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, 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
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KIRLIN HOLDING CORP.
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(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 1999 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: $42,673,096.
As of April 7, 2000, the aggregate market value of the issuer's Common
Stock (based on its reported last sale price on the Nasdaq National Market) held
by non-affiliates of the issuer was $41,424,619.50. At April 7, 2000, 12,559,392
shares of issuer's Common Stock were outstanding.
<PAGE>
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,
money management and e-commerce activities through its operating subsidiaries,
Kirlin Securities, Inc., Greenleaf Management Corp. and VentureHighway.com Inc.
(majority-owned).
Subsequent to December 31, 1999, the Company acquired two additional
brokerage firms, First Long Island Securities, Inc. and Princeton Securities
Corporation, which are discussed below in "Recent Acquisitions."
Kirlin Securities, Inc.
Kirlin commenced operations in 1988 and is registered as a broker-dealer
with the Securities and Exchange Commission and is a member of the National
Association of Securities Dealers, Inc. and the Securities Investor Protection
Corporation. 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. Kirlin also offers a managed assets portfolio program to
manage the financial assets of its clients. At March 1, 2000, Kirlin maintained
over 16,000 customer accounts, which held over $1 billion in assets. Kirlin is
licensed to conduct activities as a broker-dealer in the District of Columbia
and in 47 states, and operates primarily from its headquarters in Syosset, New
York, as well as five branch offices located in California, New Jersey and New
York.
Greenleaf Management Corp.
Greenleaf Management is the manager of Greenleaf Capital Partners II, LLC,
a private investment fund capitalized in June 1999 to invest in one or more
selected companies and take advantage of investment opportunities that may
arise.
VentureHighway.com Inc.
VentureHighway commenced operations in June 1999 and is a majority-owned
subsidiary of the Company. VentureHighway owns and operates
www.venturehighway.com, an Internet website designed to link angel investors,
venture capitalists and corporate strategic partners with small- and mid-sized
businesses seeking capital. In connection with its Internet matching services,
VentureHighway receives a nominal listing fee from the listed companies, while
prospective investors are not currently charged membership fees. If a "match" is
made and the listed company reaches an agreement with the investor for
financing, a success fee as low as 1% of the consideration received by the
listed company is paid to Kirlin. VentureHighway is planning to expand its
operations to host a full complement of investment banking services.
The Company was incorporated under the laws of the State of Delaware on
July 28, 1994.
Recent Acquisitions
First Long Island Securities, Inc.
On March 17, 2000, the Company acquired all of the outstanding stock of
First Long Island, which continues its operations as a retail-oriented brokerage
firm. First Long Island commenced operations in 1985 and is registered as a
broker-dealer with the Commission and is a member of the NASD and the SIPC.
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First Long Island is licensed to conduct activities as a broker-dealer in four
states and operates from its office in Syosset, New York. At March 17, First
Long Island maintained approximately 3,000 customer accounts, which held over
$100 million in assets, and maintained 16 registered representatives, most of
whom work on a part-time basis. First Long Island's revenues for its fiscal year
ended December 31, 1999 were $756,000 and its net income was $32,000.
Princeton Securities Corporation
On April 3, 2000, VentureHighway acquired all of the outstanding stock of
Princeton Investments Holding Corp., which, in turn, is the sole stockholder of
Princeton Securities Corporation, a retail-oriented brokerage firm. Princeton
Securities commenced operations in 1988 and is registered as a broker-dealer
with the Commission and is a member of the NASD and the SIPC. Princeton
Securities is licensed to conduct activities as a broker-dealer in 49 states and
operates from its office in Princeton, New Jersey. At April 3, Princeton
Securities maintained approximately 2,700 customer accounts, which held
approximately $145 million in assets, and employed 12 registered
representatives. Princeton Securities has a March 31 fiscal year end. On an
unaudited basis, Princeton Securities' revenues for the nine-months ended
December 31, 1999 were approximately $3,581,000 and its net income was
approximately $108,000.
Brokerage Operations
Principal Transactions
The largest portion of the Company's revenues in the last several years
(75.2% in 1997, 55.7% in 1998 and 58.7% in 1999) have been derived from
principal trading activities in equity and fixed income securities, including
merchant banking investments. 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 17, 2000, the Company
made a market in the equity securities of 26 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 Company's commission
revenue is derived from brokerage transactions in listed and over-the-counter
securities and mutual fund securities. The Company has agreements with numerous
mutual fund management companies pursuant to which the Company sells shares in a
variety of mutual funds. Mutual fund commissions are derived from standard
dealers' discounts which are a small percentage 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.
Money Management
The Company established and maintains a Managed Asset Portfolio Program
("MAPP") to manage the financial assets of its clients, for which it receives a
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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 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.
In order to provide additional money management services and investment
opportunities to its clients, Greenleaf Capital Partners II, LLC, was formed by
the Company in 1999. See the discussion of Greenleaf on page 5.
Investment and Merchant Banking
Investment banking revenue is derived principally from underwriting fees,
commissions and expense allowances, as well as the realization of gains from the
exercise of warrants, received in connection with underwriting public offerings
or acting as placement agent in private offerings. During the last three years,
the Company's investment banking activities have consisted of acting as
placement agent for three private placements in 1999, including the private
placements for VentureHighway and Greenleaf Capital, one private placement in
1998 and two private placements in 1997. 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.
Underwriting public offerings involves 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.
In addition and 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 generally 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.
In order to leverage its merchant banking activities, Greenleaf Capital
Partners II, LLC, was formed by the Company and funded by investors in 1999. See
the discussion of Greenleaf on page 5.
Clearing Broker
The Company does not hold any funds or securities of its customers. Kirlin
currently utilizes, on a fully disclosed basis, the services of Correspondent
Services Corporation ("CSC"), a wholly-owned subsidiary of PaineWebber
Incorporated. As its clearing broker, CSC processes securities transactions for
Kirlin and the accounts of its customers for which Kirlin pays CSC a fee.
Customer accounts are protected through the Securities Investor Protection
Corporation for up to $500,000, of which coverage for cash balances is limited
to $100,000. Additional protection is provided through Traveler's Casualty and
Surety Company of America for an additional $5,000,000 per regular account,
$10,000,000 per individual retirement account, $25,000,000 per business services
accounts and CSC managed program accounts, and an additional $900,000 of free
cash balance protection is provided for all securities customers. Pursuant to
the terms of the Company's agreement with its clearing broker, Kirlin 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, Kirlin would be obligated to indemnify the clearing broker for any
resulting losses. Kirlin, to date, has not experienced any material losses as a
result of the failure of its customers to satisfy their obligations.
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Government Regulation
The securities business is subject to extensive and frequently changing
federal and state laws and substantial regulation by the Commission, state
securities agencies and self-regulatory organizations, such as the NASD
Regulation, Inc. ("NASDR"), the regulatory arm of the NASD, and the Municipal
Securities Rulemaking Board ("MSRB"). Kirlin is registered as a broker-dealer
with the Commission and is a member firm of the NASD. The NASDR has been
designated by the Commission as the Company's primary regulator and it also
enforces the rules of the MSRB with respect to the Company. NASDR adopts rules,
which are subject to approval by the Commission, that govern the members of the
NASD and conducts periodic examinations of member firms' operations. Kirlin is
also registered as an investment advisor with the State of New York and is
subject to its laws and regulations regarding investment advisors.
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, advertising, 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, 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, 1999, Kirlin had total net capital of $2,495,284, or $2,112,954 in excess of
its minimum net capital requirement calculated under the aggregate indebtedness
method, as defined.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the Commission and other regulatory bodies
and ultimately may require its liquidation. The net capital rule also prohibits
payments of dividends, redemption of stock and the prepayment or payment in
respect of principal of subordinated indebtedness if net capital, after giving
effect to the payment, redemption or repayment, would be less than specified
percentages of the minimum net capital requirement (120%). Compliance with the
net capital rule could limit those operations of Kirlin that require the
intensive use of capital, such as underwriting and trading activities, and also
could restrict the Company's ability to withdraw capital from Kirlin, which in
turn, could limit the Company's ability to pay dividends, repay debt and redeem
or purchase shares of its outstanding capital stock.
Greenleaf Management Corp.
In January 1999, Greenleaf Management was formed to serve as the manager of
Greenleaf Capital Partners II, LLC, a private investment fund. In June 1999,
Greenleaf Capital raised $5,887,500 in capital contributions from its members in
a private placement coordinated by Kirlin. Greenleaf Capital may invest in
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private companies which are suitable candidates for future initial public
offerings or may invest in public companies, in which latter case such
investments are likely to involve the purchase of restricted securities from the
companies directly or from significant stockholders of companies. To date,
Greenleaf Capital has invested approximately 50% of its capital.
VentureHighway.com
VentureHighway currently offers limited capital raising activities for
companies through its matching service. VentureHighway recently acquired
Princeton Securities.
VentureHighway anticipates that this acquisition will enable it to expand
its services to provide a full complement of investment banking services, in
addition to retaining, through Princeton Securities, any matching fee earned
through its Internet matching services. VentureHighway intends to strategically
expand its growth opportunities by being able to directly sponsor private
placements and, in the future, public offerings and becoming an Internet-based
investment banking company. VentureHighway is seeking to build the resources to
be able to participate in every aspect of investment banking for corporate and
institutional clients and will act in principal, agency and advisory capacities.
To that end, VentureHighway has retained Heidrick & Struggles, a leading
international executive search firm, to assist it in identifying a
highly-experienced investment banking executive to serve as chief executive
officer. Advisory services would include advice on strategic matters, including
mergers and acquisitions, restructurings, leveraged buy-outs and other
transactions. In addition, VentureHighway may provide seed money to establish an
investment fund which would make equity investments in companies which are
viewed as suitable candidates for future initial public offerings.
In June 1999, VentureHighway entered into an agreement with Individual
Investor Group, Inc. ("INDI"), a publicly-traded corporation, pursuant to which
INDI purchased 19.9% of the then outstanding common stock of VentureHighway,
giving VentureHighway an imputed post-investment valuation of approximately
$16,000,000. In consideration for its investment, INDI agreed to provide to
VentureHighway advertising and promotion over a 30-month period having an
aggregate stated value of $3,184,000, in magazines published by INDI (e.g.,
Individual Investor [circulation 500,000] and Ticker [circulation 100,000]) and
on websites controlled by INDI (e.g., www.individualinvestor.com). In addition,
INDI purchased 150,000 shares of common stock of the Company for $750,000, which
amount the Company, in turn, invested in VentureHighway. In connection with
INDI's investment, Jonathan L. Steinberg, the Chairman and Chief Executive
Officer of INDI, became a director of VentureHighway.
In the fourth quarter of 1999, VentureHighway completed a private placement
offered through Kirlin which raised $7,650,000, giving VentureHighway an imputed
post-offering valuation of approximately $37 million. As a result of the
investment by INDI and the private placement, the Company's ownership of
VentureHighway equals 63.7%.
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.
Marketing and Advertising
The Company has pursued an aggressive marketing and advertising program
since 1989. The Company has advertised itself and its product line in order to
get a direct response from 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 primarily advertises on radio stations and in newspapers in New York,
New Jersey, Connecticut, and California and other publications, such as
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Investor's Business Daily and Barron's. 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.
INDI also provides VentureHighway advertising and promotion over a 30-month
period having an aggregate stated value of $3,184,000, in magazines published by
INDI and on websites controlled by INDI. VentureHighway projects that it will be
expending approximately $150,000 per month on advertising and promotion in
fiscal 2000, inclusive of advertising provided by INDI.
Personnel
At March 17, 2000, the Company had approximately 249 full-time employees,
including 161 registered representatives up from 153 registered representatives
at March 16, 1999 due to the opening of additional branch offices. None of the
Company's personnel is covered by a collective bargaining agreement. The Company
considers its relationships with its employees to be good.
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ITEM 2. PROPERTIES.
The principal executive offices of the Company and its subsidiaries are
located at 6901 Jericho Turnpike, Syosset, New York 11791 where the Company
leases approximately 18,600 square feet of office space at a base rent of
approximately $320,000 per year with annual increases of 3.6%. The initial term
of the lease expires in December 2004, with one option to renew for an
additional three-year period. Kirlin also operates the following branch offices:
Approximate
Approximate Annual
Office Location Square Footage Lease Rental Expiration
- --------------- -------------- ------------ ----------
4370 La Jolla Village Drive 2,720 $83,000 January 2004
San Diego, California
612 Howard Street 8,400 $277,000 March 2004
San Francisco, California
2001 Route 46 2,900 $68,000 June 2001
Parsippany, New Jersey
485 Route 1 South 5,300 $103,000 March 2004
Iselin, New Jersey
400 Andrews Street 2,400 $37,000 June 2004
Rochester, New York
675 Third Avenue 4,400 $202,000 October 2005
New York, New York
ITEM 3. LEGAL PROCEEDINGS.
The Company's business involves substantial risks of liability, including
exposure to liability under federal and state securities laws in connection with
the underwriting or distribution of securities and claims by dissatisfied
customers for fraud, unauthorized trading, churning, mismanagement and breach of
fiduciary duty. The Company does not presently maintain an errors and omissions
insurance policy insuring it against these risks. In the normal course of the
Company's business, the Company from time to time is involved in claims,
lawsuits and arbitrations brought by its customers. It is the opinion of
management that the resolution of all claims presently pending will not have a
material adverse effect on the consolidated financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock commenced quotation on the Nasdaq SmallCap
Market on January 19, 1995 following its initial public offering and on December
6, 1999, the Company commenced trading on the Nasdaq National Market. The
following table sets forth, for the periods indicated, the last sale prices for
the Common Stock as reported by Nasdaq (representing interdealer sales which do
not include retail markups, markdowns or commissions), with prices adjusted to
reflect the Company's two-for-one stock splits effected on July 30, 1999 and
March 1, 2000:
Period High($) Low($)
------ ------- ------
Fiscal 1999
Fourth Quarter 5-1/4 2-7/8
Third Quarter 4-47/64 2-3/8
Second Quarter 2-5/8 2-7/32
First Quarter 1-3/4 3/4
Fiscal 1998
Fourth Quarter 1 3/4
Third Quarter 1-35/64 15/16
Second Quarter 1-15/16 1-1/2
First Quarter 1-15/16 1-3/8
On April 7, 2000, the last sale price of the Common Stock as reported by
the Nasdaq National Market was $6.1875. On April 7, 2000, there were
approximately 60 holders of record of the Company's Common Stock and, the
Company believes, over 600 beneficial owners of the Company's Company Stock.
The Company presently intends to retain all earnings for the Company's
continued growth. 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, although this may change based upon the foregoing
factors. The Company's ability to pay dividends in the future also may be
restricted by the obligations of Kirlin to comply with the net capital
requirements imposed on broker-dealers under regulations and rules promulgated
by the Commission and the NASDR.
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Recent Sales of Unregistered Securities
During the three months ended December 31, 1999, the Company made the
following sales of unregistered securities (adjusted to reflect the Company's
stock splits effected on July 30, 1999 and March 1, 2000):
<TABLE>
If Option,
Consideration Received Warrant or
and Description of Convertible
Underwriting or Other Exemption Security,
Discounts to Market from Terms of
Price Afforded to Registration Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
------------ ----------------- ----------- ------------------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
10/27/99 Common Stock 118,800 Restricted stock awarded 4(2) N/A
to employees under 1996
stock plan; no cash
consideration received by
the Company
</TABLE>
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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. These risks are included in "Item 1: Business," "Item 6: Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
"Exhibit 99: Risk Factors" included in this Form 10-KSB. 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 during 1999 and in prior years were generated
primarily from principal trading activities and brokerage transactions. As the
Company continues to grow it is possible that the primary source of revenue
could change and be comprised from different lines of business then experienced
in the past. 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 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 may pay interest on the securities held in inventory since its
securities can be 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.
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
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with the Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-KSB (certain amounts included in the 1998 financial statements
have been reclassified, where appropriate, to conform with the 1999
presentation):
<TABLE>
Years ended December 31,
1999 1998
------------------------ ---------------------------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net $ 21,502,232 50.4% $ 8,505,373 54.7%
Commissions 11,916,529 27.9% 5,834,873 37.5%
Investment Banking 1,503,433 3.5% 421,875 2.7%
Merchant Banking 2,027,938 4.8% (263,645) (1.7)%
Other income 984,586 2.3% 1,056,607 6.8%
Increase in value attributable to subsidiary 4,738,378 11.1% 0 0.0%
-------------- ------- -------------- --------
Total revenues 42,673,096 100.0% 15,555,083 100.0%
-------------- ------- -------------- --------
Expenses:
Employee compensation and benefits 21,698,225 50.9% 11,760,624 75.6%
Promotion and advertising 1,883,973 4.4% 699,332 4.5%
Clearance and execution charges 1,267,590 3.0% 812,018 5.2%
Occupancy and communications 3,179,830 7.4% 1,925,824 12.4%
Professional fees 1,058,967 2.5% 601,933 3.9%
Interest 128,705 0.3% 408,164 2.6%
Other 1,454,584 3.4% 584,651 3.8%
-------------- ------- -------------- --------
Total expenses 30,671,874 71.9% 16,792,546 108.0%
-------------- ------- -------------- --------
Income (loss) before income tax
provision (benefit) and minority
interest in loss of subsidiary 12,001,222 28.1% (1,237,463) (8.0)%
Income tax provision (benefit) 4,808,508 11.2% (500,573) (3.2)%
-------------- ------- -------------- --------
Income (loss) before minority interest
in loss of subsidiary 7,192,714 16.9% (736,890) (4.8)%
Minority interest in loss of subsidiary 262,372 0.6% 0 0.0%
-------------- ------- ------------- --------
Net income (loss) $ 7,455,086 17.5% $ (736,890) (4.8)%
============== ======= ============== =======
</TABLE>
Results of Operations
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Results of Operations
Principal transactions, net for the year ended December 31, 1999 increased
152.8% to $21,502,232 from $8,505,373 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 year ended December 31, 1999 increased 104.2% to
$11,916,529 from $5,834,873 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.
12
<PAGE>
Investment banking for the year ended December 31, 1999 increased 256.4% to
$1,503,433 from $421,875 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 private placements.
Merchant banking for the year ended December 31, 1999 increased 869.2% to
$2,027,938 from $(263,645) in 1998 primarily as a result of appreciation in the
value and realization of certain gains on investments owned by the Company.
Other income for the year ended December 31, 1999 decreased 6.8% to
$984,587 from $1,056,607 in 1998. The decrease is primarily attributable to the
settlement of lawsuits brought by the Company in the prior year offset by
increases in transactional and account balance rebates the Company is entitled
to from the clearing broker, as well as other broker dealers it conducts
business.
Increase in value attributable to subsidiary for the year ended December
31, 1999 increased 100% to $4,738,378. This line item did not exist in 1998. The
increase is primarily attributable to the increase in the value of the Company's
investment in its subsidiary, VentureHighway, after the completion of a private
placement by the subsidiary.
Employee compensation and benefits for the year ended December 31, 1999
increased 84.5% to $21,698,225 from $11,760,624 in 1998. Since employee
compensation to the Company's traders and registered representatives is directly
related to revenue they generate, a portion of employee compensation follows the
change in the Company's revenues. The increase in employee compensation is not
directly proportionate with the increase in revenues because a portion of this
revenue increase is related to an increase in value of the Company's investment
account and subsidiary shareholder's equity, which has no relationship to
employee compensation. In addition, during the past year the Company has
increased its roster of salaried personnel.
Promotion and advertising for the year ended December 31, 1999 increased
169.4% to $1,883,973 from $699,332 in 1998 primarily as a result of the
Company's planned increase in advertising expenditures and expenses related to
VentureHighway.
Clearance and execution charges for the year ended December 31, 1999
increased 56.1% to $1,267,590 from $812,018 in 1998 as a result of higher ticket
volume.
Occupancy and communications costs for the year ended December 31, 1999
increased 65.1% to $3,179,830 from $1,925,824 in 1998. This increase is a result
of the establishment and operations of additional branch offices, the
establishment of two new companies, and the increase in the number of employees.
Professional fees for the year ended December 31, 1999 increased 75.9% to
$1,058,967 from $601,933 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, general business
consulting, and lawsuits initiated by the Company.
Interest expense for the year ended December 31, 1999 decreased 68.5% to
$128,705 from $408,164 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 year ended December 31, 1999 increased 148.8% to
$1,454,584 from $584,651 in 1998 as a result of the settlement of customer
arbitrations, expenses related to syndicate liabilities and the continuous
improvement and maintenance of the Company's websites.
13
<PAGE>
Income tax provision for the year ended December 31, 1999 was $4,808,508 as
compared to the income tax benefit of $500,573 for the year ended December 31,
1998, which was consistent with the increase in income before this income tax
provision.
Net income of $7,455,086 for the year ended December 31, 1999 compares to
net loss of $736,890 for the year ended December 31, 1998. This resulted
primarily from the increase in revenues, offset by increases in expenses as
discussed above.
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.
Liquidity and Capital Resources
Due from Clearing Broker amounted to $5,716,261 at December 31, 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,
increased positions in securities sold short, and increased receivables related
to agency commission business at December 31, 1999.
Securities owned, at market value, at December 31, 1999 were $11,894,986 as
compared to $12,768,231 at December 31, 1998. This 6.8% decrease is primarily
attributable to a decrease in securities held in inventory for resale to its
customers offset by an increase in the value of positions held in relation to
the Company's merchant banking and investment banking activities. Approximately
41% of the Company's assets at December 31, 1999 were comprised of cash and
highly liquid securities.
Furniture, Fixtures and Leasehold Improvements, net, at December 31, 1999,
increased to $1,275,727 as compared to $706,498 at December 31, 1998. This 80.6%
increase primarily results from the purchase of additional computer hardware,
furniture, and leasehold improvements in connection with the Company's new
branch offices, conversion of the Company's operational and quotation system,
and the establishment of two new companies.
Other assets increased to $3,740,513 at December 31, 1999, from $1,974,691
at December 31, 1998, a 89.4% increase. This increase is primarily attributable
to the prepaid expense related to the issuance of restricted stock to various
employees, which will be amortized over the respective vesting periods,
receivable of an insurance settlement related to a customer arbitration, and
advances provided to newly-hired registered representatives as part of the
Company's recruiting efforts.
Securities sold short amounted to $818,574 at December 31, 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 $4,232,264 at December 31, 1999 as compared to
$1,799,531 at December 31, 1998, a 135.2% increase attributable to increased
revenues upon which commission income to registered representatives is based.
Accounts payable and accrued expenses were $1,054,095 at December 31, 1999
as compared to $583,988 at December 31, 1998, a 80.5% increase primarily
attributable payables related to the Company's general business, which were
incurred in 1999 and significantly paid in 2000.
14
<PAGE>
Income taxes payable (including deferred taxes payable) were $4,549,825 at
December 31, 1999 as compared to $729,156 at December 31, 1998. This increase is
attributable to current taxes payable reflective of the adjustment for the
current period's earnings. Additionally, deferred income taxes payable increased
resulting from an increase in the value of certain securities positions in the
Company's merchant banking portfolio and investment account; and the increase in
value attributable to its subsidiary, VentureHighway.
Minority interest in Subsidiary was $2,676,080 at December 31, 1999
reflective of the investment by third parties in the voting stock of
VentureHighway not held by the Company.
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.
On March 17, 2000, the Company purchased all of the outstanding capital
stock of First Long Island for a price equal to $350,000 plus First Long
Island's stockholders' equity as of the close of business on the day immediately
prior to the closing, of which $150,000 will be paid in monthly installments
over the two-year period following the closing. The purchase price is subject to
downward adjustment based upon the value of assets under management three months
after closing and upon gross commission revenue generated during the one-year
period following closing.
On April 3, 2000, VentureHighway purchased all of the outstanding capital
stock of Princeton Investments Holding Corp., which in turn is the sole
stockholder of Princeton Securities Corporation, for a price equal to $300,000
plus Princeton Securities' stockholders' equity as of the close of business on
the day immediately prior to the closing (estimated for closing purposes at
$566,000). In addition, for a three-year period, the two former stockholders of
Princeton Investments will be paid, in the aggregate, an override equal to 10%
of monthly commissions generated by the registered representatives of Princeton
Securities as of the closing date. The override payments are subject to downward
adjustment based upon retention of these registered representatives. The
purchase price was paid from VentureHighway's working capital.
The Company believes its financial resources will be sufficient to fund the
Company's operations and capital requirements for the foreseeable future.
Year 2000
We initiated a firm-wide program to address the Year 2000 computer issue in
order to prepare our computer systems and applications to accurately process
dates after December 31, 1999. This program consisted of a series of steps to
identify all critical and non-critical systems, determine Year 2000 compliance
through inquiries and testing and to change non-compliant systems. In addition,
we contacted all of our vendors regarding this issue, and received assurances
from all of them that they did not anticipate any Year 2000 problems. Our
program was substantially in place by December 31, 1999, and, to our knowledge,
has prevented any problems associated with the Year 2000 computer issue. Our
entire program cost less than $250,000. We do not foresee the occurrence of any
Year 2000 problems in the future.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
Index to Consolidated Financial Statements: Page
----
<S> <C> <C>
Report of Goldstein Golub Kessler LLP on the Consolidated Financial
Statements as of December 31, 1999 and 1998 and for the years then ended.....................F-1
Consolidated Statements of Financial Condition as of December 31, 1999 and 1998..................F-2
Consolidated Statements of Operations for the years ended December 31, 1999
and 1998.....................................................................................F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999 and 1998...................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999
and 1998.....................................................................................F-5
Notes to the Consolidated Financial Statements...........................................F-6 to F-12
</TABLE>
<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 Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, 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 Subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Goldstein Golub Kessler LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 13, 2000, except for the second paragraph of Note 10, as
to which the date is March 17, 2000 and the third paragraph of
Note 10, as to which the date is April 3, 2000
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents (Note 1) $ 8,445,532 $ 85,092
Due from Clearing Broker 5,716,261 -
Securities Owned, at market value (Note 2):
U.S. government and agency obligations 446,509 2,261,874
State and municipal obligations 589,388 3,254,247
Corporate bonds and other securities 10,859,089 7,252,110
Furniture, Fixtures and Leasehold Improvements, at cost,
net of accumulated depreciation and amortization of $1,246,173
and $972,523, respectively (Note 1) 1,275,727 706,498
Other Assets 3,740,513 1,974,691
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 31,073,019 $15,534,512
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased, at market value (Note 2) $ 818,574 $ 641,739
Payable to clearing broker (Note 1) - 3,467,579
Accrued compensation 4,232,264 1,799,531
Accounts payable and accrued expenses 1,054,095 583,988
Income taxes payable (including deferred taxes payable of
$3,482,940 and $728,060, respectively) 4,549,825 729,156
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 10,654,758 7,221,993
- ----------------------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary 2,676,080 -
- ----------------------------------------------------------------------------------------------------------------------
Commitments (Note 6)
Stockholders' Equity (Note 3):
Common stock - $.0001 par value; authorized 15,000,000 shares,
issued and outstanding 6,247,628 and 5,605,528 shares, respectively 625 561
Additional paid-in capital 8,328,418 6,353,906
Retained earnings 9,413,138 1,958,052
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,742,181 8,312,519
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $31,073,019 $15,534,512
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
Year ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Principal transactions, net (Notes 1 and 2) $21,502,232 $ 8,505,373
Commissions 11,916,529 5,834,873
Investment banking 1,503,433 421,875
Merchant banking 2,027,938 (263,645)
Other income 984,586 1,056,607
Increase in value attributable to subsidiary 4,738,378 -
- ----------------------------------------------------------------------------------------------------------------------
42,673,096 15,555,083
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Employee compensation and benefits 21,698,225 11,760,624
Promotion and advertising (Note 1) 1,883,973 699,332
Clearance and execution charges 1,267,590 812,018
Occupancy and communications 3,179,830 1,925,824
Professional fees 1,058,967 601,933
Interest 128,705 408,164
Other 1,454,584 584,651
- ----------------------------------------------------------------------------------------------------------------------
30,671,874 16,792,546
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax (provision) benefit and
minority interest in loss of subsidiary 12,001,222 (1,237,463)
Income tax (provision) benefit (Note 8) (4,808,508) 500,573
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest in loss of subsidiary 7,192,714 (736,890)
Minority interest in loss of subsidiary 262,372 -
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 7,455,086 $ (736,890)
======================================================================================================================
Basic earnings (loss) per common share $ 1.25 $ (.13)
======================================================================================================================
Diluted earnings (loss) per common share $ 1.20 $ (.13)
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years ended December 31, 1999 and 1998
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Retained
Shares Par Value Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stockholders' equity at
January 1, 1998 5,440,528 544 $5,869,236 $2,694,942 $ 8,564,722
Stock issuance 165,000 17 484,670 - 484,687
Net loss - - - (736,890) (736,890)
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity at
December 31, 1998 5,605,528 561 6,353,906 1,958,052 8,312,519
Stock issuance 642,100 64 1,974,512 - 1,974,576
Net income - - - 7,455,086 7,455,086
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity at
December 31, 1999 6,247,628 625 $8,328,418 $9,413,138 $17,742,181
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
- --------------------------------------------------------------------------------
<TABLE>
Year ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,455,086 $ (736,890)
- ----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 462,950 258,897
Deferred income taxes 2,754,880 (469,636)
Investment by minority shareholders 2,938,452 -
Minority interest in loss of subsidiary (262,372) -
Noncash compensation 1,127,826 -
(Increase) decrease in operating assets:
Receivable from clearing broker (5,716,261) -
Securities owned, at market value 873,245 1,863,167
Other assets (1,765,822) (865,132)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at market value 176,835 (957,540)
Payable to clearing broker (3,467,579) 639,060
Accrued compensation 2,432,733 (394,612)
Accounts payable and accrued expenses 470,107 75,435
Income taxes payable 1,065,789 -
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments 1,090,783 149,639
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 8,545,869 (587,251)
Cash flows used in investing activity - purchase of furniture, fixtures
and leasehold improvements (1,032,179) (128,563)
Cash flows provided by financing activity - issuance of common stock 846,750 484,687
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 8,360,440 (231,127)
Cash and cash equivalents at beginning of year 85,092 316,219
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,445,532 $ 85,092
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 109,758 $ 408,164
======================================================================================================================
Income taxes $ 762,354 $ 50,705
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. ORGANIZATION AND The consolidated financial statements include the accounts of Kirlin Holding Corp.
SUMMARY OF ("KHC") and its wholly owned subsidiaries, Kirlin Securities, Inc. ("Kirlin"),
SIGNIFICANT ACCOUNTING Greenleaf Management Corp. ("Greenleaf") and its majority-owned (63.7%) subsidiary,
POLICIES: 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. Kirlin also offers a managed assets portfolio program to
manage the financial assets of its clients. VentureHighway was incorporated March 1,
1999 and commenced operations on June 1, 1999. VentureHighway operates a branded web
site designed to match companies seeking funding with qualified investors. Greenleaf
was formed in January 1999 to serve as the manager of a private investment fund which
was capitalized in June 1999 to invest in one or more selected companies. 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.
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 Company to off-balance-sheet
risk in the event that customers do not fulfill their obligations with the clearing
broker, as Kirlin has agreed to indemnify the clearing broker for any resulting losses.
At December 31, 1999, substantially all of the securities owned and securities sold,
not yet purchased, and the amount due from clearing broker reflected in the
consolidated statement of financial condition are security positions with and amounts
due from this 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 operations.
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.
</TABLE>
F-6
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Company expenses the costs of advertising the first time the advertising takes
place. Advertising expense was approximately $1,624,000 and $483,000 for the years
ended December 31, 1999 and 1998, respectively.
Management does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on the
accompanying consolidated financial statements.
2. SECURITIES OWNED AND Securities sold, not yet purchased, consist of the following:
SECURITIES SOLD,
NOT YET PURCHASED: December 31, 1999 1998
----------------------------------------------------------------------------------------
State and municipal obligations $240,926 $285,875
Corporate bonds and other securities 577,648 355,864
----------------------------------------------------------------------------------------
$818,574 $641,739
=========================================================================================
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, 1999 and 1998 are
stock warrants and investments in privately held companies not readily marketable
amounting to approximately $8,767,000 and $4,083,000, respectively (49% each year
of stockholders' equity) which have been valued at fair value as determined by
management. The warrants are valued based on a percentage of the market value of
the underlying securities. The resulting unrealized gains and losses are reflected
in principal transactions.
3. STOCKHOLDERS' EQUITY: During June 1999, the Company declared a 2-for-1 stock split. All references to
shares and price per share have been adjusted to reflect this stock split.
The Company authorized 1,000,000 shares of preferred stock, par value $.001 per
share. No shares have been issued as of December 31, 1999.
In August 1994, the Company adopted the 1994 Stock Plan ("1994 Plan") covering
2,400,000 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. In April 1996, the
Company adopted the 1996 Stock Plan ("1996 Plan") covering 4,000,000 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. At December 31, 1999, options to
</TABLE>
F-7
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
purchase 681,300 shares of common stock at an exercise price between $1.25 and $6.8125
per share are outstanding. Such options vest over periods of up to three years and
are exercisable at various dates through January 2004.
The following table summarizes the 1999 and 1998 activity in the Company's stock
options:
</TABLE>
<TABLE>
Number Price per
of Shares Share
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 169,000 $ 1.25 - $ 2.50
Forfeited during the year (8,000) $ 1.25 - $ 2.065
---------------------------------------------------------------------------------------
Balance at December 31, 1998 161,000 $ 1.25 - $ 2.50
Granted during the year 646,000 $ 1.9375 - $6.8125
Exercised during the year (53,700) $ 1.25 - $ 2.50
Forfeited during the year (72,000) $ 1.25
-----------------------------------------------------------------------------------------
Balance at December 31, 1999 681,300 $ 1.25 - $6.8125
=========================================================================================
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
</TABLE>
<TABLE>
Remaining
Number Contractual
Exercise Price Outstanding Life
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
$2.50 1,300 61 months
$2.0625 4,000 55 months
$1.25 30,000 73 months
$1.9375 321,000 109 months
$2.96875 10,000 114 months
$6.8125 305,000 115 months
$6.125 10,000 118 months
------------------------------------------------------------------------------------
$1.25 - $6.8125 681,300
====================================================================================
As of December 31, 1999, 1,300 and 2,667 options with exercise prices of $2.50 and
$2.0625 per share, respectively, were exercisable.
</TABLE>
F-8
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
During the year ended December 31, 1999, the Company granted 288,400 shares of
restricted stock to employees of KSI with a market value of approximately
$1,128,000. These shares vest as follows:
</TABLE>
<TABLE>
Date Shares
-------------------------------------------------------------------------------------
<S> <C> <C>
July 1, 2000 2,000
January 1, 2001 93,965
June 1, 2001 25,000
July 1, 2001 2,000
January 1, 2002 93,968
June 1, 2002 25,000
July 1, 2002 2,000
December 31, 2002 15,000
January 1, 2003 29,467
------------------------------------------------------------------------------------
288,400
====================================================================================
</TABLE>
<TABLE>
<S> <C>
The Company has adopted the disclosure-only provisions of Statement of Financing
Accounting Standards ("SFAS") No. 123, Accounting for Stock-based Compensation.
Accordingly, no compensation costs have been recognized for the options granted.
Had compensation cost been determined based on the fair value at the date of grant
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
and earnings (loss) per common share would have been as follows:
</TABLE>
<TABLE>
Year ended December 31, 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $7,455,086 $(736,890)
Net income (loss) - pro forma 7,196,736 (855,390)
Basic earnings (loss) per common
share - as reported 1.25 (.13)
Basic earnings (loss) per common share -
pro forma 1.20 (.15)
Diluted earnings (loss) per common
share - as reported 1.20 (.13)
Diluted earnings (loss) per common share -
pro forma 1.16 (.15)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. For options granted prior to 1999, the
following assumptions were used: expected volatility of 40%, risk-free interest
rate of approximately 7% and expected option lives of six years. For options
granted during 1999 the following assumptions were used: expected volatility of
79%, risk-free interest rate of approximately 6% and expected option lives of 10
years.
The pro forma disclosures are not likely to be representative of the effects on
reported net income for future periods.
F-9
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. NET CAPITAL As a registered broker-dealer, Kirlin is subject to the SEC's Uniform Net Capital Rule
REQUIREMENT: 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, 1999 and 1998, Kirlin had net capital, as defined, of $2,495,284 and
$1,353,358, respectively, which exceeded the minimum net capital requirements by
$2,112,954 and $1,103,358, respectively. Kirlin's ratio of aggregate indebtedness to
net capital was 2.3-to-1 and 1.97-to-1 at December 31, 1999 and 1998, respectively.
5. RETIREMENT AND SAVINGS Kirlin sponsors a Retirement and Savings Plan for all full-time employees over the age
PLAN: of 19 pursuant to Section 401(k) of the Internal Revenue Code. Kirlin matches 50% of
each participant's contribution up to $1,500 per participant per year. Kirlin's
contributions to the plan for the years ended December 31, 1999 and 1998 were
approximately $84,000 and $104,000, respectively.
6. COMMITMENTS: Kirlin leases office space at several locations under noncancelable leases expiring at
various times through December 31, 2005. The approximate minimum annual rental
payments for these leases are as follows:
</TABLE>
<TABLE>
Year ending December 31,
<S> <C> <C>
2000 $1,048,000
2001 1,040,000
2002 1,028,000
2003 1,043,000
2004 661,000
2005 160,000
- ------------------------------------------------------------------------------------------------------------------
$4,980,000
==================================================================================================================
</TABLE>
<TABLE>
<S> <C>
The leases contain provisions for escalations based on increases in certain costs
incurred by the lessor. Rent expense was approximately $894,000 and $492,000 for
the years ended December 31, 1999 and 1998, respectively.
Kirlin has a letter of credit with its clearing broker for the benefit of a
landlord, in the amount of $100,000. At December 31, 1999, there were no amounts
drawn down on this letter of credit.
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 of these warrants.
</TABLE>
F-10
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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.
8. INCOME TAXES: The Company files consolidated federal income tax returns and separate Company state
income tax returns. Commencing October 18, 1999, VentureHighway will file federal
income tax returns on a stand-alone basis.
</TABLE>
The income tax (provision) benefit consists of:
<TABLE>
Year ended December 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(1,410,141) $ 73,349
State (643,487) (42,412)
------------------------------------------------------------------------------------
(2,053,628) 30,937
------------------------------------------------------------------------------------
Deferred:
Federal (2,115,654) 345,851
State (639,226) 123,785
-------------------------------------------------------------------------------------
(2,754,880) 469,636
-------------------------------------------------------------------------------------
$(4,808,508) $500,573
=====================================================================================
The provision (benefit) for income taxes for the years ended December 31, 1999 and
1998 differs from the amount computed using the federal statutory rate of 34% as a
result of the following:
1999 1998
-------------------------------------------------------------------------------------
Tax (benefit) at federal statutory rate 34 % (34)%
State income taxes, net of federal benefit 7 (7)
Other (1) 1
-------------------------------------------------------------------------------------
40 % (40)%
=====================================================================================
The deferred tax asset (liability) results from the following:
1999 1998
--------------------------------------------------------------------------------------
Unrealized appreciation on investment
securities not readily marketable $(4,372,235) $(1,051,164)
Other temporary differences 889,295 322,007
--------------------------------------------------------------------------------------
$(3,482,940) $ (729,157)
======================================================================================
</TABLE>
F-11
<PAGE>
KIRLIN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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>
<TABLE>
Year ended December 31, 1999
------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS:
Income available to common
stockholders $7,455,086 5,990,043 $1.25
Effect of dilutive securities - options 209,670
------------------------------------------------------------------------------------
Diluted EPS:
Income available to common
stockholders and assumed
exercise $7,455,086 6,199,713 $1.20
====================================================================================
Year ended December 31, 1998
------------------------------------------------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------------------
Basic and diluted EPS:
Distribution of loss to
common stockholders $ (736,890) 5,603,720 $(.13)
==================================================================================================================
</TABLE>
<TABLE>
<S> <C>
The incremental shares from assumed conversions of options are not included for
the year ended December 31, 1998 since their inclusion would be anti-dilutive.
10. SUBSEQUENT EVENTS: In February 2000, the Company declared a 2-1 stock split. This stock split has not
been adjusted for in these financial statements.
On March 17, 2000, KHC acquired all of the outstanding capital stock of First Long
Island Securities, Inc., a retail-oriented brokerage firm.
In addition, on April 3, 2000, VentureHighway acquired all of the outstanding capital
stock of Princeton Investments Holding Corp., which in turn, owns all of the
outstanding capital stock of Princeton Securities Corporation, a retail-oriented
brokerage firm.
</TABLE>
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 2000.
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.
29
<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: April 13, 2000
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>
Signatures Title Date
- ------------------------ ----------------------------------- --------------
<S> <C> <C>
/s/ David O. Lindner Chairman of the Board of Directors April 13, 2000
- ------------------------ and Chief Executive Officer
David O. Lindner (Principal Executive Officer)
/s/ Anthony J. Kirincic Director, President and Chief April 13, 2000
- ------------------------- Financial Officer (Principal Financial
Anthony J. Kirincic Officer)
/s/ Barry Shapiro Controller (Principal April 13, 2000
- ------------------------ Accounting Officer)
Barry Shapiro
/s/ Edward J. Casey Director April 13, 2000
- ------------------------
Edward J. Casey
/s/ Harold Paul Director April 13, 2000
- ------------------------
Harold Paul
</TABLE>
30
<PAGE>
EXHIBIT INDEX
<TABLE>
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 Indemnification Agreement, dated B 10.9
November 14, 1995, between the Registrant
and Edward J. Casey
10.5 Indemnification Agreement, dated February D 10.6
5, 1998, between the Registrant and
Edmund McCormick
10.6 Stock Option Agreement, dated January 11, F 10.7
1999, between the Registrant and David O.
Lindner
10.6.1 Schedule of Omitted Document in the form F 10.7.1
of Exhibit 10.6, including material detail in
which such document differs from Exhibit
10.6
10.7 Stock Option Agreement, dated January 11, F 10.8
1999, between the Registrant and Edward
J. Casey
10.7.1 Schedule of Omitted Document in the form F 10.8.1
of Exhibit 10.7, including material detail in
which such document differs from Exhibit
10.7
10.8 Restricted Stock Agreement, dated January F 10.9
11, 1999, between the Registrant and Barry
Shapiro
10.9 Agreement, dated as of June 2, 1999, G 10.10
between Individual Investor Group, Inc.,
Registrant and VentureHighway.com Inc.
</TABLE>
31
<PAGE>
<TABLE>
Incorporated
Exhibit By Reference No. in
Number Description from Document Document Page
- ------ ----------- ------------- -------- ----
<S> <C> <C> <C> <C>
10.10 Stockholder Agreement, dated as of June 2, G 10.11
1999, between Individual Investor Group,
Inc., Registrant and VentureHighway.com
Inc.
10.11 Stock Option Agreement, dated as of July 8, H 10.10
1999, between the Company and Harold
Paul
10.12 Amendment, dated as of March 24, 2000, to -- -- Filed
Agreement dated as of June 2, 1999, Herewith
between Individual Investor Group, Inc.,
Registrant and VentureHighway.com Inc.
21 List of Subsidiaries -- Filed
Herewith
27.1 Financial Data Schedule (12/31/99) -- -- Filed
Herewith
99 Risk Factors - - Filed
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.
D. Registrant's Form 10-KSB for the fiscal year ended December 31, 1997.
E. Registrant's Form 10-KSB for the fiscal quarter ended March 31, 1998.
F. Registrant's Form 10-KSB for the fiscal year ended December 31, 1998.
G. Current Report on Form 8-K of Individual Investor Group, Inc. (SEC File No.
1-10932), dated June 16, 1999.
H. Registrant's Form 10-QSB for the fiscal quarter ended June 30, 1999.
32
VENTUREHIGHWAY.COM INC.
6901 Jericho Turnpike
Syosset, New York 11791
March 17, 2000
Mr. Jonathan Steinberg
Chief Executive Officer
Individual Investor Group, Inc.
125 Broad Street, 14th Floor
New York, NY 10004
Re: Agreement, Dated as of June 2, 1999 by and among Kirlin Holding Corp.
("Kirlin"), Individual Investor Group, Inc. ("Indi") and
Venturehighway.com Inc. ("Venturehighway") the "Agreement")
-----------------------------------------------------------------
Dear Jonathan:
As you are aware, if Venturehighway, either directly or through a
subsidiary, did not become registered with the Securities and Exchange
Commission ("SEC") as a broker-dealer and become a member of the National
Association of Securities Dealers, Inc.("NASD") by December 31, 1999, Indi had
the right, exercisable by written notice to Venturehighway on or prior to
January 31, 2000, to terminate the Agreement. Based upon the fact that Kirlin
entered into a contract to acquire Princeton Securities Corporation
("Princeton") in October 1999 (which contract is being assigned to
Venturehighway at cost immediately prior to the closing), and as a result of our
communications to you that regulatory approval of the NASD has been pending,
Indi did not exercise its rights to terminate the contract. A closing of the
Princeton acquisition by Venturehighway is presently scheduled for Monday, April
3, 2000. This letter is intended to memorialize our agreement that
Venturehighway has until May 1, 2000 to acquire Princeton with Indi waiving its
right to terminate the Agreement pending such acquisition, provided that, if
Venturehighway does not acquire Princeton by May 1, 2000, Indi shall have the
right to terminate the Agreement thereafter at any time up through and including
May 31, 2000.
<PAGE>
Mr. Jonathan Steinberg
March 17, 2000
Page 2
Kindly confirm your agreement to the foregoing by countersigning this
letter and returning it to me.
Venturehighway.com Inc.
/s/ David O. Lindner
By:________________________
David O. Lindner, Chairman
and Chief Executive Officer
Agreed to and Accepted:
Kirlin Holding Corp.
/s/ Anthony J. Kirincic
By:__________________________
Anthony J. Kirincic,
President
Individual Investor Group, Inc.
/s/ Jonathan Steinberg
By:___________________________
EXHIBIT 21
Subsidiaries of Registrant
--------------------------
Percentage State of
Name Ownership Organization
- -------- ---------- --------------
Kirlin Securities, Inc. 100% Delaware
Greenleaf Management Corp. 100% New York
VentureHighway.com Inc. 63.7% New York
First Long Island Securities, Inc. 100% New York
Princeton Investments
Holding Corp. 100%(1) New Jersey
Princeton Securities
Corporation 100%(2) New Jersey
- -----------------------------------------
(1) Owned by VentureHighway.com Inc.
(2) Owned by Princeton Investments Holding Corp.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,445,532
<SECURITIES> 11,894,986
<RECEIVABLES> 9,456,774
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,797,292
<PP&E> 2,521,900
<DEPRECIATION> (1,246,173)
<TOTAL-ASSETS> 31,073,019
<CURRENT-LIABILITIES> 13,330,838
<BONDS> 0
<COMMON> 625
0
0
<OTHER-SE> 17,741,556
<TOTAL-LIABILITY-AND-EQUITY> 31,073,019
<SALES> 42,673,096
<TOTAL-REVENUES> 42,673,096
<CGS> 24,849,788
<TOTAL-COSTS> 24,849,788
<OTHER-EXPENSES> 5,693,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,705
<INCOME-PRETAX> 12,001,222
<INCOME-TAX> 4,808,508
<INCOME-CONTINUING> 262,372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,455,086
<EPS-BASIC> 1.25
<EPS-DILUTED> 1.20
</TABLE>
EXHIBIT 99
Risk Factors
You should carefully consider the risks described below before you decide
to invest in our company. The risks described below are not the only ones facing
us. Additional risks not presently known to us or that we currently believe are
immaterial may also impair our business operations. Our business, financial
condition or results of operation could be materially adversely affected by any
of these risks. The trading price of our common stock could decline because of
any one of these risks, and you may lose all or part of your investment.
A downturn in the securities markets may cause our revenues to decline and harm
our business.
Our business, and the securities industry generally, is directly affected
by many factors that are beyond our control and that could cause a downturn in
the securities markets, including the following factors:
o national and international political and economic
conditions;
o broad trends in business and finance;
o interest rate levels and changes in interest rate levels;
o changes in tax laws; and
o changes in government and self-regulatory organization
regulations.
If there is a market downturn, our revenues are likely to decline and, if
we were unable to reduce our expenses at the same pace, our results of operation
would deteriorate. For example:
o A market downturn could lead to a decline in the volume of
transactions that we execute for our customers and would
reduce the revenues we receive from commissions and spreads.
o A market downturn that reduces the value of our clients'
portfolios or increases the amount of withdrawals would
reduce the revenues we receive from our asset management
business.
o A market downturn could reduce the number and size of
transactions for which we provide underwriting or placement
agent services.
Our business is subject to risks of losses from trading activities.
Our proprietary trading activities involve the purchase, sale or short sale
of securities as principal. We face the risk of changes in the market prices of
those securities and the risk of a decrease in the liquidity of markets for
those securities, which could limit our ability to resell securities purchased
or to repurchase securities sold in principal transactions. Our trading
department maintains inventories of equity and debt securities on both a long
and short basis. If we have any long positions (i.e., own securities), a
downturn in the market could reduce the value of our positions and result in
losses. Conversely, if we have short positions (i.e., have sold securities we do
not own), an upturn in the market could expose us to unlimited losses as we
attempt to cover our short position by acquiring securities in a rising market.
<PAGE>
Our business is subject to risks of losses from underwriting activities.
Our business is subject to risks of losses from underwriting activities. As
an underwriter, we commit to purchasing securities from an issuer and assume the
risk that we may not be able to resell such securities to our customers. As we
increase our underwriting business and serve as manager or co-manager of public
offerings of securities, we expect to make increased commitments of our capital
for this purpose and thus increase our exposure to this risk. Further, we expect
that increased underwriting activity will also increase our commitment of
capital for the purpose of making a market in these securities following an
offering. The increased concentration of our capital in these securities will
increase our exposure to trading risks regarding these securities.
Under applicable law, as an underwriter we are subject to substantial
potential liability for misstatements or omissions of material facts in
prospectuses and other communications with respect to such offerings and we may
not be able to obtain indemnification from the issuers of these securities for
this liability.
Our business is subject to risks of losses from long term and speculative
merchant banking investments.
We make long term merchant banking investments that are usually speculative
and involve a high degree of risk. The long term nature of these investments
also increases our exposure to market risks and restricts the use of our capital
for longer periods of time. Since these investments are sometimes illiquid, we
may be unable to realize gains or reduce losses during periods of fluctuating
values of these investments
Because of the present level of our capital (we had stockholders' equity of
$17,742,181 at December 31, 1999), a large reduction in value of one or more of
our investments could have a significant impact on our capital.
Our merchant banking and proprietary trading investments may cause our operating
results to fluctuate widely regardless of whether we have liquidated our
investments and actually realized gain or loss.
We must value our merchant banking and proprietary trading investments on a
quarterly basis at a price related to the current market prices of such
securities. Accordingly, a large fluctuation in the market prices of these
securities, regardless of whether we have liquidated them and actually realized
gain or loss, can have a significant impact upon our results of operation for
that quarter, particularly so since we had total revenues of $42,673,096 in the
last fiscal year.
We may have difficulty effectively managing our growth.
We expect our business to grow in several areas:
o We expect to expand our retail brokerage operations by both
hiring registered representatives and acquiring other
broker-dealers.
2
<PAGE>
o We have been increasing our investment banking activities
and anticipate engaging in more underwritings and private
placements in the future.
o We anticipate a greater level of merchant banking business,
particularly through investments made by Greenleaf Capital
Partners II, LLC, a private investment fund we established
this year. We are also committing resources to our
majority-owned subsidiary, VentureHighway.com Inc., which
owns and operates a branded website designed to match
companies seeking funding from qualified investors and, in
the future, will engage in public offerings or private
placements over the Internet.
Our current senior management has limited experience managing a rapidly
growing enterprise and may not be able to effectively manage our growth.
We depend on David O. Lindner and Anthony J. Kirincic and the loss of either of
their services could harm our business.
We place substantial reliance upon the efforts and abilities of our two key
executive officers: David O. Lindner, Chairman and Chief Executive Officer, and
Anthony J. Kirincic, President and Chief Financial Officer. The loss of the
services of either of them could have a material adverse effect on our business,
operations, revenues or prospects. We do not have employment agreements with
either of Messrs. Lindner or Kirincic, although we are considering entering into
such agreements. We do not maintain and we do not intend to obtain key man
insurance on the lives of Messrs. Lindner or Kirincic.
Intense competition from existing and new entities may adversely affect our
revenues and profitability.
The securities industry is rapidly evolving, intensely competitive and has
few barriers to entry. We expect competition to continue and intensify in the
future. Many of our competitors have significantly greater financial, technical,
marketing and other resources than us. Some of our competitors also offer a
wider range of services and financial products than us and have greater name
recognition and a larger client base. These competitors may be able to respond
more quickly to new or changing opportunities, technologies and client
requirements and may be able to undertake more extensive promotional activities,
offer more attractive terms to clients, and adopt more aggressive pricing
policies. We cannot assure you that we will be able to compete effectively with
current or future competitors or that the competitive pressures faced by us will
not harm our business.
3
<PAGE>
We rely very heavily on our clearing broker, Correspondent Services Corporation,
and termination of our agreement with it could disrupt our business.
Correspondent Services Corporation acts as our clearing broker. It
processes all securities transactions for our account and for the accounts of
our clients. It also provides billing services, extends credit and provides for
control and receipt, custody and delivery of securities. We depend upon the
operational capacity and ability of Correspondent Services Corporation for the
orderly processing of transactions. In addition, by engaging the processing
services of a clearing firm, we are exempt from some capital reserve
requirements and other regulatory requirements imposed by federal and state
securities laws. Our clearing agreement may be terminated by Correspondent
Services Corporation upon 90 days' prior written notice. Termination of this
agreement could disrupt our business since we would find it necessary to engage
another clearing firm.
Our clearing broker extends credit to our clients and we are liable if our
clients do not pay.
We permit our clients to purchase securities on a margin basis or sell
securities short, which means that our clearing firm extends credit to the
client secured by cash and securities in the clients' account. During periods of
volatile markets the value of the collateral held by our clearing broker could
fall below the amount borrowed by the client. If margin requirements are not
sufficient to cover losses, our clearing broker sells or buys securities at
prevailing market prices, and may incur losses to satisfy client obligations. We
have agreed to indemnify our clearing broker for losses it incurs while
extending credit to our clients.
Employee misconduct could harm us and is difficult to detect and deter.
We run the risk that employee misconduct could occur. Misconduct by
employees could include binding us to transactions that exceed authorized limits
or present unacceptable risks, or hiding from us unauthorized or unsuccessful
activities. This type of misconduct could result in unknown and unmanaged risks
or losses. Employee misconduct could also involve the improper use of
confidential information, which could result in regulatory sanctions and serious
reputational harm. The precautions we take to prevent and detect this activity
may not be effective to deter or prevent misconduct.
We are currently subject to extensive securities regulation, and the failure to
comply could subject us to penalties or sanctions.
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC, the NASD and other
self-regulatory organizations, such as the various stock exchanges and the
Municipal Securities Rulemaking Board, and state securities commissions all
require strict compliance with their rules and regulations. Failure to comply
with any of these laws, rules or regulations could result in censure, the
imposition of a fine, the issuance of a cease-and-desist order or in suspension
or expulsion of us or any of our officers or employees, any of which could harm
our business.
4
<PAGE>
Failure to comply with net capital requirements could subject us to suspension
or revocation by the SEC or suspension or expulsion by the NASD.
The SEC and the NASD have stringent rules with respect to the maintenance
of specific levels of net capital by broker-dealers. Our failure to maintain the
required net capital may result in a suspension or revocation of our
registration by the SEC or in a suspension or expulsion of our membership by the
NASD. A change in the net capital rules, the imposition of new rules or any
unusually large charge against net capital could limit our operations that
require the extensive use of our capital. A significant operating loss or any
unusually large charge against net capital also could adversely affect our
ability to expand or maintain our present levels of business, which could harm
our business.
The success of VentureHighway is dependent upon market acceptance for recently
introduced services and on-line commerce.
VentureHighway's success will depend on the willingness of entrepreneurs
and investors to use on-line services as a method to seek capital and business
opportunities. We cannot assure you that entrepreneurs or investors will use
on-line services for this purpose or will use the services of VentureHighway.
A significant percentage of our common stock is held by our directors and
executive officers, who can significantly influence all actions by our company
requiring a vote of our stockholders.
Our directors and executive officers own approximately 46.7% of our
outstanding common stock. Accordingly, management is in a position to
significantly influence the election of the directors of our company and all
other matters that are put to a vote of our stockholders.
We may issue preferred stock with preferential rights which may adversely affect
your rights.
The rights of the holders of our common stock will be subject to and may be
adversely by the rights of holders of any preferred stock that may be issued by
us in the future. Our articles of incorporation authorize our board of directors
to issue up to 1,000,000 shares of "blank check" preferred stock, and to fix the
rights, preferences, privilege and restrictions, including voting rights, of
these shares without further stockholder approval. To date, we have not issued
any shares of preferred stock.
5
