U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Act
____ of 1934
For the quarterly period ended September 30, 1997
_____ 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 Small Business Issuer as Specified in its Charter)
Delaware 11-3229358
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6901 Jericho Turnpike, Syosset, New York 11791
(Address of Principal Executive Offices)
(800) 899-9400
(Issuer's Telephone Number Including Area Code)
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Check whether the issuer: (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 issuer's classes of common
equity, as of the latest practicable date: At November 10, 1997, Issuer had
outstanding 1,360,132 shares of Common Stock, par value $.0001 per share.
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
KIRLIN HOLDING CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS:
Cash $ 269,319 $ 75,304
Securities Owned, at market value:
U.S. government and agency obligations 2,113,506 2,153,235
State and municipal obligations 2,193,786 4,654,466
Corporate bonds and other securities 7,523,611 6,826,647
Furniture, Fixtures and Leasehold Improvements, at cost, net of
accumulated depreciation of $647,625 and $511,096 for
September 30, 1997 and December 31, 1996, respectively 737,617 691,124
Income taxes receivable 80,818
Other Assets 782,289 637,066
------------------ -- ---------------
Total assets $ 13,700,946 $ 15,037,842
================== == ===============
LIABILITIES and STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, not yet purchased, at market value $ 2,328,756 $ 2,019,664
Payable to clearing broker 709,650 4,586,717
Accrued compensation 2,083,899 1,174,706
Accounts payable and accrued expenses 490,684 649,556
Income taxes payable 426,959 582,514
------------------ -- ---------------
Total liabilities 6,039,948 9,013,157
------------------ -- ---------------
Commitments
Stockholders' Equity (Note 2):
Common stock, par value $.0001; 15,000,000 shares authorized,
at September 30, 1997: 1,360,132 shares issued and outstanding;
at December 31, 1996: 1,302,330 shares issued and outstanding 136 130
Additional paid-in capital 5,869,644 5,522,036
Retained earnings 1,791,218 502,519
------------------ -- ---------------
Total stockholders' equity 7,660,998 6,024,685
------------------ -- ---------------
Total liabilities and stockholders' equity $ 13,700,946 $ 15,037,842
================== == ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30, September 30,
--------------- --------------------
1997 1996 1997 1996
--------------- ------------- ---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net $ 5,452,833 $ 3,204,057 $ 11,994,578 $ 9,078,371
Commissions 1,157,605 1,066,604 3,519,476 3,310,993
Other income 98,436 103,743 294,344 293,680
--------------- -------------- ----------------- ----------------
6,708,874 4,374,404 15,808,398 12,683,044
--------------- -------------- ----------------- ----------------
Expenses:
Employee compensation and benefits 4,441,795 2,397,118 10,512,874 7,491,402
Promotion and advertising 88,827 434,853 233,932 1,071,033
Clearance and execution charges 233,934 274,815 671,363 749,575
Occupancy and communications 463,744 418,882 1,301,885 1,150,418
Professional fees 70,765 47,786 195,922 143,020
Interest 64,934 150,588 190,179 363,513
Other 112,726 117,364 374,644 328,294
--------------- -------------- ----------------- ----------------
5,476,725 3,841,406 13,480,799 11,297,255
--------------- -------------- ----------------- ----------------
Income before provision for income taxes 1,232,149 532,998 2,327,599 1,385,789
Provision for income taxes (Note 3) 543,128 218,917 1,038,900 642,781
--------------- -------------- ----------------- ----------------
Net income $ 689,021 $ 314,081 $ 1,288,699 $ 743,008
=============== ============== ================= ================
Net income per common share (Note 4) $ 0.51 $ 0.20 $ 0.85 $ 0.47
=============== ============== ================= ================
Weighted average common shares outstanding 1,346,095 1,302,330 1,317,079 1,302,330
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
---------------------------- Additional Retained
Shares Par Value Capital Earnings Total
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Stockholders' equity,
January 1, 1997 1,302,330 $ 130 $ 5,522,036 $ 502,519 $ 6,024,685
Exercise of stock options 38,000 4 208,996 209,000
Exercise of stock option
exchange offer 19,802 2 138,612 138,614
Net income 1,288,699 1,288,699
-- ---------- -------------- -- ----------- -- ----------- -- ----------
Stockholders' equity,
September 30, 1997 1,360,132 $ 136 $ 5,869,644 $ 1,791,218 $ 7,660,998
== ========== ============== == =========== == =========== == ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,288,699 $ 743,008
----------------- ------------------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 136,529 128,168
Deferred income taxes 219,029 395,321
Stock option exchange for common stock 138,614
Decrease (increase) in securities owned, at market value 1,803,445 (20,203,328)
(Increase) in other assets (145,223) (298,136)
(Increase) in income taxes receivable (80,818)
Increase (decrease) in securities sold, not yet
purchased, at market value 309,092 (570,407)
(Decrease) increase in payable to clearing broker (3,877,067) 18,872,192
Increase in accrued compensation 909,193 711,498
(Decrease) increase in accounts payable and accrued expenses (158,872) 421,838
(Decrease) in income taxes payable (374,584)
----------------- ------------------
Total adjustments (1,120,662) (542,854)
----------------- ------------------
Net cash provided by operating activities 168,037 200,154
----------------- ------------------
Cash flows from investing activities:
Purchase of furniture, fixtures and leasehold improvements (183,022) (295,926)
----------------- ------------------
Net cash used in investing activities (183,022) (295,926)
----------------- ------------------
Cash flows from financing activities:
Issuance of common stock 209,000
----------------- ------------------
Net cash provided by financing activities 209,000
----------------- ------------------
Net increase (decrease) in cash 194,015 (95,772)
Cash, beginning of period 75,304 179,944
----------------- ------------------
Cash, end of period $ 269,319 $ 84,172
================= ==================
Supplemental information:
Interest paid $ 190,179 $ 386,537
Income taxes paid $ 1,568,920 $ 44,452
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Kirlin
Holding Corp. and its wholly owned 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, other than investments, have been through Kirlin. All
material intercompany transactions and balances have been eliminated in
consolidation. Kirlin has offices in New York, New Jersey, California
and Florida.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
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
in order to make the financial statements not misleading have been
included. The operations for the three and nine-month periods ended
September 30, 1997 are not necessarily indicative of the results that
may be expected for the full year ending December 31, 1997. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996.
2. Stockholders' Equity
On July 24, 1997, the Company completed an exchange offer to holders of
its outstanding stock options. The Company's Board of Directors
authorized this exchange offer, in which optionholders were offered the
right to surrender their options for cash and/or common stock at
varying rates depending upon the terms of the option being surrendered,
in order to reduce the number of options outstanding, which has a
dilutive effect on the Company's reported earnings per share. Prior to
the exchange offer, 538,738 options were outstanding, as compared to
the Company's 1,302,330 shares of Common Stock outstanding.
Upon completion of the exchange offer, 448,488 options were surrendered
in exchange for $537,298 in cash and 19,802 shares of Common Stock.
Concurrently with the exchange offer, three executive officers of the
Company exercised options to purchase 38,000 shares of Common Stock and
the Company's wholly-owned subsidiary, Kirlin Securities, Inc.,
surrendered, without payment of any consideration, options it held to
purchase 16,095 shares of Common Stock.
Following these actions, as of July 25, 1997, the Company had 1,360,132
shares of Common Stock outstanding and options to purchase 52,250
shares of Common Stock remain outstanding, at exercise prices ranging
from $5.50 to $10.00 per share.
6
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
3. Income Taxes
The Company files consolidated federal income tax returns and combined
New York, New Jersey, California and Florida State income tax returns.
The provision for income taxes differs from the amount of income taxes
determined by applying the federal statutory rates principally because
of the effect of state taxes.
4. Earnings Per Share
Net income per common share is based on the weighted average number of
shares outstanding for each period. For the three and nine-month
periods ended September 30, 1997 and 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. 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 fully diluted net income per common share for the three and
nine-month periods ended September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30, September 30,
--------------------------- -------------------------
1997 1996 1997 1996
------------ ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Primary Net Income Per Common Share
Net Income $ 689,021 $ 314,081 $ 1,288,699 $ 743,008
Plus: Estimated proceeds from investment in
U.S. government securities or
commercial paper, net of taxes 13,407 47,839
---------- ------------ ------------ ------------
Net Income used in calculation $ 689,021 $ 327,488 $ 1,288,699 $ 790,847
========== ============ ============ ============
Weighted average number of shares outstanding 1,346,095 1,302,330 1,317,079 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 351,317 205,571 351,317
---------- ------------ ------------ ------------
Total shares used in calculation 1,346,095 1,653,647 1,522,650 1,653,647
========== ============ ============ ============
Net income per common share $ 0.51 $ 0.20 $ 0.85 $ 0.48
========== ============ ============ ============
</TABLE>
7
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fully Diluted Net Income Per Common Share
Net Income $ 689,021 $ 314,081 $ 1,288,699 $ 743,008
Plus: Estimated proceeds from investment
in U.S. government securities or
commercial paper, net of taxes 12,463 37,388
---------- ------------ ------------ ------------
Net Income used in calculation 689,021 $ 326,544 $ 1,288,699 $ 780,396
========== ============ ============ ============
Weighted average number of shares outstanding 1,346,095 1,302,330 1,317,079 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 351,317 206,599 351,317
---------- ------------ ------------ ------------
Total shares used in calculation 1,346,095 1,653,647 1,523,678 1,653,647
========== ============ ============ ============
Net income per common share $ 0.51 $ 0.20 $ 0.85 $ 0.47
========== ============ ============ ============
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward-Looking Statements
When used in this Form 10-QSB 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.
Results of Operations
Total revenues for the three and nine-month periods ended September 30,
1997 increased 53.4% and 24.6%, respectively, to $6,708,874 and $15,808,398 from
the comparable periods in 1996. The increase was attributable to income
generated from the Company's merchant banking and retail brokerage activities,
which was reflective of a strong marketplace. As a result, principal
transactions, net increased by 70.2% and 32.1%, respectively, for the three and
nine-month periods ended September 30, 1997 from the comparable periods in 1996.
Commissions increased 8.5% and 6.3%, respectively, primarily as a result of a
customer shift to equity securities.
Employee compensation and benefits for the three and nine-month periods
ended September 30, 1997 increased 85.3% and 40.3%, respectively, to $4,441,795
and $10,512,874 from the comparable periods in 1996. Since employee compensation
to the Company's traders and registered representatives is directly related to
revenue, a portion of employee compensation follows the change in the Company's
revenues. The increase was also partially attributable to a $675,912 charge
related to a stock option exchange offer to holders of the Company's outstanding
stock options which was completed on July 24, 1997.
Promotion and advertising for the three and nine-month periods ended
September 30, 1997 decreased 79.6% and 78.2%, respectively, to $88,827 and
$233,932 from the comparable periods in 1996 primarily as a result of a shift of
work to internal staff and the Company's planned reduction in advertising
expenditures, primarily in radio and television advertising, due to a retail
product focused on the Company's existing client base through the use of print
media.
Clearance and execution charges for the three and nine-month periods
ended September 30, 1997 decreased 14.9% and 10.4%, respectively, to $233,934
and $671,363 from the comparable periods in 1996 as a result of reduced fees
charged by the Company's clearing broker.
Occupancy and communications costs for the three and nine-month periods
ended September 30, 1997 increased 10.7% and 13.2%, respectively, to $463,744
and $1,301,885 from the comparable periods in 1996. This increase was a result
of the establishment and operations of branch offices.
Professional fees for the three and nine-month periods ended September
30, 1997 increased 48.1% and 37.0% to $70,765 and $195,922 from the
comparable periods in 1996 primarily as a result of an increase in external
consultation with outside professionals.
9
<PAGE>
Interest expense for the three and nine-month periods ended September
30, 1997 decreased 56.9% and 47.7%, respectively, to $64,934 and $190,179 from
the comparable periods in 1996 as a result of smaller inventory positions
purchased on margin, which incur interest.
Other expenses for the three-month period ended September 30, 1997
decreased 4.0% to $112,726, and for the nine-month period ended September 30,
1997 increased 14.1% to $374,644, respectively, from the comparable periods in
1996 as a result of an increase in general office expenses primarily as a result
of the establishment and operations of branch offices.
Income tax provision for the three and nine-month periods ended
September 30, 1997 were $543,128 and $1,038,900, respectively, which was
consistent with the increase in income before this income tax provision.
Net income of $689,021 and $1,288,699, respectively, for the three and
nine-month periods ended September 30, 1997 compares to net income of $314,081
and $743,008, respectively, for the three and nine-month periods ended September
30, 1996 primarily as a result of increased revenues and an increased operating
cost reduction emphasis in 1997.
Liquidity and Capital Resources
Securities owned, at market value, at September 30, 1997 were
$11,830,903 as compared to $13,634,348 at December 31, 1996. This 13.2% decrease
was attributable to the Company's reduced need to maintain securities in
inventory for resale to its customers at September 30, 1997 as compared with
December 31, 1996. To a significant extent, the Company's inventory requirements
for securities is market driven, with a less active market and lower sales
necessitating lower inventory levels. Approximately 71.5% of the Company's
assets at September 30, 1997 were comprised of cash and highly liquid
securities.
Furniture, fixtures and leasehold improvements, net, at September 30,
1997, increased to $737,617 as compared to $691,124 at December 31, 1996. This
6.7% increase resulted from the establishment and operations of a branch office
and additional computer hardware, office furniture, and leasehold improvements
purchased in connection with the existence and maintenance of the Company's
offices.
Other assets increased to $782,289 at September 30, 1997, from $637,066
at December 31, 1996, a 22.8% increase. This increase was primarily attributable
to managed fee income receivable related to a retail product, advances to
registered representatives, and a decrease in prepaid operating assets.
Income Taxes Receivable and Income Taxes Payable were $80,818 and
$426,959, respectively, at September 30, 1997 as compared to Income Taxes
Payable of $582,514 at December 31, 1996. This change is comprised of current
taxes receivable and payable reflective of the payment of estimated income taxes
and the adjustment for the current period's earnings, and deferred income taxes
payable resulting from unrealized appreciation on securities positions.
Securities sold short amounted to $2,328,756 at September 30, 1997 as
compared to $2,019,664 at December 31, 1996. Management monitors these
positions on a daily basis and covers short positions when appropriate. A
portion of the short position at September 30, 1997 was covered during the
subsequent month.
10
<PAGE>
Payable to clearing broker amounted to $709,650 at September 30, 1997
as compared to $4,586,717 at December 31, 1996. This 84.5% decrease was a result
of decreased inventory purchases on margin.
Accrued compensation was $2,083,899 September 30, 1997 as compared to
$1,174,706 at December 31, 1996, a 77.4% increase attributable to increased
revenues upon which commission income to registered representatives is based.
Accounts payable and accrued expenses were $490,684 at September 30,
1997 as compared to $649,556 at December 31, 1996, a 24.5% decrease attributable
to accrued promotion, general office expenses, and an accrued expense related to
a settlement with a customer.
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.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule (9/30/97)
(b) Reports on Form 8-K
None
12
<PAGE>
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 10, 1997 By: /s/ Anthony J. Kirincic
---------------------------------
Anthony J. Kirincic
President and Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
27. Financial Data Schedule (9/30/97) 15
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 269,319
<SECURITIES> 11,830,903
<RECEIVABLES> 863,107
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,963,329
<PP&E> 1,385,242
<DEPRECIATION> (647,625)
<TOTAL-ASSETS> 13,700,946
<CURRENT-LIABILITIES> 6,039,948
<BONDS> 0
<COMMON> 136
0
0
<OTHER-SE> 7,660,862
<TOTAL-LIABILITY-AND-EQUITY> 13,700,946
<SALES> 15,808,398
<TOTAL-REVENUES> 15,808,398
<CGS> 11,418,169
<TOTAL-COSTS> 11,418,169
<OTHER-EXPENSES> 1,872,451
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,179
<INCOME-PRETAX> 2,327,599
<INCOME-TAX> 1,038,900
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,288,699
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
