U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to ______________________
Commission File number 0-25336
KIRLIN HOLDING CORP.
---------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 11-3229358
- ------------------------------ ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6901 Jericho Turnpike, Syosset, New York 11791
----------------------------------------------
(Address of Principal Executive Offices)
(800) 899-9400
----------------------------------------------
(Issuer's Telephone Number Including Area Code)
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No |_|.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At August 16, 1999, Issuer had
outstanding 6,143,528 shares of Common Stock, par value $.0001 per share (which
reflects a 2-for-1 stock split, accomplished by declaration of a 100% stock
dividend payable on July 30, 1999 to all stockholders of record on July 14,
1999. The information in this Form 10-QSB does not give effect to this 2-for-1
stock split.)
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ------------------
(Unaudited)
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,044,908 $ 85,092
Securities Owned, at market value:
U.S. government and agency obligations 1,212,935 2,261,874
State and municipal obligations 2,017,663 3,254,247
Corporate bonds and other securities 11,342,536 7,252,110
Receivable from clearing broker 2,748,543
Furniture, Fixtures and Leasehold Improvements, at cost, net of
accumulated depreciation of $1,024,380 and $972,523 for
June 30, 1999 and December 31, 1998, respectively 911,438 706,498
Other Assets 1,710,181 1,974,691
---------------- ------------------
Total assets $ 20,988,204 $ 15,534,512
================ ==================
LIABILITIES and STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, not yet purchased, at market value $ 1,528,522 $ 641,739
Payable to clearing broker 3,467,579
Accrued compensation 3,589,437 1,799,531
Accounts payable, accrued expenses and taxes payable 746,431 585,084
Deferred taxes payable 2,467,252 728,060
---------------- ------------------
Total liabilities 8,331,642 7,221,993
---------------- ------------------
Commitments
Stockholders' Equity (Note 2):
Common stock, $.0001 par value; authorized 15,000,000 shares,
issued and outstanding 3,046,764 and 2,802,764 shares, respectively 305 280
Additional paid-in capital 7,544,975 6,354,187
Retained earnings 5,111,282 1,958,052
---------------- ------------------
Total stockholders' equity 12,656,562 8,312,519
---------------- ------------------
Total liabilities and stockholders' equity $ 20,988,204 $ 15,534,512
================ ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three-Months Ended Six-Months Ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
--------------- ------------- --------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net $ 6,124,358 $ 2,422,349 $ 10,410,629 $ 5,406,760
Commissions 3,120,341 1,427,335 5,674,556 2,903,275
Merchant Banking 1,429,379 (248,657) 1,257,211 268,765
Investment Banking 509,808 421,875 935,058 421,875
Other income 265,772 304,857 401,147 415,594
--------------- -------------- ---------------- --------------
11,449,658 4,327,759 18,678,601 9,416,269
--------------- -------------- ---------------- --------------
Expenses:
Employee compensation and benefits 5,879,831 2,394,629 9,871,672 5,593,081
Promotion and advertising 198,952 230,793 471,974 305,526
Clearance and execution charges 274,152 189,870 596,431 395,484
Occupancy and communications 791,483 460,838 1,459,901 840,330
Professional fees 249,907 185,702 476,847 284,074
Interest 27,827 104,669 80,929 190,069
Other 212,838 199,579 444,558 339,818
--------------- -------------- ---------------- --------------
7,634,990 3,766,080 13,402,312 7,948,382
--------------- -------------- ---------------- --------------
Income before provision for income taxes 3,814,668 561,679 5,276,289 1,467,887
Income tax provision (Note 3) 1,656,877 250,184 2,123,059 656,464
--------------- -------------- ---------------- --------------
Net income $ 2,157,791 $ 311,495 $ 3,153,230 $ 811,423
=============== ============== ================ ==============
Basic earnings per common share (Note 4) $ 0.74 $ 0.11 $ 1.03 $ 0.29
=============== ============== ================ ==============
Diluted earnings per common share (Note 4) $ 0.72 $ 0.11 $ 1.02 $ 0.29
=============== ============== ================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the six months ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-in Retained
Shares Par Value Capital Earnings Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Stockholders' equity,
January 1, 1999 2,802,764 $ 280 $ 6,354,187 $ 1,958,052 $ 8,312,519
Stock issuance 244,000 25 1,190,788 1,190,813
Net income 3,153,230 3,153,230
------------- ------------- -------------- ------------- -------------
Stockholders' equity,
June 30, 1999 3,046,764 $ 305 $ 7,544,975 $ 5,111,282 $ 12,656,562
============= ============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
1999 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,153,230 $ 811,423
------------------ -----------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 51,857 135,185
Deferred income taxes 1,739,192 425,196
Noncash compensation 440,813
(Increase) in securities owned, at market value (1,804,903) (253,984)
(Increase) in receivable from clearing broker (2,748,543)
Decrease in other assets 264,510 67,775
Increase (decrease) in securities sold, not yet
purchased, at market value 886,783 (65,363)
(Decrease) in payable to clearing broker (3,467,579) (592,691)
Increase (decrease) in accrued compensation 1,789,906 (1,289,143)
Increase in accounts payable, accrued expenses
and taxes payable 161,347 113,689
------------------ -----------------
Total adjustments (2,686,617) (1,459,336)
------------------ -----------------
Net cash provided by (used in) operating activities 466,613 (647,913)
------------------ -----------------
Cash flows from investing activities:
Purchase of furniture, fixtures and leasehold improvements (256,797) (33,816)
------------------ -----------------
Net cash used in investing activities (256,797) (33,816)
------------------ -----------------
Cash flows from financing activities:
Issuance of common stock 750,000 484,687
------------------ -----------------
Net cash provided by financing activities 750,000 484,687
------------------ -----------------
Net increase (decrease) in cash and cash equivalents 959,816 (197,042)
Cash and cash equivalents, beginning of period 85,092 316,219
------------------ -----------------
Cash and cash equivalents, end of period $ 1,044,908 $ 119,177
================== =================
Supplemental information:
Interest paid $ 80,929 $ 190,069
Income taxes paid $ 60,298 $ 43,899
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Kirlin
Holding Corp. and its wholly owned subsidiaries, Kirlin Securities,
Inc. ("Kirlin") and Greenleaf Management Corp., and its 80.1% owned
subsidiary, VentureHighway.com Inc. ("VentureHighway") (collectively
the "Company"). The Company's principal subsidiary, Kirlin, is a
full-service, retail-oriented brokerage firm specializing in the
trading and sale of both equity and fixed income securities, including
mutual funds. 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 and California.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
as required by generally accepted accounting principles for annual
financial statements. In the opinion of management of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary
in order to make the financial statements not misleading have been
included. The operations for the three and six-month periods ended June
30, 1999 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1999. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998.
Certain amounts included in the 1998 financial statements have been
reclassified, where appropriate, to conform with the 1999 presentation.
2. Stockholders' Equity
On January 11, 1999, the Company's Board of Directors authorized the
issuance of 69,000 shares of common stock (valued at the closing price
on January 8, 1999) to employees of the Company in connection with
their bonuses related to the year ended December 31, 1998. Following
this action, the Company had 2,871,764 shares of Common Stock
outstanding.
On June 1, 1999, the Company's Board of Directors authorized the sale
and issuance of 150,000 shares of common stock at a price of $5.00 per
share to Individual Investor Group, Inc. ("INDI"), which became
effective on June 2, 1999. The Company also agreed that INDI would
acquire 19.9% of VentureHighway for approximately $3.2 million of
advertising. Following this action, the Company had 3,021,764 shares of
Common Stock outstanding.
On June 4, 1999, the Company's Board of Directors authorized the
issuance of 25,000 shares of common stock (valued at the closing price
on June 3, 1999) to employees of the Company. Following this action,
the Company had 3,046,764 shares of Common Stock outstanding.
On June 29, 1999, the Company's Board of Directors declared a 2-for-1
stock split accomplished by declaration of a 100% stock dividend
payable on July 30, 1999, to all stockholders of record on July 14,
1999. The share amounts contained in this report have not been adjusted
to reflect the stock split.
6
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
3. Income Taxes
The Company files consolidated federal income tax returns, but each
constituent entity files separate state income tax returns. The
provision for income taxes differs from the amount of income taxes
determined by applying the federal statutory rates principally because
of the effect of state taxes.
4. Earnings Per Share
Net income per common share is 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>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- -----------
<S> <C> <C> <C>
Three months ended June 30, 1999:
Basic EPS:
Income available to
common stockholders $ 2,157,791 2,928,633 $ 0.74
Effect of Dilutive
Securities - options 57,460
------------- -------------- -----------
Diluted EPS:
Income available to common
stockholders and assumed
exercise $ 2,157,791 2,986,093 $ 0.72
============= ============== ===========
Three months ended June 30, 1998:
Basic EPS:
Income available to
common stockholders $ 311,495 2,802,764 $ 0.11
Effect of Dilutive
Securities - options 46,654
------------- -------------- -----------
Diluted EPS:
Income available to common
stockholders and assumed
exercise $ 311,495 2,849,418 $ 0.11
============= ============== ===========
</TABLE>
7
<PAGE>
KIRLIN HOLDING CORP. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- -----------
<S> <C> <C> <C>
Six months ended June 30, 1999:
Basic EPS:
Income available to
common stockholders $ 3,153,230 3,055,204 $ 1.03
Effect of Dilutive
Securities - options 49,754
-------------- -------------- -----------
Diluted EPS:
Income available to common
stockholders and assumed
exercise $ 3,153,230 3,104,958 $ 1.02
============== ============== ===========
Six months ended June 30, 1998:
Basic EPS:
Income available to
common stockholders $ 811,423 2,800,940 $ 0.29
Effect of Dilutive
Securities - options 45,957
-------------- -------------- -----------
Diluted EPS:
Income available to common
stockholders and assumed
exercise $ 811,423 2,846,897 $ 0.29
============== ============== ===========
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with
the Securities and Exchange 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. These risks and uncertainties include
those set forth in Item 2 (entitled "Management's Discussion and Analysis of
Financial Condition and Result of Operations") of Part I hereof and elsewhere
in this Report, in Item 1 (entitled "Business") of Part I and Item 6 (entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations") of Part II of the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998, and in the section entitled "Risk Factors"
of the Company's Prospectus, dated August 13, 1999, filed with the Securities
and Exchange Commission. The Company has no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
Results of Operations
Principal transactions, net for the three and six-month periods ended
June 30, 1999 increased 152.8% and 92.5%, respectively, to $6,124,358 and
$10,410,629 from the comparable periods in 1998. The increase is primarily
attributable to an increase in equity business generated by additional
registered representatives and appreciation in the value of warrants and/or unit
purchase options the Company received in prior periods in connection with
underwriting public offerings or acting as placement agent in private offerings
in connection with its investment banking activities.
Commissions for the three and six-month periods ended June 30, 1999
increased 118.6% and 95.5%, respectively, to $3,120,341 and $5,674,556 from the
comparable periods in 1998. The increase is primarily attributable to the
Company's increased business in equity securities and mutual funds, which,
except for equity securities for which the Company maintains an inventory, are
bought and sold on an agency basis for which the Company receives a commission.
This increase is a direct result of an active market in equity securities as
well as the addition of registered representatives.
Merchant banking for the three and six-month periods ended June 30,
1999 increased 674.8% and 367.8%, respectively, to $1,429,379 and $1,257,211
from the comparable periods in 1998 primarily as a result of appreciation in the
value of investments owned by the Company.
Investment banking for the three and six-month periods ended June 30,
1999 increased 20.8% and 121.6%, respectively, to $509,808 and $935,058 from the
comparable periods in 1998. The increase is primarily attributable to investment
banking fees the Company generated from acting as placement agent related to a
bridge loan financing and a private placement.
Other income for the three and six-month periods ended June 30, 1999
decreased 12.8% and 3.5%, respectively, to $265,772 and $401,147 from the
comparable periods in 1998. The decrease is primarily attributable to the
settlement of a lawsuit brought by the Company against a former registered
representative in the prior year.
Employee compensation and benefits for the three and six-month periods
ended June 30, 1999 increased 145.5% and 76.5%, respectively, to $5,879,831 and
$9,871,672 from the comparable periods in 1998. The increase is primarily
attributable to the increase in the Company's revenue since employee
compensation to the Company's traders and registered representatives is directly
related to certain components of revenue.
9
<PAGE>
Promotion and advertising for the three and six-month periods ended
June 30, 1999 decreased 13.8% and increased 54.4%, respectively, to $198,952 and
$471,974 from the comparable periods in 1998 primarily as a result of the
Company's planned decrease in advertising expenditures during the past quarter.
Clearance and execution charges for the three and six-month periods
ended June 30, 1999 increased 44.4% and 50.8%, respectively, to $274,152 and
$596,431 from the comparable periods in 1998 as a result of higher ticket
volume.
Occupancy and communications costs for the three and six-month periods
ended June 30, 1999 increased 71.7% and 73.7%, respectively, to $791,483 and
$1,459,901 from the comparable periods in 1998. This increase is a result of the
establishment and operations of additional branch offices.
Professional fees for the three and six-month periods ended June 30,
1999 increased 34.6% and 67.9%, respectively, to $249,907 and $476,847 from the
comparable periods in 1998 primarily as a result of computer consultation
related to the establishment of branch offices and addressing the Y2K issue and
legal consultation related to new business ventures and lawsuits initiated by
the Company.
Interest expense for the three and six-month periods ended June 30,
1999 decreased 73.4% and 57.4%, respectively, to $27,827 and $80,929 from the
comparable periods in 1998 as a result of a reduction of inventory positions
purchased on margin and securities sold short, which are held at the clearing
broker and charged interest. The Company seeks to minimize its cash balances and
withdraws cash for operations from its trading accounts as needed. To the extent
necessary, inventory positions are utilized as collateral for such withdrawals.
Other expenses for the three and six-month periods ended June 30, 1999
increased 6.6% and 30.8%, respectively, to $212,838 and $444,558 from the
comparable periods in 1998 as a result of the settlement of a customer
arbitration and an increase in regulatory fees and general office expenses
related to the increase in registered representatives.
Income tax provision for the three and six-month periods ended June 30,
1999 were $1,656,877 and $2,123,059, respectively. For the three and six-month
periods ended June 30, 1999, the Company utilized a net operating loss
carry-forward from the prior year to reduce the income tax provision.
Net income of $2,170,308 and $3,165,747, respectively, for the three
and six-month periods ended June 30, 1999 compares to net income of $311,495 and
$811,423 for the three and six-month periods ended June 30, 1998. This resulted
primarily from the increase in revenues offset by increases in expenses as
discussed above.
Liquidity and Capital Resources
Securities owned, at market value, at June 30, 1999 were $14,573,134 as
compared to $12,768,231 at December 31, 1998. This 14.1% increase is primarily
attributable to increases in securities held in inventory for resale to the
Company's customers and increases in the value of positions held in relation to
the Company's merchant banking activities. Approximately 40% of the Company's
assets at June 30, 1999 were comprised of cash and highly liquid securities.
Receivable from clearing broker amounted to $2,748,543 at June 30, 1999
as compared to a payable to clearing broker of $3,467,579 at December 31, 1998.
This shift results primarily from reduced inventory purchased on margin and
increased positions in securities sold short at June 30, 1999.
Furniture, fixtures and leasehold improvements, net, at June 30, 1999,
increased to $911,438 as compared to $706,498 at December 31, 1998. This 29.0%
increase primarily results from the purchase of additional computer hardware,
furniture, and leasehold improvements in connection with the Company's new
branch offices and conversion of the Company's operational and quotation system.
10
<PAGE>
Other assets decreased to $1,710,181 at June 30, 1999, from $1,974,691
at December 31, 1998, a 13.4% decrease. This decrease is primarily attributable
to current taxes receivable, which arose due to the utilization of a net
operating loss carry-forward from the prior year.
Securities sold short amounted to $1,528,522 at June 30, 1999 as
compared to $641,739 at December 31, 1998. Management monitors these positions
on a daily basis and covers short positions when deemed appropriate.
Accrued compensation was $3,589,437 at June 30, 1999 as compared to
$1,799,531 at December 31, 1998, a 99.5% increase attributable to increased
revenues upon which commission income to registered representatives is based.
Accounts payable and accrued expenses were $746,431 at June 30, 1999 as
compared to $585,084 at December 31, 1998, a 27.6% increase primarily
attributable to general office expenses related to the operation of all offices
due to an increase in the number of employees and the establishment of new
branch offices. Additionally, the Company incurred recruiting fees in order to
hire various support personnel.
Deferred income taxes payable were $2,467,252 at June 30, 1999 as
compared to $728,060 at December 31, 1998. This increase is reflective of the
adjustment for deferred income taxes payable resulting from an increase in the
value of certain securities positions in the Company's merchant banking
portfolio and investment account.
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 is the
result of computer systems and applications that currently use two digits rather
than four to recognize a particular year (e.g., "98" for "1998"). The Y2K issue
affects the Company's information technology systems (i.e., computer systems,
network elements and software applications) as well as other business systems
that might have time-sensitive programs or microprocessors that may not properly
reflect or recognize the year 2000 ("non-IT systems"). The failure to reflect or
recognize dates after 1999 could cause the Company's information technology and
non-IT systems to fail or cause errors, which could lead to disruptions in
operations or increased costs. The Company, similar to most securities
institutions, is significantly subject to the potential impact of the Y2K issue
due to the nature of the industry. Potential impacts to the Company may arise
from software, computer hardware, and other equipment both within the Company's
direct control and outside the Company's ownership, yet with which the Company
interfaces either electronically or operationally. The Company has commenced a
review of its internal systems and programs to determine the extent to which its
information technology systems are Y2K compliant. The Company has commenced a
review of whether its non-IT systems are Y2K compliant. Since much of the
Company's internal information technology has been developed fairly recently,
the Company does not anticipate that its internal information technology systems
will face significant issues of non-compliance. The Company has completed an
evaluation of its mission critical systems and remediation of certain systems
11
<PAGE>
will be necessary. Remediation of the systems is still in the process of being
completed. Based on current information, the Company believes it will spend
approximately $100,000 to $150,000 in 1999 and expects to accrue approximately
$50,000 to $100,000 for 2000, although there can be no assurance that such
amounts will be sufficient due to unforeseen difficulties, to complete the
review and address the Y2K issue with respect to its internal information
technology systems and non-IT systems.
However, even if the Company's internal systems are Y2K compliant, the
Company remains at risk from Y2K failure caused by third parties. The Company
has commenced to contact third parties with which it interacts to determine the
state of their assessment and remediation of any Y2K issues they face. To date,
the Company has not received sufficient information from such third parties to
complete its assessment of their Y2K readiness. Some of the third parties with
which the Company has significant interaction include, most significantly, its
clearing broker, Correspondence Services Corporation ("CSC"), and vendors
providing phone service, payroll services and banking services. In April 1999
CSC installed a new clearing system, which addressed the Y2K issue. The
Company's major third-party vendor has communicated that it has completed its
internal testing, including a fully integrated system test of all its core
processing applications and that they will continue to conduct additional tests
throughout the remainder of 1999. The Company will continue to assess whether it
is necessary to retain the services of other third-party vendors who are Y2K
compliant in order to prevent a disruption in the Company's business. The
Company has developed a contingency plan for those areas where plans to achieve
Y2K compliance fail.
The failure to correct a material Y2K problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the uncertainty
of the Y2K readiness of third-party vendors, the Company is unable to determine
at this time whether the consequences of Y2K failures will have a material
impact on the Company's results of operations, liquidity or financial condition.
Although the Company expects that its mission critical systems will be compliant
and tested by the third quarter of 1999, there is no guarantee that these
results will be achieved. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure to
identify all susceptible systems, non-compliance by third parties whose systems
and operations impact the Company, and other similar uncertainties. A reasonably
possible worst case scenario might include one or more of the Company's or a
third-party vendor's significant systems being non-compliant. Such an event
could result in a material disruption to the Company's operations, which would
adversely affect the Company's results of operations, liquidity and financial
condition.
12
<PAGE>
PART II: OTHER INFORMATION
ITEM 2: SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
Consideration Received
and Description of If Option, Warrant
Underwriting or Other or Convertible
Discounts to Market Security, Terms of
Title of Price Afforded to Exemption from Exercise or
Date of Sale Security Number Sold Purchasers Registration Claimed Conversions
- ----------------- ---------------- --------------- ------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
6/1/99 Options to 5,000 Options granted under 4(2) 1/3 exercisable
purchase 1996 Stock Plan; no 6/1/02, 6/1/03,
Common Stock cash consideration 6/1/04 at an
received by Company exercise price of
until exercise $5.9375 per share
and which all expire
6/1/09
6/2/99 Common Stock 150,000 $750,000 4(2) N/A
6/4/99 Common Stock 25,000 Restricted stock 4(2) N/A
awarded to employees
under 1996 Stock Plan;
no cash consideration
received by the Company
</TABLE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company held its Annual Meeting of Stockholders on June 4, 1999. At
the meeting the directors nominated for re-election, David O. Lindner and Edward
J. Casey, were each re-elected for three-year terms with 2,618,986 shares voted
in favor of their re-election and 24,810 shares for which authority to vote was
withheld.
ITEM 5: OTHER INFORMATION
On June 29, 1999, the Board of Directors of the Company declared a two
for one stock split of the Company's common stock, which was paid as a 100%
stock dividend on July 30, 1999 to stockholders of record on July 14, 1999. The
Company issued an additional 3,046,764 shares of its common stock in connection
with the stock split.
On July 8, 1999, Harold Paul was elected to the Board of Directors as a
Class II director to fill a vacancy created by the resignation of Edmund
McCormick on April 23, 1999. Mr. Paul's term will expire on the date of the
Company's annual meeting to be held in 2000.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10 Stock Option Agreement, dated as of July 8, 1999,
between the Company and Harold Paul
27 Financial Data Schedule (6/30/99)
(b) Reports on Form 8-K
Current Report on Form 8-K, dated June 2, 1999, and filed with
the Commission on June 16, 1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kirlin Holding Corp.
--------------------------
(Registrant)
Dated: August 16, 1999 By: /s/ Anthony J. Kirincic
------------------------
Anthony J. Kirincic
President and Chief
Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- -------- -----------
10.10 Stock Option Agreement, dated as of July 8, 1999, between the
Company and Harold Paul
27 Financial Data Schedule (6/30/99)
15
STOCK OPTION AGREEMENT
[Director Non-Qualified]
AGREEMENT made as of the 8th day of July 1999, by and between
KIRLIN HOLDING CORP., a Delaware corporation (the "Company"), and Harold Paul
(the "Director").
WHEREAS, on July 8, 1999 (the "Grant Date"), pursuant to the
terms and conditions of the Kirlin Holding Corp. 1996 Stock Plan (the "Plan"),
the Board of Directors of the Company authorized the grant to the Director of an
option (the "Option") to purchase an aggregate of 2,500 shares of the authorized
but unissued Common Stock of the Company, $.0001 par value (the "Common Stock"),
conditioned upon the Director's acceptance thereof upon the terms and conditions
set forth in this Agreement and subject to the terms of the Plan; and
WHEREAS, the Director desires to acquire the Option on the
terms and conditions set forth in this Agreement and subject to the terms of the
Plan;
IT IS AGREED:
1. Grant of Stock Option. The Company hereby grants the
Director the Option to purchase all or any part of an aggregate of 2,500 shares
of Common Stock (the "Option Shares") on the terms and conditions set forth
herein and subject to the provisions of the Plan.
2. Non-Incentive Stock Option. The Option represented hereby
is not intended to be an Option which qualifies as an "Incentive Stock Option"
under Section 422 of the Internal Revenue Code of 1986, as amended.
3. Exercise Price. The exercise price of the Option shall be
$13.625 per share, subject to adjustment as hereinafter provided.
4. Exercisability. This Option is exercisable, subject to the
terms and conditions of the Plan, immediately. It shall remain exercisable
except as otherwise provided herein, until the close of business on July 7, 2009
(the "Exercise Period").
5. Termination of Directorship. The Option shall terminate on
the third anniversary of the first date upon which the Director shall no longer
be a member of the Board of Directors of the Company, or any successor company,
for any reason whatsoever.
6. Withholding Tax. Not later than the date as of which an
amount first becomes includible in the gross income of the Director for Federal
income tax purposes with respect to the Option, the Director shall pay to the
Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state and local taxes of any kind required by law to be
withheld or paid with respect to such amount. The obligations of the Company
under the Plan and pursuant to this Agreement shall be conditional upon such
payment or arrangements with the Company and the Company shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the Director from the Company.
7. Adjustments. In the event of any merger, reorganization,
consolidation, recapitalization, consolidation, recapitalization, dividend
(other than cash dividend), stock split, reverse stock split, or other change in
corporate structure affecting the number of issued shares of Common Stock, the
Company shall proportionally adjust the number and kind of Option Shares
1
<PAGE>
and the exercise price of the Option in order to prevent the dilution or
enlargement of the Director's proportionate interest in the Company and her
rights hereunder, provided that the number of Option Shares shall always be a
whole number.
8. Method of Exercise.
8.1. Notice to the Company. The Option shall be
exercised in whole or in part by written notice in substantially the form
attached hereto as Exhibit A directed to the Company at its principal place of
business accompanied by full payment as hereinafter provided of the exercise
price for the number of Option Shares specified in the notice.
8.2. Delivery of Option Shares. The Company
shall deliver a certificate for the Option Shares to the Director as soon as
practicable after payment therefor.
8.3. Payment of Purchase Price.
8.3.1. Cash Payment. The Director shall
make cash payments by wire transfer, certified or bank check or personal check,
in each case payable to the order of the Company; the Company shall not be
required to deliver certificates for Option Shares until the Company has
confirmed the receipt of good and available funds in payment of the purchase
price thereof.
8.3.2. Cashless Payment. Provided that
prior approval of the Company has been obtained, the Director may use Common
Stock of the Company owned by him or her to pay the purchase price for the
Option Shares by delivery of stock certificates in negotiable form which are
effective to transfer good and valid title thereto to the Company, free of any
liens or encumbrances. Shares of Common Stock used for this purpose shall be
valued at the Fair Market Value.
8.3.3. Payment Price of Withholding Tax.
Any required withholding tax may be paid in cash or with Common Stock in
accordance with Sections 8.3.1. and 8.3.2.
8.3.4. Exchange Act Compliance.
Notwithstanding the foregoing, the Company shall have the right to reject
payment in the form of Common Stock if in the opinion of counsel for the
Company, (i) it could result in an event of "recapture" under Section 16(b) of
the Securities Exchange Act of 1934; (ii) such shares of Common Stock may not be
sold or transferred to the Company; or (iii) such transfer could create legal
difficulties for the Company.
9. Nonassignability. The Option shall not be assignable or
transferable except by will or by the laws of descent and distribution in the
event of the death of the Director. No transfer of the Option by the Director by
will or by the laws of descent and distribution shall be effective to bind the
Company unless the Company shall have been furnished with written notice thereof
and a copy of the will and such other evidence as the Company may deem necessary
to establish the validity of the transfer and the acceptance by the transferee
or transferees of the terms and conditions of the Option.
10. Company Representations. The Company hereby represents and
warrants to the Director that:
2
<PAGE>
(i) the Company, by appropriate and all required
action, is duly authorized to enter into this Agreement and consummate
all of the transactions contemplated hereunder; and
(ii) the Option Shares, when issued and delivered by
the Company to the Director in accordance with the terms and conditions
hereof, will be duly and validly issued and fully paid and
non-assessable.
11. Director Representations. The Director hereby
represents and warrants to the Company that
(i) he or she is acquiring the Option and shall
acquire the Option Shares for his or her own account and not with a
view towards the distribution thereof;
(ii) he or she has received a copy of all reports and
documents required to be filed by the Company with the Commission
pursuant to the Exchange Act within the last 24 months and all reports
issued by the Company to its stockholders;
(iii) he or she understands that he or she must bear
the economic risk of the investment in the Option Shares, which cannot
be sold by his or her unless they are registered under the Securities
Act of 1933 (the "1933 Act") or an exemption therefrom is available
thereunder and that the Company is under no obligation to register the
Option Shares for sale under the 1933 Act;
(iv) in his or her position with the Company, he or
she has had both the opportunity to ask questions and receive answers
from the officers and directors of the Company and all persons acting
on its behalf concerning the terms and conditions of the offer made
hereunder and to obtain any additional information to the extent the
Company possesses or may possess such information or can acquire it
without unreasonable effort or expense necessary to verify the accuracy
of the information obtained pursuant to clause (ii) above;
(v) he or she is aware that the Company shall place
stop transfer orders with its transfer agent against the transfer of
the Option Shares in the absence of registration under the 1933 Act or
an exemption therefrom as provided herein; and
(vi) in the absence of registration under the 1933
Act, the certificates evidencing the Option Shares shall bear the
following legend:
"The shares represented by this certificate have been
acquired for investment and have not been registered
under the Securities Act of 1933. The shares may not
be sold or transferred in the absence of such
registration or an exemption therefrom under said
Act."
12. Restriction on Transfer of Option Shares. Anything in this
Agreement to the contrary notwithstanding, the Director hereby agrees that he or
she shall not sell, transfer by any means or otherwise dispose of the Option
Shares acquired by him or her without registration under the 1933 Act, or in the
event that they are not so registered, unless (i) an exemption from the 1933 Act
registration requirements is available thereunder, and (ii) the Director has
3
<PAGE>
furnished the Company with notice of such proposed transfer and the Company's
legal counsel, in its reasonable opinion, shall deem such proposed transfer to
be so exempt.
13. Miscellaneous.
13.1. Notices. All notices, requests, deliveries,
payments, demands and other communications which are required or permitted to be
given under this Agreement shall be in writing and shall be either delivered
personally or sent by registered or certified mail, or by private courier,
return receipt requested, postage prepaid to the Company at its principal
executive office and to the Director at his address set forth below, or to such
other address as either party shall have specified by notice in writing to the
other. Notice shall be deemed duly given hereunder when delivered or mailed as
provided herein.
13.2. Plan Paramount; Conflicts with Plan. This
Agreement and the Option shall, in all respects, be subject to the terms and
conditions of the Plan, whether or not stated herein. In the event of a conflict
between the provisions of the Plan and the provisions of this Agreement, the
provisions of the Plan shall in all respects be controlling.
13.3. Stockholder Rights. The Director shall not
have any of the rights of a stockholder with respect to the Option Shares until
such shares have been issued after the due exercise of the Option.
13.4. Waiver. The waiver by any party hereto of
a breach of any provision of this Agreement shall not operate or be construed as
a waiver of any other or subsequent breach.
13.5. Entire Agreement. This Agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof. This Agreement may not be amended except by writing executed by
the Director and the Company.
13.6. Binding Effect; Successors. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and, to the
extent not prohibited herein, their respective heirs, successors, assigns and
representatives. Nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto and as provided above, their
respective heirs, successors, assigns and representatives any rights, remedies,
obligations or liabilities.
13.7. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
(without regard to choice of law provisions).
13.8. Headings. The headings contained herein are
for the sole purpose of convenience of reference, and shall not in any way limit
or affect the meaning or interpretation of any of the terms or provisions of
this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this
Agreement as of the day and year first above written.
DIRECTOR : KIRLIN HOLDING CORP.
/s/ Harold Paul /s/ Anthony J. Kirincic
- -------------------- By: ------------------------------
Harold Paul Anthony J. Kirincic, President
5
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE OF OPTION
- -----------------------------------
DATE
Kirlin Holding Corp.
Attention: Board of Directors
Re: Purchase of Option Shares
Gentlemen:
In accordance with my Stock Option Agreement dated as of July 8, 1999
("Agreement") with Kirlin Holding Corp. (the "Company"), I hereby irrevocably
elect to exercise the right to purchase _________ shares of the Company's common
stock, par value $.0001 per share ("Common Stock"), which are being purchased
for investment and not for resale.
As payment for my shares, enclosed is (check and complete applicable
box[es]):
|_| a [personal check] [certified check] [bank check] payable to the order
of "Kirlin Holding Corp." in the sum of $_________;
|_| confirmation of wire transfer in the amount of $_____________; and/or
|_| [If prior approval of the Company has been obtained,] certificate for
____ shares of the Company's Common Stock, free and clear of any
encumbrances, duly endorsed, having a Fair Market Value (as such term
is defined in the Company's 1996 Stock Plan) of $_________.
I hereby represent, warrant to, and agree with, the Company that
(i) I am acquiring the Option Shares for my own account and not with
a view towards the distribution thereof;
(ii) I have received a copy of all reports and documents required to
be filed by the Company with the Commission pursuant to the Exchange Act within
the last 24 months and all reports issued by the Company to its stockholders;
(iii) I understand that I must bear the economic risk of the
investment in the Option Shares, which cannot be sold by me unless they are
registered under the Securities Act of 1933 (the "1933 Act") or an exemption
therefrom is available thereunder and that the Company is under no obli gation
to register the Option Shares for sale under the 1933 Act;
(iv) in my position with the Company, I have had both the opportunity
to ask questions and receive answers from the officers and directors of the
Company and all persons acting on its behalf concerning the terms and conditions
<PAGE>
of the offer made hereunder and to obtain any additional information to the
extent the Company possesses or may possess such information or can acquire it
without unreasonable effort or expense necessary to verify the accuracy of the
information obtained pursuant to clause (ii) above;
(v) I am aware that the Company shall place stop transfer orders with
its transfer agent against the transfer of the Option Shares in the absence of
registration under the 1933 Act or an exemption therefrom as provided herein;
(vi) my rights with respect to the Option Shares shall, in all
respects, be subject to the terms and conditions of this Company's 1996 Stock
Plan and this Agreement; and
(vii) in the absence of registration under the 1933 Act, the
certificates evidencing the Option Shares shall bear the following legend:
"The shares represented by this certificate have been acquired
for investment and have not been registered under the Securities
Act of 1933. The shares may not be sold or transferred in the
absence of such registration or an exemption therefrom under said
Act."
Kindly forward to me my certificate at your earliest convenience.
Very truly yours,
- ---------------------------------- -------------------------------------
(Signature) (Address)
- ---------------------------------- -------------------------------------
(Print Name) (Address)
-------------------------------------
(Social Security Number)
2
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