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
For the fiscal year ended December 31, 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.
-------------------------------------------------
(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 1998 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: $21,417,761.
As of March 16, 1998, 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 $8,085,402. At March 16, 1998, 2,802,764
shares of issuer's Common Stock were outstanding.
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PART I
ITEM 1. BUSINESS.
General
Kirlin Holding Corp. (the "Company") is a holding company engaged in
securities brokerage, securities trading and investment and merchant banking
primarily 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, 1997, the Company
maintained over 14,000 retail customer accounts, which held over $721 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 42 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.
Principal Transactions
Most of the Company's revenues in the last several years (57.4% in
1995, 71.1% in 1996 and 75.2% in 1997) have been derived from principal trading
activities, including merchant banking investments, 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. 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 16,
1998, 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 currently has agreements with 55 mutual fund
management companies pursuant to which the Company sells shares in approximately
100 mutual funds. Mutual fund commissions are derived from
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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. The program's focus is to manage money to achieve long-term
growth or income while attempting to limit risk. Economic conditions are
monitored in order to determine which sectors will perform well in order to
strategically allocate assets to these sectors. Under the program, an individual
portfolio plan is developed to fit each client's risk/reward relationship. At
March 16, 1998, total assets under management were over $14 million.
Investment and Merchant Banking
Investment banking revenue is derived principally from underwriting fees,
commissions and expense allowances in connection with underwriting activities.
During the last three years, the Company's investment banking activities have
consisted of, acting as placement agent for two private placements in 1997,
co-underwriting an initial public offering and acting as co-placement agent in a
private placement in 1996, and co-underwriting an initial public offering and
acting as the placement agent in two private placements in 1995. 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, this area does involve certain risks.
Because underwriters commit to purchase securities at a discount from the
initial public offering price, they are exposed to substantial losses in the
event that the securities cannot be sold or must be sold below syndicate cost.
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, 1997, the Company had invested approximately $1,146,000 in
three 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
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limited to $100,000, and additional protection is provided through Aetna
Casualty and Surety Co. for an additional $5,000,000 per regular account,
$10,000,000 per individual retirement account and $100,000,000 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, 1997, Kirlin had total net capital of
$1,461,274, or $1,211,274 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
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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.
Kirlin is registered as an investment advisor with the State of New
York and is subject to its laws and regulations regarding investment advisors.
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 continues to
develop its merchant banking capabilities. 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, although its advertising levels were significantly reduced in 1997.
The Company has advertised itself and its product line in order to get a direct
response from readers and 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 regulated by the NASD. During
the past year the Company reduced the amount of capital expenditure related to
marketing and advertising in order to concentrate on its existing client and
lead base. This base of people were introduced to the Company's managed asset
program and other products continually offered by the Company. The Company's
base of people remained consistent with the prior years. Accordingly, the
Company will increase its marketing and advertising expenditures in the coming
year.
Personnel
At March 16, 1998, the Company had 162 full-time employees, including
122 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.
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 is looking at expanding this office, possibly by leasing
additional space located adjacent to its existing space. The Company also
operates the following branch offices:
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<TABLE>
<CAPTION>
Approximate
Approximate Annual
Office Location Square Footage Lease Rental Expiration
- --------------- -------------- ------------ ----------
<S> <C> <C> <C>
60 Spear Street 2,200 $45,000 August 1998
San Francisco, California
4370 La Jolla Village Drive 2,300 $56,000 December 1998
San Diego, California
2001 Route 46 2,900 $68,000 June 2001
Parsippany, New Jersey
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Company's business involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied customers for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. The Company does not presently maintain an errors
and omissions insurance policy insuring it against these risks. In the normal
course of the Company's business, the Company from time to time is involved in
claims, lawsuits and arbitrations brought by its customers. It is the opinion of
management that the resolution of all proceedings presently pending will not
have a material adverse effect on the consolidated financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to the completion of the Company's initial public offering on
January 18, 1995, there was no established public trading market for the
Company's Common Stock. The Company's Common Stock commenced quotation on the
Nasdaq SmallCap Market on January 19, 1995. The following table sets forth, for
the periods indicated, the high and low bid prices for the Common Stock as
reported by the Nasdaq SmallCap Market (representing interdealer quotations
which do not include retail markups, markdowns or commissions), with prices
adjusted to reflect the Company's two-for-one stock split effected on December
22, 1997:
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<TABLE>
<CAPTION>
Period High($) Low($)
<S> <C> <C>
Fiscal 1997
Fourth Quarter 8.5 3.9375
Third Quarter 3.9375 3.5
Second Quarter 4.25 3.5
First Quarter 4.75 4.3125
Fiscal 1996
Fourth Quarter 4.875 4.75
Third Quarter 4.9375 4.5
Second Quarter 4.75 3.375
First Quarter 3.5 2.25
</TABLE>
The Company has applied to list its Common Stock on the Nasdaq National
Market and such application is pending.
On March 16 1998, the last sale price of the Common Stock as reported
by the Nasdaq SmallCap Market was $6.625. On March 16, 1998, there were 59
holders of record of the Company's Common Stock and, the Company believes, over
700 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.
Depending upon the Company's capital resources and needs, the Company
may pay cash dividends in the 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
None.
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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 and to
continue to promote its 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. As a result of its principal trading
activities, the amount of the Company's liabilities and assets can vary widely
from period-to-period.
The Company pays its 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 is directly affected by general economic conditions,
interest rates and market conditions. All of these factors may have an impact on
its principal trading and overall business volume. The Company's costs
associated with occupancy, communications and equipment costs are relatively
fixed and, in periods of reduced volume, can have an adverse effect on earnings.
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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:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net $ 16,097,818 75.2% $ 11,743,255 71.1%
Commissions 4,922,375 23.0% 4,354,436 26.4%
Other income 397,568 1.8% 407,863 2.5%
------------- -------- -------------- --------
Total revenues 21,417,761 100.0% 16,505,554 100.0%
------------- -------- -------------- --------
Expenses:
Employee compensation and benefits 13,593,522 63.5% 10,122,437 61.3%
Promotion and advertising 262,742 1.2% 1,254,504 7.6%
Clearance and execution charges 833,998 3.9% 837,055 5.1%
Occupancy and communications 1,750,123 8.2% 1,573,768 9.5%
Professional fees 273,696 1.3% 216,090 1.3%
Interest 294,970 1.4% 535,713 3.2%
Other 570,592 2.6% 575,643 3.6%
------------- -------- -------------- --------
Total expenses 17,579,643 82.1% 15,115,210 91.6%
------------- -------- -------------- --------
Income before income tax provision 3,838,118 17.9% 1,390,344 8.4%
Provision for income taxes 1,645,695 7.7% 754,566 4.6%
-------------- -------- ----------------- --------
Net income $ 2,192,423 10.2% $ 635,778 3.8%
============= ======= ================ ========
</TABLE>
Results of Operations
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 increased 29.8% to
$21,417,761 from $16,505,554 in 1996. This increase is attributable to income
generated from the Company's merchant banking and retail brokerage activities,
which was reflective of a strong marketplace.
Employee compensation and benefits in 1997 increased 34.3% to
$13,593,522 from $10,122,437 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 in 1997 decreased 79.1% to $262,742 from
$1,254,504 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. The Company
intends to increase its expenditures in 1998 to promote the Company and its
product lines.
Clearance and execution charges in 1997 decreased to $833,998 from
$837,055 in 1996 as a result of reduced fees charged by the Company's clearing
broker.
Occupancy and communications costs in 1997 increased 11.2% to
$1,750,123 from $1,573,768 in 1996. This increase is a result of the
establishment and operations of branch offices.
Professional fees in 1997 increased 26.7% to $273,696 from $216,090 in
1996 primarily as a result of an increase in external consultation with outside
professionals.
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Interest expense in 1997 decreased 44.9% to $294,970 from $535,713 in
1996 as a result of smaller inventory positions purchased on margin, which incur
interest.
The amount of other expenses in 1997 were comparable to 1996.
Income tax provision for the year ended December 31, 1997 was
$1,645,695 as compared to $754,566 for the year ended December 31, 1996, which
was consistent with the increase in income before this income tax provision.
Net income of $2,192,423 for the year ended December 31, 1997 compares
to net income of $635,778 for the year ended December 31, 1996 primarily as a
result of increased revenues and an increased operating cost reduction emphasis
in 1997.
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, 1997 were
$14,631,398 as compared to $13,634,348 at December 31, 1996. This 7.3% 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 requirement for securities is market driven, with a more active market
and greater sales necessitating higher inventory levels. Approximately 65.3% of
the Company's assets at December 31, 1997 were comprised of cash and highly
liquid securities.
Furniture, fixtures and leasehold improvements, net, at December 31,
1997, increased to $836,832 as compared to $691,124 at December 31, 1996. This
21.1% increase results 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 $1,109,559 at December 31, 1997, from
$637,066 at December 31, 1996, a 74.2% increase. This increase is primarily
attributable to advances to registered representatives, a loan related to one of
the Company's investment undertakings, prepaid operating expenses, and income
taxes related to the current period's earnings.
Securities sold short amounted to $1,599,279 at December 31, 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 December 31, 1997 was covered during the subsequent month.
Payable to clearing broker amounted to $2,828,519 at December 31, 1997
as compared to $4,586,717 at December 31, 1996. This 38.3% decrease is a result
of decreased inventory purchases on margin.
Accrued compensation was $2,194,143 at December 31, 1997 as compared to
$1,174,706 at December 31, 1996, a 86.8% increase attributable to increased
revenues upon which commission income to registered representatives is based.
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Accounts payable and accrued expenses were $509,649 at December 31,
1997 as compared to $649,556 at December 31, 1996, a 21.5% decrease attributable
to accrued promotion, general office expenses, and an accrued expense related to
a settlement with a customer.
Deferred Income Taxes Payable were $1,197,696 at December 31, 1997 as
compared to $198,536 at December 31, 1996. This increase is reflective of the
adjustment for 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.
Year 2000
The Company has been evaluating the potential impact of the situation
commonly referred to as the "Year 2000 Issue" ("Y2K"). The Y2K issue concerns
the inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information relating to the year
2000 and beyond. Many of the world's computer systems currently record years in
a two-digit format. Such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally. The potential costs and uncertainties associated with Y2K
will depend on a number of factors, including software, hardware and the nature
of the industry in which a company operates.
To ensure that the Company's computer systems are Y2K compliant, the
Company has been reviewing each of its systems and programs. The Company is also
working with its major external vendors and suppliers to assess their compliance
efforts and the Company's exposure to them. Any entities which the Company
interacts electronically with, most significantly its clearing broker, can have
an effect on its abilities to address the Y2K problem.
As a result of researching the Company's hardware and software, the
Company believes its internal systems will be Y2K compliant by the end of 1999.
Although the Company has discussed the Y2K issue with its clearing broker, it
has not yet determined that its clearing broker's system will be Y2K compliant.
If the Company's clearing broker will not be Y2K compliant on a timely basis,
the Company will change to another clearing broker. The Company does not believe
the change will have an adverse effect on the Company's operating results or
financial condition. If the Company's clearing broker at the appropriate time is
not Y2K compliant, the Company's business likely will be disrupted and this
could have a material adverse effect on the Company's operations.
11
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements: Page
------
<S> <C>
Report of Goldstein Golub Kessler & Company, P.C. on the Consolidated Financial
Statements as of December 31, 1997 and for the year then ended.................................F-1
Consolidated Statements of Financial Condition as of December 31, 1997 and 1996....................F-2
Consolidated Statements of Income for the years ended December 31, 1997
and 1996.......................................................................................F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997 and 1996.....................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997
and 1996.......................................................................................F-5
Notes to the Consolidated Financial Statements.............................................F-6 to F-12
</TABLE>
12
<PAGE>
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, 1997 and 1996, 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, 1997 and 1996, 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 19, 1998
F-1
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash (Note 1) ........................................................ $ 316,219 $ 75,304
Securities Owned, at market value (Note 2):
U.S. government and agency obligations ............................. 2,949,723 2,153,235
State and municipal obligations .................................... 1,618,284 4,654,466
Corporate bonds and other securities ............................... 10,063,391 6,826,647
Furniture, Fixtures and Leasehold Improvements, at cost,
net of accumulated depreciation and amortization of $713,626 and
$511,096, respectively (Note 1) ..................................... 836,832 691,124
Other Assets ......................................................... 1,109,559 637,066
- --------------------------------------------------------------------------------------------------
Total Assets ................................................... $16,894,008 $15,037,842
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased, at market value (Note 2) ....... $ 1,599,279 $ 2,019,664
Payable to clearing broker (Note 1) ................................ 2,828,519 4,586,717
Accrued compensation ............................................... 2,194,143 1,174,706
Accounts payable and accrued expenses .............................. 509,649 649,556
Income taxes payable ............................................... 383,978
Deferred taxes payable ............................................. 1,197,696 198,536
- --------------------------------------------------------------------------------------------------
Total liabilities .............................................. 8,329,286 9,013,157
- --------------------------------------------------------------------------------------------------
Commitments (Note 6)
Stockholders' Equity (Note 3):
Common stock - $.0001 par value; authorized 15,000,000 shares,
issued and outstanding 2,720,264 and 2,604,660 shares, respectively 272 130
Additional paid-in capital ......................................... 5,869,508 5,522,036
Retained earnings .................................................. 2,694,942 502,519
- --------------------------------------------------------------------------------------------------
Total stockholders' equity ..................................... 8,564,722 6,024,685
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ..................... $16,894,008 $15,037,842
==================================================================================================
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Principal transactions, net (Notes 1 and 2) $16,097,818 $11,743,255
Commissions ............................... 4,922,375 4,354,436
Other income .............................. 397,568 407,863
- -------------------------------------------------------------------------
21,417,761 16,505,554
- -------------------------------------------------------------------------
Expenses:
Employee compensation and benefits ........ 13,593,522 10,122,437
Promotion and advertising (Note 1) ........ 262,742 1,254,504
Clearance and execution charges ........... 833,998 837,055
Occupancy and communications .............. 1,750,123 1,573,768
Professional fees ......................... 273,696 216,090
Interest .................................. 294,970 535,713
Other ..................................... 570,592 575,643
- -------------------------------------------------------------------------
17,579,643 15,115,210
- -------------------------------------------------------------------------
Income before provision for income taxes .... 3,838,118 1,390,344
Provision for income taxes (Note 8) ......... 1,645,695 754,566
- -------------------------------------------------------------------------
Net income .................................. $ 2,192,423 $ 635,778
- -------------------------------------------------------------------------
Basic earnings per common share ............. $ .83 $ .24
=========================================================================
Diluted earnings per common share ........... $ .78 $ .23
=========================================================================
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1997 and 1996 (Accumulated
Additional Deficit)
Common Stock Paid-in Retained
Shares Par Value Capital Earnings Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stockholders' equity at
January 1, 1996 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
Exercise of stock options 38,000 4 208,996 - 209,000
Stock option exchange 19,802 2 138,612 - 138,614
2-for-1 stock dividend 1,360,132 136 (136) - -
Net income - - - 2,192,423 2,192,423
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity at
December 31, 1997 2,720,264 $272 $5,869,508 $2,694,942 $8,564,722
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,192,423 $ 635,778
- ----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 202,530 170,888
Deferred income taxes 999,160 322,920
Noncash compensation 138,614 192,500
(Increase) decrease in operating assets:
Securities owned, at market value (997,050) (4,871,042)
Other assets (472,493) (402,562)
(Decrease) increase in operating liabilities:
Securities sold, not yet purchased, at market value (420,385) 515,227
Payable to clearing broker (1,758,198) 2,319,995
Accrued compensation 1,019,437 767,083
Accounts payable and accrued expenses (139,907) 238,511
Income taxes payable (383,978) 383,978
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments (1,812,270) (362,502)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 380,153 273,276
Cash flows used in investing activity - purchase of furniture, fixtures
and leasehold improvements (348,238) (377,916)
Cash flows provided by financing activity - issuance of common stock 209,000 -
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 240,915 (104,640)
Cash at beginning of year 75,304 179,944
- ----------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 316,219 $ 75,304
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 294,970 $ 535,713
======================================================================================================================
Income taxes $ 1,279,160 $ 47,759
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
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. ("KHC") and its wholly owned subsidiary, Kirlin Securities, Inc.
("Kirlin") (collectively the "Company"). The Company, through 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 ex securities. Primarily all activity of the Company has 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.
Kirlin is registered as a broker-dealer with the Securities and Exchange
Commission (the "SEC") 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 C 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, 1997, 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 $37,000 and $1,053,000 for the
years ended December 31, 1997 and 1996, respectively.
F-6
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
2. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED:
Securities sold, not yet purchased, are stated at market value and consist of
the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
U.S. government and agency obligations $ 25,774 $ 4,705
State and municipal obligations 784,135 820,676
Corporate bonds and other securities 789,370 1,194,283
- ---------------------------------------------------------------------
$1,599,279 $2,019,664
=====================================================================
</TABLE>
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, 1997 and 1996 are
investment securities not readily marketable amounting to approximately
$3,908,000 and $896,000, respectively (46% and 15%, 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 security or in the
case of warrants, 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, 1997.
In August 1994, the Company adopted the 1994 Stock Plan ("1994 Plan") covering
1,200,000 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.
The options vest over periods of up to five years and are exercisable at various
dates through January 2006.
On July 16, 1997, the Company made an exchange offer to the holders of all of
its outstanding options and warrants. The offer involved the exchange of these
options and warrants for cash, stock of the Company or a combination of one-half
cash and one-half stock, all at various specified exchange rates dependent upon
the grant date and exercise price of the outstanding options and warrants.
Pursuant to this offer, 169,500 options and warrants were exchanged for stock
representing 39,604 shares valued at $138,614 and 727,476 were exchanged for
cash. The Company recognized $675,912 of compensation expense related to this
F-7
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exchange. Concurrent with the exchange offer, Kirlin surrendered to KHC warrants
to purchase 32,190 shares.
The following table summarizes the 1997 and 1996 activity in the Company's stock
options:
<TABLE>
<CAPTION>
Number of
Shares Price per Share
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 1996 474,700 $4.13 - $5.50
Granted during the year 703,900 $2.50 - $2.75
Canceled during the year (73,000) $2.50 - $5.00
- ----------------------------------------------------------------------------------------
Balance at December 31, 1996 1,105,600 $2.50 - $5.50
Exercised during the year (76,000) $2.50 - $5.50
Surrendered during the year (848,700) $2.50 - $5.50
Forfeited during the year (96,400) $2.50 - $4.13
- ----------------------------------------------------------------------------------------
Balance at December 31, 1997 84,500 $2.50 - $5.00
========================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Remaining
Number Contractual
Exercise Price Outstanding Life
- -----------------------------------------------------------------------------------------
<S> <C> <C>
$5.00 12,500 85 months
$4.13 4,000 79 months
$2.50 68,000 96 months
- -----------------------------------------------------------------------------------------
$2.50 - $5.00 84,500
=========================================================================================
</TABLE>
As of December 31, 1997, 12,500 options with an exercise price of $5.00 per
share were exercisable.
During the year ended December 31, 1997, the Company declared a 2-for-1 stock
split. The above number of shares and price per share have been adjusted to
reflect the stock split.
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
F-8
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net income - as reported $2,192,423 $635,778
Net income - pro forma 2,073,923 517,278
Basic earnings per common share - as reported .83 .24
Basic earnings per common share - pro forma .78 .20
Diluted earnings per common share - as reported .78 .23
Diluted earnings per common share - pro forma .73 .18
</TABLE>
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.
In April 1996, the Company adopted the 1996 Stock Plan ("1996 Plan") covering
2,000,000 shares of 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. At December
31, 1997, no common stock or options had been issued pursuant to the 1996 Plan.
4. NET CAPITAL REQUIREMENT:
As a registered broker-dealer, Kirlin is subject to the SEC'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, 1997 and 1996, Kirlin had net capital, as defined, of $1,461,274
and $2,277,715, respectively, which exceeded the minimum net capital
requirements by $1,211,274 and $2,027,715, respectively. Kirlin's ratio of
aggregate indebtedness to net capital was 1.82-to-1 and .95-to-1 at December 31,
1997 and 1996, 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, 1997
and 1996 were $69,876 and $70,267, respectively.
F-9
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1998 $358,123
1999 222,167
2000 59,429
2001 34,020
--------------------
$673,739
====================
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 $454,778 and $463,407 for
the years ended December 31, 1997 and 1996, respectively.
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, 1997 and
1996:
<TABLE>
<CAPTION>
Average
Market
Notional Value for
Amount Market Value the Year
- ------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stock options
and warrants:
Assets $723,034 $1,133,660 $1,205,560 $230,574 $373,076 $638,786
Liabilities 6,496 365,668 1,994 91,653 33,404 123,423
======================================================================================================
</TABLE>
Net revenue from principal transactions consists of fixed income and equity
activities.
F-10
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal $ 467,572 $295,106
State 178,963 136,540
- ----------------------------------------------------------------------------------------
646,535 431,646
- ----------------------------------------------------------------------------------------
Deferred:
Federal 747,550 238,538
State 251,610 84,382
- ----------------------------------------------------------------------------------------
999,160 322,920
- ----------------------------------------------------------------------------------------
$1,645,695 $754,566
========================================================================================
</TABLE>
The provision for income taxes for the years ended December 31, 1997 and 1996
differs from the amount computed using the federal statutory rate of 34% as a
result of the following:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Tax at federal statutory rate 34% 34%
State income taxes 9 9
Nondeductible expenses 6
Other 5
- ----------------------------------------------------------------------------------------
43% 54%
========================================================================================
</TABLE>
The deferred tax asset (liability) results from the following:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation (depreciation) on
investment securities not readily marketable $(1,184,249) $(263,388)
Other temporary differences (13,447) 64,852
- -----------------------------------------------------------------------------------------
$(1,197,696) $(198,536)
=========================================================================================
</TABLE>
F-11
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EARNINGS PER SHARE:
Net income per common share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations.
<TABLE>
<CAPTION>
Year ended December 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Income available to
common stockholders $2,192,423 2,655,860 $.83
Effect of Dilutive Securities - options 169,651
- -----------------------------------------------------------------------------------------
Diluted EPS:
Income available to common
stockholders and assumed
exercise $2,192,423 2,825,511 $.78
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
- ----------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Income available to common
stockholders $635,778 2,604,660 $.24
Effect of Dilutive Securities - options 194,187
- ----------------------------------------------------------------------------------------
Diluted EPS:
Income available to common
stockholders and assumed
exercise $635,778 2,798,847 $.23
========================================================================================
</TABLE>
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." Accordingly,
the above amounts for 1996 have been restated.
F-12
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See Item 12.
ITEM 10. EXECUTIVE COMPENSATION.
See Item 12.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See Item 12.
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 in June 1998.
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
<PAGE>
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 27, 1998
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.
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------- --------------------------------------- --------------
<S> <C> <C>
/s/ David O. Lindner Chairman of the Board of Directors March 27, 1998
- ------------------------------- and Chief Executive Officer (Principal
David O. Lindner Executive Officer)
/s/ Anthony J. Kirincic Director, President and Chief March 27, 1998
- ------------------------------- Financial Officer (Principal Financial
Anthony J. Kirincic Officer)
/s/ Robert A. Paduano Director March 27, 1998
- -------------------------------
Robert A. Paduano
/s/ Barry Shapiro Controller (Principal March 27, 1998
- ------------------------------- Accounting Officer)
Barry Shapiro
/s/ Edward J. Casey Director March 27, 1998
- -------------------------------
Edward J. Casey
/s/ Edmund McCormick Director March 27, 1998
- -------------------------------
Edmund McCormick
</TABLE>
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Incorporated
Exhibit By Reference No. in
Number Description from Document Document Page
- ------ ----------- ------------- -------- ----
<S> <C> <C> <C> <C>
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
10.1 1994 Stock Plan A 10.2
10.2 Clearing Agreement between Kirlin A 10.3
Securities, Inc. and Correspondent Services
Corporation
10.3 1996 Stock Plan C Appendix A
10.4 Lease Agreement, dated May 23, 1994, A 10.4
between Kirlin Securities, Inc. and BBRG,
Inc.
10.5 Indemnification Agreement, dated B 10.9
November 14, 1995, between the Registrant
and Edward J. Casey
10.6 Indemnification Agreement, dated February -- -- Filed
5, 1998, between the Registrant and Herewith
Edmund McCormick
21 List of Subsidiaries -- -- Filed
Herewith
27.1 Financial Data Schedule (12/31/97) -- -- Filed
Herewith
27.2 Restated Financial Data Schedule -- -- Filed
(12/31/96) Herewith
</TABLE>
- ---------------------
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.
C. Registrant's Definitive Proxy Statement dated May 8, 1996.
27
<PAGE>
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
This Agreement, made and entered into as of this 5th day of
February, 1998 ("Agreement"), by and between Kirlin Holding Corp., a Delaware
corporation (the "Corporation"), and Edmund McCormick (the "Indemnitee"):
WHEREAS, highly competent persons have become reluctant to
serve publicly-held corporations as directors, officers, or in other capacities,
unless they are provided with better protection from the risk of claims and
actions against them arising out of their service to and activities on behalf of
such corporation; and
WHEREAS, the current cost of obtaining adequate insurance and
the uncertainties related to indemnification have increased the difficulty of
attracting and retaining such persons; and
WHEREAS, the Board of Directors of the Corporation (the
"Board") has determined that the inability to attract and retain such persons is
detrimental to the best interests of the Corporation's stockholders and that
such persons should be assured that they will have better protection in the
future; and
WHEREAS, it is reasonable, prudent and necessary for the
Corporation to obligate itself contractually to indemnify such persons to the
fullest extent permitted by applicable law so that such persons will serve or
continue to serve the Corporation free from undue concern that they will not be
adequately indemnified; and
WHEREAS, this Agreement is a supplement to and in furtherance
of Section 7.5 of the By-laws of the Corporation, and Article 9 of the
Certificate of Incorporation of the Corporation and any resolutions adopted
pursuant thereto and shall neither be deemed to be a substitute therefor nor to
diminish or abrogate any rights of Indemnitee thereunder; and
WHEREAS, Indemnitee is willing to serve on behalf of the
Corporation on the condition that he be indemnified according to the terms of
this Agreement;
NOW, THEREFORE, in consideration of the premises and the
covenants contained herein, the Corporation and Indemnitee do hereby covenant
and agree as follows:
1. Definitions. For purposes of this Agreement:
(a) "Change in Control" means a change in control of the Corporation
occurring after the Effective Date (as defined in Section 14) of a nature
that would be required to be reported in response to Item 6(e) of Schedule
14A of Regulation 14A (or in response to any similar item on any similar
schedule or form) promulgated under the Securities Exchange Act of 1934, as
amended (the "Act"), whether or not the Corporation is then subject to such
reporting requirement provided, however, that, without limitation, such a
Change in Control shall be deemed to have occurred if, after the Effective
Date (i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Act), directly or indirectly, of securities of the Corporation
representing 20% or more of the combined voting power of the Corporation's
then outstanding securities without the prior approval of at least
two-thirds of the members of the Board in office immediately prior to such
person attaining such percentage interest; (ii) the Corporation is a party
to a merger, consolidation, sale of assets or other reorganization, or a
proxy contest, as a consequence of which members of the Board in office
immediately prior to such transaction or event constitute less than a
majority of the Board thereafter, or (iii) during any period of two
consecutive years, individuals who at the beginning of such period
constituted the Board (including for this purpose any new director whose
election
<PAGE>
or nomination for election by the Corporation's stockholders was approved
by a vote of at least two-thirds of the directors then still in office who
were directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board.
(b) "Corporate Status" means the status of a person who is or was a
director, officer, employee, agent or fiduciary of the Corporation or of
any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the request
of the Corporation.
(c) "Disinterested Director" means a director of the Corporation who
is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(d) "Expenses" means all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a
witness in a Proceeding.
(e) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither then
presently is, nor in the past five years has been, retained to represent:
(i) the Corporation or Indemnitee in any other matter material to either
such party, or (ii) any other party to the Proceeding giving rise to a
claim for indemnification hereunder. Not withstanding the foregoing, the
term "Independent Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Corporation or Indemnitee
in an action to determine Indemnitee's rights under this Agreement.
(f) "Proceeding" means any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any
other proceeding, whether civil, criminal, administrative or investigative,
except one initiated by an Indemnitee pursuant to Section 11 of this
Agreement to enforce his rights under this Agreement.
2. Services by Indemnitee. Indemnitee agrees to serve as a director of the
Corporation. Indemnitee may at any time and for any reason resign from such
position (subject to any other contractual obligation or any obligation imposed
by operation of law).
3. Indemnification - General. The Corporation shall indemnify, defend and
advance Expenses to, Indemnitee as provided in this Agreement to the fullest
extent permitted by applicable law in effect on the date hereof and to such
greater extent as applicable law may thereafter from time to time permit. The
rights of Indemnitee provided under the preceding sentence shall include, but
shall not be limited to, the rights set forth in the other Sections of this
Agreement.
4. Proceedings Other Than Proceedings by or in the Right of the Corporation.
Indemnitee shall be entitled to the rights of indemnification provided in this
Section if, by reason of his Corporate Status, he is, or is threatened to be
made, a party to any threatened, pending or completed Proceeding, other than a
Proceeding by or in the right of the Corporation. Pursuant to this Section,
Indem nitee shall be indemnified against Expenses, judgments, penalties, fines
and amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with any such Proceeding or any claim, issue or matter
therein, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal Proceeding, had no reasonable cause to believe his conduct was
unlawful.
5. Proceedings by or in the Right of the Corporation. Indemnitee shall be
entitled to the rights of indemnification provided in this Section if, by reason
of his Corporate Status, he is, or is threatened to be made, a party to any
threatened, pending or completed Proceeding brought by or in the right of the
Corporation to procure a judgment in its favor. Pursuant to this Section,
<PAGE>
Indemnitee shall be indemnified against Expenses actually and reasonably
incurred by him or on his behalf in connection with any such Proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation. Notwithstanding the foregoing,
no indemnification against such Expenses shall be made in respect of any claim,
issue or matter in any such proceeding as to which Indemnitee shall have been
adjudged to be liable to the Corporation if applicable law prohibits such
indemnification unless the Court of Chancery of the State of Delaware, or the
court in which such Proceeding shall have been brought or is pending, shall
determine that indemnification against Expenses may nevertheless be made by the
Corporation.
6. Indemnification for Expenses of Party Who is Wholly or Partly Successful.
Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee is, by reason of his Corporate Status, a party to and is successful,
on the merits or otherwise, in any Proceeding, he shall be indemnified against
all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith. If Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Corporation shall
indemnify Indemnitee against all Expenses actually and reasonably incurred by
him or on his behalf in connection with each successfully resolved claim, issue
or matter. For the purposes of this Section and without limiting the foregoing,
the termination of any claim, issue or matter in any such Proceeding by
dismissal, with or without prejudice, shall be deemed to be a successful result
as to such claim, issue or matter.
7. Indemnification or Expenses of a Witness. Notwithstanding any other provision
of this Agreement, to the extent that Indemnitee is, by reason of his Corporate
Status, a witness in any Proceeding, he shall be indemnified against all
Expenses actually and reasonably incurred by him or on his behalf in connection
therewith.
8. Advancement of Expenses. The Corporation shall advance all Expenses incurred
by or on behalf of Indemnitee in connection with any Proceeding within twenty
days after the receipt by the Corporation of a statement or statements from
Indemnitee requesting such advance or advances from time to time, whether prior
to or after final disposition of such Proceeding. Such statement or statements
shall reasonably evidence the Expenses incurred by Indemnitee and shall include
or be preceded or accompanied by an undertaking (e.g., a promise by the
Indemnitee to pay) by or on behalf of Indemnitee to repay any Expenses advanced
if it shall ultimately be determined that Indemnitee is not entitled to be
indemnified against such Expenses.
9. Procedure for Determination of Entitlement to Indemnification.
(a) To obtain indemnification under this Agreement in connection with
any Proceeding, and for the duration thereof, Indemnitee shall submit to
the Corporation a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and
is reasonably necessary to determine whether and to what extent Indemnitee
is entitled to indemnification. The Secretary of the Corporation shall,
promptly upon receipt of any such request for indemnification, advise the
Board in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to
Section 9(a) hereof, a determination, if required by applicable law, with
respect to Indemnitee's entitlement thereto shall be made in such case: (i)
if a Change in Control shall have occurred, by Independent Counsel (unless
Indemnitee shall request that such determination be made by the Board or
the stockholders, in which case in the manner provided for in clauses (ii)
or (iii) of this Section 9(b) in a written opinion to the Board, a copy of
which shall be delivered to Indemnitee); (ii) if a Change of Control shall
not have occurred, (A) by the Board by a majority vote of a quorum
consisting of Disinterested Directors, or (B) if a quorum of the Board
consisting of Disinterested Directors is not obtainable, or even if such
quorum is obtainable, if such quorum of Disinterested Directors so directs,
either (x) by Independent Counsel, selected by a majority vote of the Board
at a meeting in which a quorum is present, in a written opinion to the
Board, a copy of which shall be delivered to Indemnitee, or (y) by the
stockholders of the Corporation, as determined by such quorum of
Disinterested Directors, or a quorum of the Board, as the case may be;
<PAGE>
or (iii) as provided in Section 10(b) of this Agreement. If it is so
determined that Indemnitee is entitled to indemnification, payment to
Indemnitee shall be made within ten (10) days after such determination.
Indemnitee shall cooperate with the person, persons or entity making such
determination with respect to Indemnitee's entitlement to indemnification,
including providing to such person, persons or entity upon reasonable
advance request any documentation or information which is not privileged or
otherwise protected from disclosure and which is reasonably available to
Indemnitee and reasonably necessary to such determination. Any costs or
expenses (including attorneys' fees and disbursements) incurred by
Indemnitee in so cooperating with the person, persons or entity making such
determination shall be borne by the Corporation (irrespective of the
determination as to Indemnitee's entitlement to indemnification) and the
Corporation hereby indemnifies and agrees to hold Indemnitee harmless
therefrom.
(c) If required, Independent Counsel shall be selected as follows: (i)
if a Change of Control shall not have occurred, Independent Counsel shall
be selected by the Board, and the Corporation shall give written notice to
Indemnitee advising him of the identity of Independent Counsel so selected,
or (ii) if a Change of Control shall have occurred, Independent Counsel
shall be selected by Indemnitee (unless Indemnitee shall request that such
selection be made by the Board, in which event (i) shall apply), and
Indemnitee shall give written notice to the Corporation advising it of the
identity of Independent Counsel so selected. In either event, Indemnitee or
the Corporation, as the case may be, may, within seven days after such
written notice of selection shall have been given, deliver to the
Corporation or to Indemnitee, as the case may be, a written objection to
such selection. Such objection may be asserted only on the ground that
Independent Counsel so selected does not meet the requirements of
"Independent Counsel" as defined in Section 1(e) of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. If such written objection is made, Independent Counsel so
selected may not serve as Independent Counsel unless and until a court has
determined that such objection is without merit. If, within 20 days after
submission by Indemnitee of a written request for indemnification pursuant
to Section 9(a) hereof, no Independent Counsel shall have been selected and
not objected to, either the Corporation or Indemnitee may petition the
Court of Chancery of the State of Delaware, or other court of competent
jurisdiction, for resolution of any objection which shall have been made by
the Corporation or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person
selected by such court or by such other person as such court shall
designate, and the person with respect to whom an objection is so resolved
or the person so appointed shall act as Independent Counsel under Section
9(b) hereof. The Corporation shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with its actions pursuant to this Agreement, and the Corporation
shall pay all reasonable fees and expenses incident to the procedures of
this Section 9(c), regardless of the manner in which such Independent
Counsel was selected or appointed. Upon the due commencement date of any
judicial proceeding or arbitration pursuant to Section 11(a)(iii) of this
Agreement, Independent Counsel shall be discharged and relieved of any
further responsibility in such capacity (subject to the applicable
standards of professional conduct then prevailing).
10. Presumptions and Effects of Certain Proceedings.
(a) If a Change of Control shall have occurred, in making a
determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement if
Indemnitee has submitted a request for indemnification in accordance with
Section 9(a) of this Agreement, and the Corporation shall have the burden
of proof to overcome that presumption in connection with the making by any
person, persons or entity of any determination contrary to that
presumption.
(b) If the person, persons or entity empowered or selected under
Section 9 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within 60 days after
receipt by the Corporation of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have
been made and Indemnitee shall be entitled to such indemnification, absent
(i) a misstatement by Indemnitee of a material fact, or an omission of a
material fact necessary to make Indemnitee's statement not materially
misleading, in connection with the request for indemnification, or (ii)
<PAGE>
prohibition of such indemnification under applicable law provided,
however, that such 60-day period may be extended for a reasonable time, not
to exceed an additional 30 days, if the person, persons or entity making
the determination with respect to entitlement to indemnification in good
faith require(s) such additional time for the obtaining or evaluating of
documentation and/or information relating thereto and provided, further,
that the foregoing provisions of this Section 10(b) shall not apply (i) if
the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 9(b) of this Agreement and if (A) within
15 days after receipt by the Corporation of the request for such
determination the Board has resolved to submit such determination to the
stockholders for their consideration at an annual meeting thereof to be
held within 90 days after such receipt and such determination is made
thereat, or (B) a special meeting of stockholders is called within 15 days
after such receipt for the purpose of making such determination, such
meeting is held for such purpose within 90 days after having been so called
and such determination is made thereat, or (ii) if the determination of
entitlement to indemnification is to be made by Independent Counsel
pursuant to Section 9(b) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement or conviction, or upon a plea of
nolo contendere or its equivalent, shall not (except as otherwise expressly
provided in this Agreement) of itself adversely affect the right of
Indemnitee to indemnification or create a presumption that Indemnitee did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the Corporation or, with respect to
any criminal Proceeding, that Indemnitee had reasonable cause to believe
that his conduct was unlawful.
11. Remedies of Indemnitee.
(a) In the event that (i) a determination is made pursuant to Section
9 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made
pursuant to Section 8 of this Agreement, (iii) the determination of
indemnification is to be made by Independent Counsel pursuant to Section
9(b) of this Agreement and such determination shall not have been made and
delivered in a written opinion within 90 days after receipt by the
Corporation of the request for indemnification, (iv) payment of
indemnification is not made pursuant to Section 7 of this Agreement within
ten days after receipt by the Corporation of a written request therefor, or
(v) payment of indemnification is not made within ten days after a
determination has been made that Indemnitee is entitled to indemnification
or such determination is deemed to have been made pursuant to Section 9 or
10 of this Agreement, Indemnitee shall be entitled to an adjudication in an
appropriate court of the State of Delaware, State of New York or State of
New Jersey, or in any other court of competent jurisdiction, of his
entitlement to such indemnification or advancement of Expenses.
Alternatively, the Indemnitee, at his option, may seek an award in
arbitration to be conducted by a single arbitrator pursuant to the rules of
the American Arbitration Association at a location within the County of Los
Angeles, State of California, in the county in which the Corporation's
principal executive offices are located, or such other location as the
Indemnitee and the Corporation shall mutually agree. Indemnitee shall
commence such proceeding seeking an adjudication or an award in arbitration
within 180 days following the date on which Indemnitee first has the right
to commence such proceeding pursuant to this Section 11(a). The Corporation
shall not oppose Indemnitee's right to seek any such adjudication or award
in arbitration.
(b) In the event that a determination shall have been made pursuant to
Section 9 of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant
to this Section shall be conducted in all respects as a de novo trial or
arbitration on the merits and Indemnitee shall not be prejudiced by reason
of that adverse determination. If a Change of Control shall have occurred
in any judicial proceeding or arbitration commenced pursuant to this
Section, the Corporation shall have the burden of proving that Indemnitee
is not entitled to indemnification or advancement of Expenses, as the case
may be.
(c) If a determination shall have been made or deemed to have been
made pursuant to Section 9 or 10 of this Agreement that Indemnitee is
entitled to indemnification, the Corporation shall be bound by such
determination in any judicial proceeding or arbitration commenced pursuant
<PAGE>
to this Section, absent (i) a misstatement by Indemnitee of a material
fact, or an omission of a material fact necessary to make Indemnitee's
statement not materially misleading, in connection with the request for
indemnification, or (ii) prohibition of such indemnification under
applicable law.
(d) The Corporation shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such
arbitrator that the Corporation is bound by all the provisions of this
Agreement.
(e) In the event that Indemnitee, pursuant to this Section, seeks a
judicial adjudication of, or an award in arbitration to enforce, his rights
under, or to recover damages for breach of, this Agreement, Indemnitee
shall be entitled to recover from the Corporation, and shall be indemnified
by the Corporation against, any and all expenses (of the kinds described in
the definition of Expenses) actually and reasonably incurred by him in such
judicial adjudication or arbitration, but only if he prevails therein. If
it shall be determined in such judicial adjudication or arbitration that
Indemnitee is entitled to receive all of the indemnification or advancement
of expenses sought, the expenses incurred by Indemnitee in connection with
such judicial adjudication or arbitration shall be appropriately prorated.
12. Procedure Regarding Indemnification. With respect to any Proceedings, the
Indemnitee, prior to taking any action with respect to such Proceeding, shall
consult with the Corporation as to the procedure to be followed in defending,
settling, or compromising the Proceeding and shall not consent to any settlement
or compromise of the Proceeding without the written consent of the Corporation
(which consent shall not be unreasonably withheld or delayed). The Corporation
shall be entitled to participate in defending, settling or compromising any
Proceeding and to assume the defense of such Proceeding with counsel of its
choice and shall assume such defense if requested by the Indemnitee.
Notwithstanding the election by, or obligation of, the Corporation to assume the
defense of a Proceeding, the Indemnitee shall have the right to participate in
the defense of such Proceeding and to employ counsel of Indemnitee's choice, but
the fees and expenses of such counsel shall be at the expense of the Indemnitee
unless (i) the employment of such counsel shall have been authorized in writing
by the Company, or (ii) the Indemnitee shall have reasonably concluded that
there may be defenses available to him which are different from or additional to
those available to the Corporation (in which latter case the Corporation shall
not have the right to direct the defense of such Proceeding on behalf of the
Indemnitee), in either of which events the fees and expenses of not more than
one additional firm of attorneys selected by the Indemnitee shall be borne by
the Corporation. If the Corporation assumes the defense of a Proceeding, then
counsel for the Corporation and Indemnitee shall keep Indemnitee reasonably
informed of the status of the Proceeding and promptly send to Indemnitee copies
of all documents filed or produced in the Proceeding, and the Corporation will
not compromise or settle any such Proceeding without the written consent of the
Indemnitee (which consent shall not be unreasonably withheld or delayed) if the
relief provided is other than monetary damages and will promptly notify the
Indemnitee of any settlement and the amount thereof.
13. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under
applicable law, the certificate of incorporation or by-laws of the
Corporation, any agreement, a vote of stockholders or a resolution of
directors, or otherwise. No amendment, alteration or repeal of this
Agreement or any provision hereof shall be effective as to any Indemnitee
with respect to any action taken or omitted by such Indemnitee in his
Corporate Status prior to such amendment, alteration or repeal.
(b) To the extent that the Corporation maintains an insurance policy
or policies providing liability insurance for directors, officers,
employees, agents or fiduciaries of the Corporation or of any other
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which such person serves at the request of the
Corporation, Indemnitee shall be covered by such policy or policies in
accordance with its or their terms to the maximum extent of the coverage
<PAGE>
available for any such director, officer, employee, agent or fiduciary
under such policy or policies.
(c) In the event of any payment under this Agreement, the Corporation
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such
documents as are necessary to enable the Corporation to bring suit to
enforce such rights.
(d) The Corporation shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under
any insurance policy, contract, agreement or otherwise.
14. Duration of Agreement. This Agreement shall become effective as of the date
that Indemnitee is elected or appointed as a director of the Corporation
("Effective Date") and shall continue until and terminate upon the later of: (a)
ten years after the date that Indemnitee shall have ceased to serve as a
director, officer, employee, agent or fiduciary of the Corporation or of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which Indemnitee served at the request of the Corporation; or
(b) the final termination of all pending Proceedings in respect of which
Indemnitee is granted rights of indemnification or advancement of Expenses
hereunder and or any proceeding commenced by Indemnitee pursuant to Section 11
of this Agreement. This Agreement shall be binding upon the Corporation and its
successors and assigns and shall inure to the benefit of Indemnitee and his
heirs, executors and administrators.
15. Severability. If any provision or provisions of this Agreement shall be held
to be invalid, illegal or unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including, without limitation, each portion of any Section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby; and (b) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
16. Exception to Right of Indemnification or Advancement of Expenses. Except as
provided in Section 11(e), Indemnitee shall not be entitled to indemnification
or advancement of Expenses under this Agreement with respect to any Proceeding,
or any claim therein, brought or made by him against the Corporation.
17. Identical Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute one and the same Agreement. Only one
such counterpart signed by the party against whom enforceability is sought needs
to be produced to evidence the existence of this Agreement.
18. Headings. The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect the construction thereof.
19. Modification and Waiver. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
20. Notice by Indemnitee. Indemnitee agrees promptly to notify the Corporation
at its principal executive offices in writing upon being served with any
summons, citation, subpoena, complaint, indictment, information or other
document relating any Proceeding or matter which may be subject to
indemnification or advancement of Expenses covered hereunder.
<PAGE>
21. Notices. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if (i) delivered
by hand and receipted for by the party to whom such notice or other
communication shall have been directed, or (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed:
(a) If to Indemnitee, to: Edmund McCormick
c/o McCormick & Company
18 Bank Street
Summit, NJ 07901
(b) If to the Corporation, to:
Kirlin Holding Corp.
6901 Jericho Turnpike
Syosset, NY 11791
Attn: Chairman
or to such other address or such other person as Indemnitee or the Corporation
shall designate in writing in accordance with this Section, except that notices
regarding changes in notices shall be effective only upon receipt.
22. Governing Law. The parties agree that this Agreement shall be governed by,
and construed and enforced in accordance with, the internal laws of the State of
Delaware without regard to principles of conflicts of law.
23. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage
of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
KIRLIN HOLDING CORP.
By:____________________________
Anthony J. Kirincic
President
INDEMNITEE
_____________________________
Edmund McCormick
<PAGE>
* * * * *
Kirlin Securities, Inc., a Delaware corporation and wholly-owned subsidiary of
the Corporation, hereby guarantees the payment of all monies owed to Indemnitee
by the Corporation pursuant to the foregoing Indemnification Agreement;
provided, however that such guarantee shall only be effective if (i) a judgment
or other final determination is rendered in a Proceeding against Indemnitee that
is adverse to Indemnitee and (ii) the Corporation has failed to pay all monies
owed to Indemnitee by the Corporation pursuant to the Indemnification Agreement
and such failure has continued for a period of not less than one-hundred twenty
(120) days.
KIRLIN SECURITIES, INC.
By: _______________________________
Anthony J. Kirincic
President
<PAGE>
EXHIBIT 21
Subsidiaries of Registrant
Name Percentage Ownership State of Organization
- ----------------------- -------------------- ---------------------
Kirlin Securities, Inc. 100% Delaware
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 316,219
<SECURITIES> 14,631,398
<RECEIVABLES> 1,109,559
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,057,176
<PP&E> 1,550,458
<DEPRECIATION> (713,626)
<TOTAL-ASSETS> 16,894,008
<CURRENT-LIABILITIES> 8,329,286
<BONDS> 0
<COMMON> 272
0
0
<OTHER-SE> 8,564,450
<TOTAL-LIABILITY-AND-EQUITY> 16,894,008
<SALES> 21,417,761
<TOTAL-REVENUES> 21,417,761
<CGS> 14,690,262
<TOTAL-COSTS> 14,690,262
<OTHER-EXPENSES> 2,594,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294,970
<INCOME-PRETAX> 3,838,118
<INCOME-TAX> 1,645,695
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,192,423
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.78
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 75,304
<SECURITIES> 13,634,348
<RECEIVABLES> 637,066
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,346,718
<PP&E> 1,202,220
<DEPRECIATION> (511,096)
<TOTAL-ASSETS> 15,037,842
<CURRENT-LIABILITIES> 9,013,157
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 6,024,555
<TOTAL-LIABILITY-AND-EQUITY> 15,037,842
<SALES> 16,505,554
<TOTAL-REVENUES> 16,505,554
<CGS> 12,213,996
<TOTAL-COSTS> 12,213,996
<OTHER-EXPENSES> 2,365,501
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 535,713
<INCOME-PRETAX> 1,390,344
<INCOME-TAX> 754,566
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 635,778
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</TABLE>
