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 June 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 August 11, 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>
June 30, December 31,
1997 1996
------------ ---------------
(Unaudited)
ASSETS:
<S> <C> <C>
Cash $ 209,793 $ 75,304
Securities Owned, at market value:
U.S. government and agency obligations 1,865,394 2,153,235
State and municipal obligations 2,870,016 4,654,466
Corporate bonds and other securities 5,116,884 6,826,647
Furniture, Fixtures and Leasehold Improvements, at cost, net of
accumulated depreciation of $606,793 and $511,096 for
June 30, 1997 and December 31, 1996, respectively 745,059 691,124
Other Assets 596,726 637,066
Income taxes receivable 40,634
---------------- -------------------
Total assets $ 11,444,506 $ 15,037,842
================ ===================
LIABILITIES and STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, not yet purchased, at market value $ 2,034,432 $ 2,019,664
Payable to clearing broker 1,156,298 4,586,717
Accrued compensation 1,129,070 1,174,706
Accounts payable and accrued expenses 500,343 649,556
Income taxes payable 582,514
---------------- -------------------
Total liabilities 4,820,143 9,013,157
---------------- -------------------
Commitments
Stockholders' Equity:
Common stock, $.0001 par value; authorized 15,000,000 shares,
issued and outstanding 1,302,330 130 130
Additional paid-in capital 5,522,036 5,522,036
Retained earnings 1,102,197 502,519
---------------- -------------------
Total stockholders' equity 6,624,363 6,024,685
---------------- -------------------
Total liabilities and stockholders' equity $ 11,444,506 $ 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 Six-Months Ended
June 30, June 30,
1997 1996 1997 1996
-------------- ------------- --------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net $ 2,414,885 $ 3,099,497 $ 6,541,745 $ 5,874,314
Commissions 1,291,198 1,118,227 2,361,871 2,244,389
Other income 88,837 106,338 195,908 189,937
--------------- -------------- ---------------- ------------
3,794,920 4,324,062 9,099,524 8,308,640
--------------- -------------- ---------------- ------------
Expenses:
Employee compensation and benefits 2,358,004 2,617,066 6,071,079 5,094,284
Promotion and advertising 98,034 350,492 145,105 636,180
Clearance and execution charges 194,309 220,610 437,429 474,760
Occupancy and communications 450,123 399,905 838,141 731,536
Professional fees 70,933 64,416 125,157 95,234
Interest 61,599 104,988 125,245 212,925
Other 128,424 114,567 261,918 210,930
--------------- -------------- ---------------- ------------
3,361,426 3,872,044 8,004,074 7,455,849
--------------- -------------- ---------------- ------------
Income before provision for income taxes 433,494 452,018 1,095,450 852,791
Provision for income taxes (Note 2) 200,345 229,767 495,772 423,864
--------------- -------------- ---------------- ------------
Net income $ 233,149 $ 222,251 $ 599,678 $ 428,927
=============== ============== ================ ============
Net income per common share (Note 3) $ 0.16 $ 0.14 $ 0.39 $ 0.28
=============== ============== ================ ============
Weighted average common shares outstanding 1,302,330 1,302,330 1,302,330 1,302,330
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 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
Net income 599,678 599,678
------------- -------------- -------------- -------------- -------------
Stockholders' equity,
June 30, 1997 1,302,330 $ 130 $ 5,522,036 $ 1,102,197 $ 6,624,363
============= ============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------------
1997 1996
---------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 599,678 $ 428,927
----------------- -----------------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 95,697 81,224
Deferred income taxes (59,564) 82,218
Decrease (increase) in securities owned, at market value 3,782,054 (4,031,879)
Decrease (increase) in other assets 40,340 (283,978)
(Increase) in income taxes receivable (179,606)
Increase (decrease) in securities sold, not yet
purchased, at market value 14,768 (61,010)
(Decrease) increase in payable to clearing broker (3,430,419) 3,075,655
(Decrease) increase in accrued compensation (45,636) 522,074
(Decrease) increase in accounts payable and accrued expenses (149,213) 315,799
(Decrease) in income taxes payable (383,978)
----------------- -----------------
Total adjustments (315,557) (299,897)
----------------- -----------------
Net cash provided by operating activities 284,121 129,030
----------------- -----------------
Cash flows from investing activities:
Purchase of furniture, fixtures and leasehold improvements (149,632) (175,467)
----------------- -----------------
Net cash used in investing activities (149,632) (175,467)
----------------- -----------------
Net increase (decrease) in cash 134,489 (46,437)
Cash, beginning of period 75,304 179,944
----------------- -----------------
Cash, end of period $ 209,793 $ 133,507
================= =================
Supplemental information:
Interest paid $ 125,245 $ 217,150
Income taxes paid $ 1,118,920 $ 41,900
</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 six-month periods ended June
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. 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.
3. 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 six-month
periods ended June 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 six-month periods ended June 30, 1997 and 1996 are as follows:
6
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Three-Months Ended Six-Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------------ ------------ ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Primary Net Income Per Common Share
Net Income $ 233,149 $ 222,251 $ 599,678 $ 428,927
Plus: Estimated proceeds from investment in
U.S. government securities or
commercial paper, net of taxes 14,080 15,551 24,644 34,682
------------- ------------ ------------ ------------
Net Income used in calculation $ 247,229 $ 237,802 $ 624,322 $ 463,609
============= ============ ============ ============
Weighted average number of shares outstanding 1,302,330 1,302,330 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 294,367 353,317 294,367 353,317
------------- ------------ ------------ ------------
Total shares used in calculation 1 ,596,697 1,655,647 1,596,697 1,655,647
============= ============ ============ ============
Net income per common share $ 0.16 $ 0.14 $ 0.39 $ 0.28
============= ============ ============ ============
Fully Diluted Net Income Per Common Share
Net Income $ 233,149 $ 222,251 $ 599,678 $ 428,927
Plus: Estimated proceeds from investment in
U.S. government securities or
commercial paper, net of taxes 14,080 13,613 24,644 27,227
------------- ------------ ------------ ------------
Net Income used in calculation $ 247,229 $ 235,864 $ 624,322 $ 456,154
============= ============ ============ ============
Weighted average number of shares outstanding 1,302,330 1,302,330 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 294,367 353,317 294,367 353,317
------------- ------------ ------------ ------------
Total shares used in calculation 1,596,697 1,655,647 1,596,697 1,655,647
============= ============ ============ ============
Net income per common share $ 0.16 $ 0.14 $ 0.39 $ 0.28
============= ============ ============ ============
</TABLE>
7
<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 six-month periods ended June 30, 1997
decreased and increased 12.2% and 9.5%, respectively, to $3,794,920 and
$9,099,524 from the comparable periods in 1996. The decrease in the three-month
period was attributable to a sluggish retail marketplace at the beginning of the
quarter and the increase during the six-month period was attributable to a
particularly strong market place during the first quarter of 1997. As a result,
principal transactions, net decreased and increased by 22.1% and 11.4%,
respectively, for the three and six-month periods ended June 30, 1997 from the
comparable periods in 1996. Commissions increased 15.5% and 5.2%, respectively,
primarily as a result of a customer shift to equity securities.
Employee compensation and benefits for the three and six-month periods
ended June 30, 1997 decreased and increased 9.9% and 19.2%, respectively, to
$2,358,004 and $6,071,079 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 in the six-month period was also partially
attributable to the hiring of staff positions.
Promotion and advertising for the three and six-month periods ended June
30, 1997 decreased 72.0% and 77.2%, respectively, to $98,034 and $145,105 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 the Company's expectation
of sluggish market conditions and a retail product focused on the Company's
existing client base.
Clearance and execution charges for the three and six-month periods ended
June 30, 1997 decreased 11.9% and 7.9%, respectively, to $194,309 and $437,429
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 six-month periods
ended June 30, 1997 increased 12.6% and 14.6%, respectively, to $450,123 and
$838,141 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 six-month periods ended June 30, 1997
increased 10.1% and 31.4% to $70,933 and $125,157 from the comparable periods in
1996 primarily as a result of an increase in external consultation with outside
professionals.
Interest expense for the three and six-month periods ended June 30, 1997
decreased 41.3% and 41.2%, respectively, to $61,599 and $125,245 from the
comparable periods in 1996 as a result of smaller inventory positions purchased
on margin, which incur interest.
8
<PAGE>
Other expenses for the three and six-month periods ended June 30, 1997
increased 12.1% and 24.2%, respectively, to $128,424 and $261,918 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 six-month periods ended June 30,
1997 were $200,345 and $495,772, respectively, which was consistent with the
increase in income before this income tax provision.
Net income of $233,149 and $599,678, respectively, for the three and
six-month periods ended June 30, 1997 compares to net income of $222,251 and
$428,927, respectively, for the three and six-month periods ended June 30, 1996
primarily as a result of increased revenues in 1997.
Liquidity and Capital Resources
Securities owned, at market value, at June 30, 1997 were $9,852,294 as
compared to $13,634,348 at December 31, 1996. This 27.7% decrease was
attributable to a sluggish retail marketplace for fixed income and equity
securities experienced during the beginning of the quarter, which decreased 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 less active market and lower sales necessitating lower
inventory levels. Approximately 74.8% of the Company's assets at June 30, 1997
were comprised of cash and highly liquid securities.
Furniture, fixtures and leasehold improvements, net, at June 30, 1997,
increased to $745,059 as compared to $691,124 at December 31, 1996. This 7.8%
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 decreased to $596,726 at June 30, 1997, from $637,066 at
December 31, 1996, a 6.3% decrease. This decrease was primarily attributable to
interest receivable on inventory held and the repayment of an interest bearing
promissory note related to one of the Company's investment banking undertakings.
Income Taxes Receivable were $40,634 at June 30, 1997 as compared to Income
Taxes Payable of $582,514 at December 31, 1996. This change is comprised of
current taxes receivable 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 $2,034,432 at June 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 deemed appropriate. A portion of the
short position at June 30, 1997 was covered during the subsequent month.
Payable to clearing broker amounted to $1,156,298 at June 30, 1997 as
compared to $4,586,717 at December 31, 1996. This 74.8% decrease was a result of
decreased inventory purchases on margin.
Accrued compensation was $1,129,070 at June 30, 1997 as compared to
$1,174,706 at December 31, 1996, a 3.9% decrease attributable to decreased
revenues upon which commission income to registered representatives is based.
Accounts payable and accrued expenses were $500,343 at June 30, 1997 as
compared to $649,556 at December 31, 1996, a 23.0% decrease attributable to
accrued promotion, general office expenses, and an accrued expense related to a
settlement with a customer.
9
<PAGE>
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.
10
<PAGE>
PART II: OTHER INFORMATION
ITEM 2: SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
Consideration received If option, warrant
and description of or convertible
Underwriting or other security, terms
discounts to market price Exemption from of exercise
Date of Sale Title of Security Number Sold offered to Purchasers registration claimed or conversions
- -------------- ------------------ --------------- --------------------------- ----------------------- -----------------
<S> <C> <C> <C> <C> <C>
7/23/97 Common Stock 38,000 $209,000 4(2) N/A
(exercise of options)
- -------------- ------------------ --------------- --------------------------- ----------------------- -----------------
7/24/97 Common Stock 19,802 Surrender and exchange 3(a)(9)
of options to purchase (exchange of N/A
84,750 shares of Common securities)
Stock
- -------------- ------------------ --------------- --------------------------- ----------------------- -----------------
</TABLE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company held its Annual Meeting of Stockholders on June 20, 1997. At the
meeting the sole director nominated for re-election, Robert A. Paduano, was
re-elected for a three-year term with 1,165,768 shares voted in favor of his
re-election and no shares for which authority to vote was withheld.
ITEM 5: OTHER INFORMATION
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.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule (6/30/97)
(b) Reports on Form 8-K
None
11
<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: August 11, 1997 By: /s/ Anthony J. Kirincic
---------------------------------------
Anthony J. Kirincic
President and Chief Financial Officer
12
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
27. Financial Data Schedule (6/30/97) 14
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 209,793
<SECURITIES> 9,852,294
<RECEIVABLES> 637,360
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,699,447
<PP&E> 1,351,852
<DEPRECIATION> (606,793)
<TOTAL-ASSETS> 11,444,506
<CURRENT-LIABILITIES> 4,820,143
<BONDS> 0
<COMMON> 130
0
0
<OTHER-SE> 6,624,233
<TOTAL-LIABILITY-AND-EQUITY> 11,444,506
<SALES> 9,099,524
<TOTAL-REVENUES> 9,099,524
<CGS> 6,653,613
<TOTAL-COSTS> 6,653,613
<OTHER-EXPENSES> 1,225,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,245
<INCOME-PRETAX> 1,095,450
<INCOME-TAX> 495,772
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 599,678
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
<PAGE>
</TABLE>
