123, the Company's net income and income per common share would have been as follows:
Year ended December 31, 1996 1995 ------------- ------------- Net income - as reported $635,778 $340,536 Net income - pro forma 517,278 312,036 Income per common share - as reported .42 .26 Income per common share - pro forma .35 .24 ------------- -------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected volatility of 40%, risk-free interest rate of approximately 7% and expected option lives of six years. The pro forma disclosures are not likely to be representative of the effects on reported net income for future periods. F-9 KIRLIN HOLDING CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In April 1996, the Company adopted the 1996 Stock Plan ("1996 Plan") covering 1,000,000 shares of common stock pursuant to which officers, directors, key employees and consultants are eligible to receive incentive ornonqualified stock options, stock appreciation rights, restricted stock awards, deferred stock, stock reload options and other stock-based awards. At December 31, 1996, no common stock or options had been issued pursuant to the 1996 Plan. In January 1995, the Company consummated its public offering in which it raised $3,241,589 in proceeds, net of offering costs, through the sale of 402,330 shares of its common stock. Upon this consummation, officers of the Company contributed to the Company, in the aggregate, 500,000 shares of the Company's common stock which they owned. Additionally, 40,233 options to purchase shares of common stock of the Company were granted to Kirlin which acted as the Company's underwriter. 4. NET CAPITAL REUIREMENT: As a registered broker-dealer, Kirlin is subject to the Securities and Exchange Commission's Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital. Kirlin computes its net capital under the aggregate indebtedness method permitted by Rule 15c3-1, which requires that Kirlin maintain minimum net capital, as defined, of 6-2/3% of aggregate indebtedness, as defined, or $250,000, whichever is greater. Additionally, the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15-to- 1. At December 31, 1996 and 1995, Kirlin had net capital, as defined, of $2,277,715 and $2,091,422, respectively, which exceeded the minimum net capital requirements by $2,027,715 and $1,841,422, respectively. Kirlin's ratio of aggregate indebtedness to net capital was .95-to-1 and .37-to-1 at December 31, 1996 and 1995, respectively. 5. RETIREMENT AND SAVINGS PLAN: Kirlin sponsors a Retirement and Savings Plan for all full-time employees over the age of 19 pursuant to Section 401(k) of the Internal Revenue Code. Kirlin matches 50% of each participant's contribution up to $1,000 per participant per year. Kirlin's contributions to the plan for the years ended December 31, 1996 and 1995 were $70,267 and $53,247, respectively. 6. COMMITMENTS: Kirlin leases office space at several locations under noncancelable leases expiring at various times through June 30, 2001. The minimum annual rental payments for these leases are as follows: Year ending December 31, 1997 $ 460,642 1998 430,533 1999 326,327 2000 94,149 2001 34,020 ----------- ---------------- $1,345,671 ================ The leases contain provisions for escalations based on increases in certain costs incurred by the lessor. Kirlin has the option to renew two of these leases for an additional five-year period. Rent expense was $463,407 and $333,538 for the years ended December 31, 1996 and 1995, respectively. F-10 KIRLIN HOLDING CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. FINANCIAL INSTRUMENTS: The Company's activities include the purchase and sale of stock options and warrants. Stock options and warrants give the buyer the right to purchase or sell securities at a specific price until a specified expiration date. These financial instruments are used to conduct trading activities and manage market risk. The Company may receive warrants as part of its underwriting activities. See Note 2 for fair value methodology. Such transactions may result in credit exposure in the event the counterparty to the transaction is unable to fulfill its contractual obligations. Substantially all of the stock options and warrants are traded on national exchanges, which can be subject to market risk in the form of price fluctuations. The following summarizes financial instruments held at December 31, 1996 and 1995:
Average Market Notional Value for Amount Market Value the Year ----------------- ------------------- ------------------- 1996 1995 1996 1995 1996 1995 ----------------- ------------------- ------------------- Stock options and warrants: Assets $1,133,660 $679,198 $230,574 $615,469 $638,786 $147,649 Liabilities 365,668 693,698 91,653 273,267 123,423 35,159 ---------- -------- -------- ------- -------- --------
Net revenue from principal transactions consists of fixed income and equity activities. 8. INCOME TAXES: The Company files consolidated federal income tax returns and separate Company state income tax returns. The provision for income taxes consists of:
Year ended December 31 1996 1995 Current: Federal $295,106 - State 136,540 - ----------- -----
431,646 - ----------- ----- Deferred: Federal 238,538 $156,810 State 84,382 54,792 ---------- -------- 322,920 211,602 ---------- -------- $754,566 $211,602 ========== ======== F-11 KIRLIN HOLDING CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The provision for income taxes for the years ended December 31, 1996 and 1995 differs from the amount computed using the federal statutory rate of 34% as a result of the following:
1996 1995 ------------ ------------ Tax at federal statutory rate 34% 34 % State income taxes 9 8 Nondeductible expenses 6 - Other 5 (4) ------------ ------------ 54% 38 % ============ ============
The deferred tax asset (liability) results from the following:
1996 1995 ------------ ----------- Net operating loss carryforward - $176,154 Unrealized appreciation on investment securities not readily marketable $(263,388) (51,770) Other temporary differences 64,852 ------------ ----------- $(198,536) $124,384 ============ ===========
9. EARNINGS PER SHARE: Net income per common share is based on the weighted average number of shares outstanding for each period. For the year ended December 31, 1996, primary and fully diluted net income per common share have been calculated using the modified treasury stock method since options to purchase common stock have a dilutive effect. For the year ended December 31, 1995, options to purchase common stock have been excluded from the computation of weighted average shares outstanding since their inclusion would have an antidilutive effect. Accounting Principles Board Opinion No. 15, "Earnings per Share," limits the assumed repurchase of shares under the treasury stock method to 20% of the shares outstanding. Any excess proceeds from the assumed exercise of options are assumed to be invested in U.S. government securities or commercial paper. Therefore, net income is adjusted for assumed interest income, net of applicable income taxes for purposes of these calculations. The weighted average number of shares of common stock outstanding and adjusted net income for primary and F-12 KIRLIN HOLDING CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS fully diluted net income per common share for the year ended December 31, 1996 are as follows:
Primary Fully Diluted Net Income Net Income Per Per Common Share Common Share ------------- -------------- Net income $ 635,778 $ 635,778 Plus: Estimated proceeds from investment in U.S. government securities or commercial paper, net of taxes 56,233 47,638 ----------- ---------- Net income used in calculation $ 692,011 $ 683,416 =========== ========== Weighted average number of shares outstanding 1,302,330 1,302,330 Plus: Net effect of dilutive stock options based on the modified treasury stock method using the average market price of common stock 332,567 332,567 ---------- ---------- Total shares used in calculation 1,634,897 1,634,897 ========== ========== Primary and fully diluted net income per common share $ 0.42 $ 0.42 ========== ==========
F-13 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As reported in the Company's Current Report on Form 8-K, dated October 3, 1995, as amended by an Amendment dated October 6, 1995, on September 28, 1995, the Company dismissed Coopers & Lybrand L.L.P. and subsequently engaged Goldstein Golub Kessler & Company, P.C. as its new independent accountants for its fiscal year ending December 31, 1995. The report of Coopers & Lybrand L.L.P. on the Company's consolidated financial statements for either of the two fiscal years ended December 31, 1993 and 1994, respectively, did not contain an adverse opinion or disclaimer of opinion, nor was it modified or qualified as to uncertainty, audit scope or accounting principles. The decision to dismiss Coopers & Lybrand L.L.P. and engage Goldstein Golub Kessler & Company, P.C. was made by the Board of Directors of the Company. During the two fiscal years ended December 31, 1993 and 1994, respectively, and through the date of termination (September 28, 1995), there were no disagreements with Coopers & Lybrand L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ITEM 10. EXECUTIVE COMPENSATION ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Items 9, 10, 11 and 12 is incorporated by reference to the information included in the Company's definitive proxy statement in connection with the Annual Meeting of Stockholders to be held on June 20, 1997. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Filed. See Exhibit Index appearing later in this Report. (b) Reports on Form 8-K. None. 25 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. KIRLIN HOLDING CORP. (Registrant) Dated: March 28, 1997 By:/s/ Anthony J. Kirincic ------------------------- Name: Anthony J. Kirincic Title: President In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date - ------------------------- -------------------------- ---------------- Chairman of the Board of Directors and Chief Executive Officer (Principal Executive /s/ David O. Lindner Officer) March 28, 1997 - ------------------------ David O. Lindner Director, President and Chief Financial Officer (Principal /s/ Anthony J. Kirincic Financial Officer) March 28, 1997 - ------------------------ Anthony J. Kirincic /s/ Robert A. Paduano Director March 28, 1997 - ----------------------- Robert A. Paduano Controller (Principal /s/ Barry Shapiro Accounting Officer) March 28, 1997 - ----------------------- Barry Shapiro /s/ Edward J. Casey - ---------------------- Edward J. Casey Director March 28, 1997
26 EXHIBIT INDEX
Incorporated Exhibit By Reference No. in Number Description from Document Document Page - -------- ------------------------------------------ ------------- ----------- ------ 3.1 Certificate of Incorporation A 3.1 3.1.1 Certificate of Correction to Certificate of A 3.1.1 Incorporation, dated July 29, 1994 3.2 Amended and Restated By-Laws A 3.2 4.1 Form of Common Stock Certificate A 4.1 4.2 Form of Underwriter's Purchase Option, A 4.2 dated January 18, 1995, by and between the Registrant and Kirlin Securities, Inc. 10.1 Employment Agreement, dated January 1, A 10.1 1994, between Kirlin Securities, Inc. and David O. Lindner 10.1.1 Schedule of Omitted Documents in the form A 10.1.1 of Exhibit 10.1, including material detail to which such documents differ from Exhibit 10.1 10.2 1994 Stock Plan A 10.2 10.3 Clearing Agreement between Kirlin A 10.3 Securities, Inc. and Clearing Services 10.4 Stock Option Agreement, dated August 1, A 10.4 1994, between the Registrant and David O. Lindner 10.4.1 Schedule of Omitted Documents in the form A 10.4.1 of Exhibit 10.4, including material detail in which such documents differ from Exhibit 10.4 10.5 Lease Agreement, dated May 23, 1994, A 10.5 between Kirlin Securities, Inc. and BBRG, Inc. 10.6 Stock Option Agreement, dated January 12, B 10.6 1996, between the Registrant and David O. Lindner 10.6.1 Schedule of Omitted Documents in the form B 10.6.1 of Exhibit 10.6, including material detail in which such documents differ from Exhibit 10.6 10.7 Stock Option Agreement, dated January 12, B 10.7 1996, between the Registrant and Barry Shapiro 27 10.7.1 Schedule of Omitted Document in the form B 10.7.1 of Exhibit 10.7, including material detail in which such document differs from Exhibit 10.7 10.8 Stock Option Agreement, dated January 12, B 10.8 1996, between the Registrant and Edward J. Casey 10.9 Indemnification Agreement, dated November B 10.9 14, 1995, between the Registrant and Edward J. Casey 21 List of Subsidiaries -- -- Filed Herewith 27 Financial Data Schedule (12/31/96) -- -- Filed Herewith
- --------------------- A. Registrant's Form SB-2 Registration Statement (No. 33-84512), declared effective November 14, 1994. B. Registrant's Form 10-KSB for the fiscal year ended December 31, 1995. 28 EX-21 2 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of Registrant Percent State of Name Ownership Organization - ----------------------- --------- ------------------ Kirlin Securities, Inc. 100% Delaware 29 EX-27 3 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 DEC-31-1996 75,304 13,634,348 637,066 0 0 14,346,718 1,202,220 (511,096) 15,037,842 9,013,157 0 0 0 130 6,024,555 15,037,842 16,505,554 16,505,554 12,213,996 12,213,996 2,365,501 0 535,713 1,390,344 754,566 0 0 0 0 635,778 0.42 0.42
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