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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
FOR THE FISCAL YEAR ENDED JUNE 30, 2002 COMMISSION FILE NUMBER 000-22996
GILMAN + CIOCIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2587324
(State or jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK, 12603
(address of principal executive offices)
(845) 485-3300
(Registrant's Telephone Number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
Check whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[ ] No [X]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting and non-voting
common equity held by non-affiliates as of April 10, 2003 was $4,477,418
based on a sale price of $0.65.
As of April 10, 2003, 9,816,979 shares of the registrant's common
equity were outstanding.
Transitional Small Business Disclosure Format (check one): Yes[ ] No [X]
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Gilman + Ciocia, Inc. (the "Company") previously filed its Form 10-K for the
year ended June 30, 2002 with unaudited financial statements as of and for the
year ended June 30, 2002. This Amendment to Form 10-K includes audited financial
statements and an opinion of Grant Thornton LLP, and replaces and supersedes the
Company's previously filed 10-K in its entirety.
GILMAN + CIOCIA, INC.
REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I
Item 1. Description of Business ........................................................................3
Item 2. Properties.....................................................................................17
Item 3. Legal Proceedings..............................................................................17
Item 4. Submission of Matters to a Vote of Security Holders............................................17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..........................18
Item 6. Selected Consolidated Financial Data...........................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................34
Item 8. Consolidated Financial Statements and Supplementary Data.......................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........70
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................71
Item 11. Executive Compensation.........................................................................74
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters........................................................................................81
Item 13. Certain Relationships and Related Transactions.................................................83
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................84
SIGNATURES.................................................................................................86
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, the
"Company" or "Gilman + Ciocia(R)" or "G+C" or "GTAX") is a corporation that was
organized in 1981 under the laws of the State of New York and reorganized under
the laws of the State of Delaware in 1993. The Company provides financial
planning services including securities brokerage services, insurance and
mortgage agency services. The Company also provides federal, state and local tax
preparation to individuals, predominantly in the middle and upper income
brackets. As of June 30, 2002, the Company had 121 offices operating in 15
states.
The Company's June 30, 2002 consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
suffered recurring losses from operations that raise substantial doubt about its
ability to continue as a going concern. Management and the Board of Directors
continue to explore a number of strategic alternatives regarding its remaining
assets and the use of its cash on-hand, and are also identifying and
implementing internal actions to improve the Company's liquidity and operations.
These alternatives have included selling some of the Company's tax and financial
planning practices, which in any such case could result in a significant shift
in the Company's business. As discussed below and in Note 20 to the Consolidated
Financial Statements, on November 26, 2002, the Company completed the sale of
certain assets of the Company to Pinnacle Taxx Advisors LLC, and more recently
completed the sale of a limited number of additional offices. Additionally, on
November 27, 2002, the Company entered into a debt forbearance agreement with
Wachovia Bank. However, except for these transactions (which are discussed more
fully in Note 20 to the Consolidated Financial Statements), the consolidated
financial statements do not include any adjustments as a result of these events
or from the uncertainty of a shift in the Company's business.
In Fiscal 2002, the Company had total revenues of $93.0 million
representing a decrease of $11.9 million, or 11.3%, compared to $104.9 million
in Fiscal 2001. This reduction was primarily attributed to the significant
reduction in commissions from financial planning services provided to its
clients, which decreased $10.4 million or 12.2% to $75.2 million in Fiscal 2002,
from $85.6 million in Fiscal 2001. In addition, revenues from tax preparation
decreased by $0.3 million, or 1.5% to $17.3 million in Fiscal 2002, from $17.6
million in Fiscal 2001. In Fiscal 2002, the revenues derived from our on-line
tax preparation business and in-house direct mail business decreased by $1.3
million, or 67.3% to $0.5 million from $1.8 million in Fiscal 2001. For segment
profits and use of assets, refer to Management's Discussion and Analysis and
Segments (See Note 16 to Consolidated Financial Statements). In Fiscal 2002,
80.8% of the Company's revenues were derived from commissions on financial
planning services, 18.6% were from tax preparation with the remaining 0.6%
derived from our on-line tax preparation business and in-house direct mail
business. During Fiscal 2002 the Company prepared approximately 76,300 federal
and state tax returns. The decline in revenues from tax preparation is
attributable to a reduction in on-line returns prepared and the impact of some
tax preparer attrition and reduced tax preparation marketing, offset by
acquisitions. The reduction in financial planning revenue for Fiscal 2002 was a
product of the declining financial markets. The declining financial markets
resulted in declines in the volume of securities transactions and in market
liquidity, which resulted in lower revenues from trading activities and
commissions.
During Fiscal 2002, the Company restated its financial statements to
restate gross revenue for Fiscal 2001 by a reduction of $0.6 million, which is
reflected in the numbers above and throughout this document. (See Note 2a of the
Notes to Consolidated Financial Statements, "Restatements")
RECENT DEVELOPMENTS
The Company has become aware that it is the subject of a formal
investigation by the Securities and Exchange Commission ("SEC"). The Company
believes that the investigation concerns, among other things, the restatement of
the Company's financial results for the fiscal year ended June 30, 2001 and the
fiscal quarters ended March 31, 2001 and December 31, 2001 (which have been
previously disclosed in the Company's amended quarterly and annual reports for
such periods), the Company's delay in filing a Form 10-K for the fiscal year
ended June 30, 2002 and the Company's past accounting and recordkeeping
practices. The Company had previously received informal, non-public inquiries
from the SEC regarding certain of these matters. On March 13, 2003, three of the
Company's executives received subpoenas from the SEC requesting them to produce
documents and provide testimony in connection with the formal investigation. In
addition, on March 19, 2003 the Company received a subpoena requesting documents
in connection with such investigation. The Company and its executives intend to
comply fully with the requests contained in the subpoenas and with the SEC's
investigation. The Company does not believe that the investigation will have a
material effect on the Company's consolidated financial statements.
In August 2002, the Company entered into an agreement granting an
option to a group of then current management, led by Thomas Povinelli, the
Company's former Chief Executive Officer, and David Puyear, the Company's former
Chief Financial Officer, to leave the Company along with employees who wished to
join them. Under the terms of this agreement, Messrs. Povinelli and Puyear had
the option to purchase a portion of the Company's offices and the tax and
financial planning revenue associated with such offices.
3
On November 26, 2002 the Company finalized this transaction pursuant to
an asset purchase agreement (the "Purchase Agreement") with Pinnacle Taxx
Advisors LLC ("Pinnacle") dated as of September 1, 2002, whereby Pinnacle, an
entity controlled by Thomas Povinelli and David Puyear, purchased certain assets
of the Company. The Company sold to Pinnacle 47 offices ("Purchased Offices")
and all tangible and intangible assets (the "Purchased Assets") which are
associated with the operations of the Purchased Offices together representing
approximately $17,690,000 in revenue, or approximately 19.0% of the Company's
annual revenue. As part of the sale of the Purchased Offices all employees of
the Purchased Offices were terminated by the Company as of November 15, 2002 and
were hired by Pinnacle. The total purchase price payable by Pinnacle is
$4,745,463. (See Note 20 of the Notes to Consolidated Financial Statements.)
There is a risk related to the Pinnacle transaction that Pinnacle could
default on its post closing obligations to the Company. Pinnacle's post closing
obligations to the Company include: a closing payment promissory note (the
"Closing Note") in the amount of $3,422,108; a balance promissory note (the
"Balance Note") in the amount of $1,323,355; and an equipment sublease with a
payment of approximately $28,000 per month. In addition, the Company will remain
liable on most of the office leases assigned to Pinnacle. The Company received
the following security and collateral from Pinnacle and its two principal
members, Thomas Povinelli and David Puyear:
1. The personal guarantees of Messrs. Povinelli and Puyear on the Closing
Note.
2. A collateral stock pledge and security interest from Povinelli on his
1,048,616 shares of Company common stock securing the Closing Note.
3. A direct Assignment from Royal Alliance Associates ("Royal") of 75% of
Pinnacle's commission overrides payable to Pinnacle each month up to
$250,000 securing the Closing Note.
4. A collateral security interest in all of Pinnacle's assets.
5. An additional collateral security interest in all of Pinnacle's
commission overrides from Royal securing the equipment sublease, the
Balance Note and Pinnacle's obligations under the office leases
assigned to Pinnacle.
As of this date, the Company has received certain payments from Royal pursuant
to the assignment in item 3 above but has not received certain payments required
under the Closing Payment Promissory Note and Equipment Sublease. The Company
has foreclosed on a portion of the stock described in item 2 above and is
considering which additional remedies to pursue with respect to such nonpayment.
In addition to the Pinnacle transaction, subsequent to June 30, 2002,
the Company has completed the sale of 11 additional offices to various parties
for an aggregate sales price of approximately $1,161,000 consisting of
approximately $352,000 of cash and $809,000 of promissory notes due to the
Company (See Note 20 of the Notes to Consolidated Financial Statements).
The Company and Wachovia Bank, National Association, formerly First
Union National Bank ("Wachovia") recently entered into a forbearance agreement
(the "Forbearance Agreement"), whereby Wachovia agreed to forbear from acting on
certain defaults of financial covenants by the Company under the Company's
revolving credit note and term loan note. On March 5, 2003, the Company received
a notice of default from the attorneys for Wachovia. Wachovia alleged that the
Company was in default for the following reasons: selling eleven offices without
the written consent of Wachovia; failing to remit to Wachovia the proceeds of
the sales of the offices; and failing to provide to Wachovia the monthly reports
required under the Forbearance Agreement. By letter dated March 10, 2003,
counsel for Wachovia advised the Company that Wachovia rescinded the notice of
default (See Note 20 of the Notes to Consolidated Financial Statements).
Wachovia also consented to the sale of certain Company offices.
Wachovia's rescission and consent were made in reliance on the Company's
agreement that it would obtain Wachovia's prior consent for all future sales of
offices and that the cash payments received or to be received from the approved
sales would be remitted to Wachovia in reduction of the Company's scheduled
principal payments.
Upon a subsequent review of the Forbearance Agreement, the Company
notified the attorneys for Wachovia that it was not in compliance with the
following provisions of the Forbearance Agreement: late filing of several local
personal property tax returns and late payment of the taxes owed; late payment
of several local license fees and late payment of several vendors of materials
and supplies; and failure to make rent payments on a few vacant offices for
which the Company was negotiating workout payments with the landlords. The total
amount due for these payables is not material and the Company has been verbally
advised by counsel to Wachovia that Wachovia will not issue a notice of default
for any of the items.
If the Company does not comply with the financial covenants and other
obligations in its loan agreement with Wachovia, or its agreements with other
institutional lenders, and such lenders elected to pursue their available
remedies, the Company's operations and liquidity would be materially adversely
affected and the Company could be forced to cease operations.
On September 24, 2002, the Company received a notice from the attorneys
for Travelers Insurance Company ("Travelers") alleging that the Company was in
default under its debt financing (the "Debt Facility") with Travelers due to
nonpayment of a $100,000 penalty for failure to meet sales production
requirements as specified in the Debt Facility. The default notice stated that
all unpaid interest and principal under the Debt Facility was immediately due
and payable but that Travelers intended to comply with the terms of a
subordination agreement between Travelers and Wachovia. Such subordination
agreement greatly restricts the default remedies which Travelers could pursue
against the Company. The Company sent the attorneys for Travelers a written
denial that the Company had failed to meet the sales production requirements and
that it was in default and Travelers has not taken any action in furtherance of
its allegation of default.
4
ACQUISITIONS AND OTHER EVENTS
In February 1999, the Company began preparing individual income taxes
online when it formed its subsidiary, e1040.com, Inc., and completed the
acquisition of all the assets of an existing online tax preparation business.
This subsidiary is no longer a central component of the Company's growth
strategy.
In Fiscal 1999, the Company purchased all of the issued and outstanding
capital stock of Prime Capital Services, Inc. ("Prime") and of North Ridge
Securities Corp. ("North Ridge"), each a registered securities broker/dealer
(the "B/D Subsidiaries"), and terminated its relationship with Royal Alliance
Associates, Inc. ("Royal Alliance"), an independent registered broker/dealer,
through which the Company had previously referred its clients' trades for
financial planning services business. Each of the financial planners to whom a
client might be introduced is a registered representative ("Registered
Representative") of one of the B/D Subsidiaries. Each Registered Representative
is also either an employee of the Company with an employment agreement calling
for a specified payout on commissions to be made by a B/D Subsidiary, or an
independent contractor with a contractual Registered Representative agreement to
share commissions with the B/D Subsidiary. The percent of commissions earned by
the Company depends on the financial planning services that are sold. Almost all
of the financial planners are also authorized agents of insurance underwriters,
and the Company earns revenues from these insurance services as well. Each of
the B/D Subsidiaries has its own clients independent of referrals from the tax
preparation business.
In July 1999, the Company formed a joint venture corporation,
GTAX/Career Brokerage, Inc. ("GTAX/CB"), with Fiengold & Scott, Inc., a company
engaged in the wholesaling of insurance and annuity products. GTAX/CB was formed
to become a licensed insurance agent in all states in which the Company markets
insurance and annuity products and to act as a licensed entity for the sale by
the Company of life insurance, long-term health care insurance and fixed-annuity
products.
The Company underwent a transition in senior management, and in the
composition of its Board of Directors in August 2002. As part of such
transition, Michael Ryan was appointed President of the Company, and has since
been appointed Chief Executive Officer of the Company. Thomas Povinelli
voluntarily resigned as the Company's Chief Executive Officer and as a director
of the Company, and David Puyear voluntarily resigned as the Company's Chief
Financial Officer. As part of such transition, the Company also expanded the
size of its Board of Directors to a total of nine directors (eight after Mr.
Povinelli's resignation), and Edward H. Cohen, Steve Gilbert and Michael Ryan
were appointed to the Board to fill the vacancies created by such expansion.
Messrs. Ryan, Gilbert and Cohen will serve until the next annual meeting of
stockholders of the Company at which their respective class of directors is to
be elected.
In addition, the Company switched independent auditors from Arthur
Andersen LLP ("Andersen") to Grant Thornton LLP ("Grant Thornton") on August 27,
2002. (See Item 9, "Changes in and Disagreements with Accountants and Accounting
and Financial Disclosure")
INDUSTRY OVERVIEW
The United States Internal Revenue Service (the "IRS") reported that
approximately 129.8 million individual 2001 federal income tax returns were
filed in the United States through June 30, 2002. According to the IRS, a paid
preparer completes approximately 50% of the tax returns filed in the United
States each year. Among paid preparers, H&R Block, Inc. ("H&R Block") dominates
the low-cost tax preparation business with approximately 10,000 offices located
throughout the United States. According to information released by H&R Block,
H&R Block prepared an aggregate of approximately 16.9 million United States tax
returns during the 2002 tax season, which represented approximately 13% of all
tax returns filed in the United States. Other than H&R Block, the tax
preparation industry is highly fragmented and includes regional tax preparation
services, accountants, attorneys, small independently owned companies, and
financial service institutions that prepare tax returns as ancillary parts of
their businesses. The ability to compete in this market depends in large part on
the geographical area, specific location of the tax preparation office, local
economic conditions, quality of on-site office management and the ability to
file tax returns electronically with the IRS.
5
According to data from the NASD, approximately 5,500 securities
broker/dealers are registered in the United States, some of which provide
financial planning services similar to those offered by the Company. A large
number of these professionals are affiliated with larger financial industry
firms. The remaining portion of the financial planning industry is highly
fragmented with services provided by certified financial planners, stockbrokers
and accountants.
TAX RETURN PREPARATION
Clients. The Company prepares federal, state and local income tax
returns for individuals, predominantly in the middle and upper income brackets.
Accordingly, most of the Company's tax offices are located in middle and higher
income neighborhoods. The Company believes that clients are attracted to the
Company's tax preparation services because they prefer not to file their own tax
returns and are unwilling to pay the fees charged by most accountants and tax
attorneys.
Tax Preparation Services. The preparation of a tax return by the
Company generally begins with a personal meeting at a Company office between a
client and an employee of the Company. At the meeting, the Company's employee
solicits from the client the information concerning income, deductions, family
status and personal financial information necessary to prepare the client's tax
return. After the meeting, the employee prepares drafts of the client's tax
returns. After review and final correction by the tax preparer, the returns are
delivered to the client for filing.
The Company believes that it offers clients a cost effective tax
preparation service compared to services provided by accountants and tax
attorneys and many independent tax preparers. The Company's volume allows it to
provide uniform service at competitive prices. In addition, as compared to
certain of its competitors that are open only during tax season, all of the
Company's offices are open year round due to the demand for financial planning
services. As a result, the Company has avoided opening offices specifically for
tax season and closing them after the peak period.
e1040.com is an online tax preparation service whereby clients submit
information concerning their income, deductions, family status and financial
information over the Internet to e1040.com's website. The client can elect one
of two preparation options. The first option is completely automated without any
human intervention by a tax professional. In other words, the return is
electronically prepared based on the client's information and filed with the
IRS. The second option allows clients to submit their electronic return to the
Gilman + Ciocia e1040.com tax preparation center for review by a tax
professional before it is filed on-line.
Since 1990, the IRS has made electronic filing available throughout the
United States. The IRS has announced its intention to increase the number of tax
returns filed electronically and is currently reviewing various proposals to
encourage the growth of its electronic filing program. The Company has qualified
to participate in the electronic filing program with the IRS and offers clients
the option of filing their federal income tax returns electronically. Under this
system, the final federal income tax return is transmitted to the IRS through a
publicly available software package. As part of its electronic filing program,
Refund Anticipation Loans ("RAL's") are also available to the clients of the
Company through arrangements with approved banking institutions. Using this
service, a client is able to receive a check in the amount of his federal refund
(less fees charged by the Company and banking institutions) drawn on an approved
bank, at the office where he or she had his or her return prepared. RAL's are
recourse loans secured by the taxpayer's refund. The Company acts only as a
facilitator between the client and the bank in preparing and submitting the loan
documentation and receives a fee for these services payable upon consummation of
the loan. None of the Company's funds are used to finance these loans, and the
Company has no liability for repayment of these loans.
Electronic Filing. Electronic filing reduces the amount of time
required for a taxpayer to receive a Federal tax refund and provides assurance
to the client that the return, as filed with the IRS, is mathematically
accurate. If the client desires, he or she may have his or her refund deposited
by the Treasury Department directly into his or her account at a financial
institution designated by the client.
Tax Preparers. The Company's tax preparation business is conducted
predominantly in the months of February, March and April when most individuals
prepare their federal, state and local income tax returns. During
6
the tax season, the Company increases the number of employees by approximately
300. Almost all of the Company's professional tax preparers have tax preparation
experience, and the Company has specifically tested and trained each one to meet
the required level of expertise to properly prepare tax returns. A large
percentage of the Company's seasonal employees return in the next year. The
Company generally utilizes advertisements in local newspapers to recruit the
remainder of its seasonal workforce.
The Company's tax preparers are generally not certified public
accountants. Therefore, they are limited in the representation that they can
provide to clients of the Company on an audit by the IRS. Only an attorney, a
certified public accountant or a person specifically enrolled to practice before
the IRS can represent a taxpayer in an audit. The Company's tax preparation
business subjects it to potential civil liabilities under the Internal Revenue
Code for knowingly preparing a false return or not complying with all applicable
laws and regulations relating to preparing tax returns. Although the Company
believes that it complies with all applicable laws and regulations, no assurance
can be given that the Company will never incur any material fines or penalties.
In addition, the Company does not maintain professional liability or malpractice
insurance policies. No assurance can be given that the Company will not be
subject to professional liability or malpractice suits. The Company has never
been the subject of a malpractice lawsuit for tax preparation.
FINANCIAL PLANNING
While preparing tax returns, clients often consider other aspects of
their financial needs, such as insurance, investments, retirement and estate
planning. To capitalize on this situation, the Company offers every client the
opportunity to complete a questionnaire that discloses information on his or her
financial situation. Financial planners subsequently review these questionnaires
and evaluate whether the client may benefit from financial planning services.
Upon request, the client is then introduced to a financial planner.
Most middle and upper income individuals require a variety of financial
planning services. If the client seeks insurance or annuity products in
connection with the creation of a financial plan, he or she is referred to a
financial planner (who may also be a tax preparer) who is an authorized agent of
an insurance underwriter. If the client seeks mutual fund products or other
securities for investment, he or she is referred to a financial planner of the
Company (who may also be a tax preparer) who is a Registered Representative of
one of the B/D Subsidiaries of the Company. See "Relationship with Registered
Representatives of Securities Broker/ Dealers" and "Relationship with Authorized
Agents of Insurance Underwriters."
Approximately 90% of the Company's offices provide both tax preparation
and regular financial planning services. The remaining Company offices provide
predominantly tax preparation services and have no regular financial planner
associated with them, although financial planners from other offices work with
clients from all of these offices.
Relationship with Registered Representatives of Securities
Broker/Dealer. The Company financial planners that provide financial planning
services to the Company's clients are Registered Representatives of the B/D
Subsidiaries, which are registered securities broker/dealers and members of the
National Association of Securities Dealers. To become a Registered
Representative, a person must pass one or more of a series of qualifying exams
administered by the NASD that test the person's knowledge of securities and
related regulations.
The B/D Subsidiaries supervise the Registered Representatives with
regard to all regulatory matters. In addition to certain mandatory background
checks required by the NASD, the Company also requires that each Registered
Representative respond in writing to a background questionnaire.
If clients of the Company inquire about the acquisition or sale of
investment securities, they are directed to a Registered Representative. The
Registered Representatives are able to effect transactions in such securities at
the request of clients and retain a certain percentage of the commissions earned
on such transactions. All security transactions are introduced and cleared on a
fully disclosed basis through a clearinghouse broker that is a member of the New
York Stock Exchange.
7
About 90% of the securities transactions handled by Registered
Representatives of the B/D Subsidiaries involve mutual funds, variable
annuities, managed money products and variable life insurance. The balance of
the firms' business includes stocks, bonds, and other securities.
Each of the Registered Representatives licensed with the B/D
Subsidiaries, except the officers of the Company, has entered into a commission
sharing agreement with the Company. The agreement generally provides that a
specified percentage of the commissions earned by the Company are paid to the
Registered Representative. The Company maintains agreements with its employee
Registered Representatives similar to those made with other key employees of the
Company that contain covenants requiring them to maintain strict confidentiality
and to refrain from certain competition with the Company.
A majority of the Company's full-year tax preparers are also Registered
Representatives, which enables them to prepare tax returns and provide financial
planning services to the Company's clients. They are compensated by the Company
on a commission basis based upon the revenue generated from the returns
prepared, but not to fall below minimum wage. In addition, they are compensated
based on the overall commissions paid to the Company on financial products they
sell to their clients.
Relationship with Authorized Agents of Insurance Underwriters. Certain
of the Company's full-time employees and financial planners are authorized
agents of insurance underwriters. If clients of the Company inquire about
insurance products, they are directed to one of these authorized agents. These
agents are able, through several insurance underwriters, to sell insurance
products to clients and are paid a certain percentage of the commissions earned
on such sales. The Company is an authorized insurance agent under both New York
and Florida law. The Company's 50% owned subsidiary, GTAX/CB, is an authorized
agent under New York State law.
Each of the insurance agents (except the Company's officers) has
entered into a commission sharing agreement with the Company. Each such
agreement generally provides that a specified percentage of the commissions
earned by the Company are paid to the agent. In the commission sharing
agreements, the employee agents also agree to maintain certain Company
information as confidential and not to compete with the Company.
BROKER/DEALER SUBSIDIARIES
Prime and North Ridge are wholly owned subsidiaries of the Company.
Each conducts a securities brokerage business providing regulatory oversight and
products and sales support to its brokers, who provide investment products and
services to their clients.
The B/D Subsidiaries have been able to recruit and retain experienced
and productive brokers who seek to establish and maintain personal relationships
with high net worth individuals. The B/D Subsidiaries generally do not hire
inexperienced brokers or trainees to work as retail brokers. The Company
believes that continuing to add experienced, highly productive brokers is an
integral part of its growth strategy.
The B/D Subsidiaries business and the securities industry in general
are subject to extensive regulation in the United States at both the federal and
state levels, as well as by self-regulatory organizations ("SRO's").
In the United States, the Securities and Exchange Commission ("SEC") is
the federal agency primarily responsible for the regulation of broker/dealers
and investment advisers doing business in the United States. The Board of
Governors of the Federal Reserve System promulgates regulations applicable to
securities credit transactions involving broker/dealers and certain other United
States institutions. Each of the B/D Subsidiaries is registered as a
broker/dealer with the SEC. Certain aspects of broker-dealer regulation have
been delegated to securities industry SRO's, principally the NASD and the New
York Stock Exchange ("NYSE"). These SRO's adopt rules (subject to SEC approval)
that govern the industry, and along with the SEC, conduct periodic examinations
of the B/D Subsidiaries' operations. Securities firms are also subject to
regulation by state securities administrators in those states in which they
conduct business.
Broker/Dealers are subject to regulations covering all aspects of the
securities industry, including sales practices, trade practices among
broker/dealers, capital requirements, the use and safekeeping of clients' funds
and securities, record keeping and reporting requirements, supervisory and
organizational procedures intended to ensure
8
compliance with securities laws and to prevent unlawful trading on material
nonpublic information, employee related matters, including qualification and
licensing of supervisory and sales personnel, limitations on extensions of
credit in securities transactions, clearance and settlement procedures,
requirements for the registration, underwriting, sale and distribution of
securities and rules of the SRO's designed to promote high standards of
commercial honor and just and equitable principles of trade. A particular focus
of the applicable regulations concerns the relationship between broker/dealers
and their clients. As a result, many aspects of the relationship between
broker/dealers and clients are subject to regulation, including in some
instances, requirements that brokers make "suitability" determinations as to
certain customer transactions, limitations on the amounts that may be charged to
clients, timing of proprietary trading in relation to client's trades, and
disclosures to clients.
Additional legislation, changes in rules promulgated by the SEC, state
regulatory authorities or SRO's, 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 SEC, SRO's and state securities commissions
may conduct administrative proceedings, which can result in censure, fines, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker/dealer, its officers or employees. The principal purpose of regulating
and disciplining broker/dealers is the protection of customers and the
securities markets, not the protection of creditors or shareholders of
broker/dealers.
As registered broker/dealers, the B/D Subsidiaries are required to
establish and maintain a system to supervise the activities of their retail
brokers, including their independent contractor offices, and other securities
professionals. The supervisory system must be reasonably designed to achieve
compliance with applicable securities laws and regulations, as well as SRO
rules. The SRO's have established minimum requirements for such supervisory
systems; however, each broker/dealer must establish procedures that are
appropriate for the nature of its business operations. Failure to establish and
maintain an adequate supervisory system may result in sanctions imposed by the
SEC or a SRO that could limit the B/D Subsidiaries abilities to conduct their
securities business. Moreover, under federal law and certain state securities
laws, the B/D Subsidiaries may be held liable for damages resulting from the
unauthorized conduct of their account executives to the extent that the B/D
Subsidiaries have failed to establish and maintain an appropriate supervisory
system.
Prime. Approximately 90% of the securities transactions effected by
Prime's Registered Representatives involve mutual funds, variable annuities,
managed money products and variable life insurance. The balance of the firm's
business includes stocks, bonds, and other securities. Individual stock, mutual
funds and bond transactions are processed through National Financial Services,
Corp., which is a wholly owned subsidiary of Fidelity Investments, where all
accounts are insured for up to $100 million.
Prime receives commissions generated by financial planners who are
Registered Representatives of Prime. As of June 30, 2002, Prime had 303
Registered Representatives. (For an explanation of the role of Registered
Representatives, see "Relationship with Registered Representatives of
Broker/Dealer " above.)
Prime is registered as a securities broker/dealer under the Securities
Exchange Act of 1934, (the "1934 Act"), and has been a member of the NASD since
1986. In addition, Prime has effected all filings under state law to register as
a broker/dealer in every state in which it operates.
North Ridge. Approximately 90% of the securities transactions effected
by North Ridge's Registered Representatives involve mutual funds, variable
annuities, managed money products and variable life insurance. The balance of
the firm's business includes stocks, bonds, and other securities. Typically,
these transactions are unsolicited and executed at discounted commission rates.
Individual stock, mutual funds and bond transactions are processed through
Pershing & Co., the clearing division of Donaldson, Lufkin & Jenrette, where all
accounts are insured for up to $100 million.
North Ridge receives commissions generated by financial planners. As of
June 30, 2002 North Ridge had approximately 80 Registered Representatives. (For
an explanation of the role of Registered Representatives, see "Relationship with
Registered Representatives of Broker/Dealer " above.)
9
North Ridge is registered as a securities broker/dealer under the of
1934 Act and has been a member of the NASD since July 1990. In addition, North
Ridge has effected all of the required filings under state law to register as a
broker/dealer in the states in which it is required to register.
MARKETING
The Company markets its services principally through direct mail,
promotions and seminars. The majority of clients in each office return to the
Company for tax preparation services during the following year.
Direct Mail. Each year prior to and during the tax season when
individuals file federal, state and local income tax returns, the Company sends
direct mail advertisements to each residence in the area surrounding the
Company's offices. The direct mail advertising solicits business principally for
the Company's tax preparation services. A large majority of the Company's new
clients each year are first introduced to the Company through its direct mail
advertising.
Seminars. The Company supports its Registered Representatives by
advertising their local financial planning seminars. At these seminars,
prospective new clients can learn about a wide variety of investment products
and tax planning opportunities.
Telemarketing. The Company promotes its Registered Representatives'
financial planning seminars through the Company's telemarketing center.
Online. The Company currently has a web site on the Internet at
http://www.e1040.com for income tax and financial planning advice and Company
information, including financial information and the latest news releases.
Other Marketing. The Company also prints and distributes brochures,
flyers and newsletters about its services.
The Company believes that its most promising market for in office tax
preparation expansion may lie in areas of above average population growth.
Individuals usually retain a local tax preparer in connection with their
individual tax returns. When people move they usually seek to find a new income
tax preparer. At or shortly after the time that they move, therefore,
individuals are most susceptible to the direct mail advertising of the Company's
tax preparation services.
ACQUISITIONS
The Company's current strategy is not to actively pursue acquisitions.
Although the Company's current strategy involves selling certain tax preparation
and financial planning businesses and does not contemplate opening or acquiring
many new offices, the Company does have a formalized acquisition model and would
consider acquiring businesses that conform to such model if sufficient capital
is available for an acquisition. This acquisition model requires each acquired
practice to commit to delivering a minimum level of profitability in the first
year of post-acquisition operations. These minimum future performance and
profitability targets, established at the closing, limit future purchase
payments unless the profitability targets are met. In addition, the targets help
to keep the principals of the acquired practices focused on delivering
profitability, which is accretive to the Company's earnings. In addition to
establishing contingent purchase price performance criteria, the Company
generally uses its stock as a significant component of the initial and future
purchase payments. We are in the third year of a significant market decline, and
if the market price of our stock continues to decline it will make it more
difficult to use our stock as currency for future acquisitions.
COMPETITION
Competitors include companies specializing in income tax preparation as
well as companies that provide general financial services. Many of these
competitors, in the tax preparation field, including H&R Block, and many
well-known brokerage firms in the financial service field have significantly
greater financial and other resources than the Company. The Company's online tax
preparation competitors are primarily Intuit and HR Block.com. The Company
believes that the primary elements of competition are convenience,
10
location, local economic conditions, quality of on site management, quality of
service, price, and with respect to online operations, effective affiliation
campaigns and ease of using the service. There is no assurance that the Company
will be able to compete successfully with larger and more established companies.
In addition, the Company may suffer from competition from departing
employees and financial planners. Although the Company attempts to restrict such
competition contractually, as a practical matter, enforcement of contractual
provisions prohibiting small-scale competition by individuals is difficult. The
Company's success in managing the expansion of its business depends in large
part upon its ability to hire, train, and supervise seasonal personnel. If this
labor pool is reduced or if the Company is required to provide its employees
higher wages or more extensive and costly benefits due to competitive reasons,
the expenses associated with the Company's operations could be substantially
increased without the Company receiving offsetting increases in revenues.
TRADEMARKS
The Company has registered its "Gilman + Ciocia" trademark and its
"e1040.com" trademark with the U.S. Patent and Trademark Office. There is no
assurance that the Company would be able successfully to defend its trademarks
if forced to litigate their enforceability. The Company believes that its
trademark "Gilman + Ciocia" constitutes a valuable marketing factor. If the
Company were to lose the use of such trademark, its sales could be adversely
affected.
REGULATION
The Company, as a preparer of federal income tax returns, is subject to
civil liabilities for violations of the Internal Revenue Code or other
regulations of the IRS. The Internal Revenue Code requires, for example, that
tax preparers comply with certain ministerial requirements with respect to the
preparation and filing of tax returns and rules on the maintenance of taxpayer
records. The Internal Revenue Code also imposes regulations relating to the
truthfulness of the contents of tax returns, the confidentiality of taxpayer
information, and the proper methods of negotiating taxpayer refund checks.
An individual must meet certain requirements to represent a taxpayer
before the IRS after the initial audit. Only an attorney, a certified public
accountant or a person specifically enrolled to practice before the IRS can
represent a taxpayer in such circumstances. Most of the Company employees are
limited to representing a taxpayer only through the stage of an audit
examination at the office of a District Director, and then only upon complying
with applicable regulations.
The IRS prohibits tax preparers from using information on a taxpayer's
tax return for certain purposes involved in the solicitation of other business
from such taxpayer without the consent of such taxpayer. The Company believes
that it complies with all applicable IRS regulations.
The Registered Representatives are strictly regulated in their
activities as Registered Representatives of a broker/dealer under the Federal
Securities Exchange Act of 1934, state regulation, the rules of the NASD, and by
the rules and regulations of the broker/dealer.
Prime and North Ridge are registered broker/dealers: Prime is
registered in every state and North Ridge is registered in every state it does
business. Gilman + Ciocia is not registered as a broker/dealer in any state and
does not believe that it is currently required to so register.
The Company is registered with the Securities and Exchange Commission
as an investment advisor.
EMPLOYEES
As of June 30, 2002, the Company employed 901 persons on a full-time
full-year basis, including five officers. During peak season the Company employs
approximately 1,145 full-time employees, of which approximately 244 are seasonal
and do only tax preparation or provide support functions. Approximately 70% of
the Company's seasonal employees return the following year and the Company uses
advertisements in online job sites,
11
to meet the balance of its recruiting needs. The minimum requirements for a tax
preparer at the Company are generally some tax preparation experience and a
passing grade on an examination given by the Company.
The Company also is affiliated with approximately 383 independent
Registered Representatives in addition to the G+C employee Registered
Representatives, who have entered into commission sharing agreements with one of
the Company's Broker/Dealer Subsidiaries.
On November 26, 2002 the Company finalized the transaction with
Pinnacle Taxx Advisors LLC ("Pinnacle") whereby Pinnacle, an entity controlled
by Thomas Povinelli and David Puyear, purchased certain assets of the Company.
The Company sold to Pinnacle 47 offices ("Purchased Offices") and all assets
which are associated with the operations of the Purchased Offices together. As
part of the sale of the Purchased Offices 137 employees of the Purchased Offices
were terminated by the Company as of November 15, 2002 and were hired by
Pinnacle (See Note 20 of the Notes to Consolidated Financial Statements.)
RISK FACTORS
This Form 10-K contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Form 10-K, the words
"anticipate," "believe," "estimate," "should," "expect" and similar expressions,
as they relate to the Company or its management, are intended to identify such
forward looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below.
Investors should not rely on past revenues as a prediction of future
revenues. Additionally, the Company's June 30, 2002 consolidated financial
statements have been prepared assuming the Company will continue as a going
concern. The Company has suffered recurring losses from operations that raise
substantial doubt about its ability to continue as a going concern. Management
and the Board of Directors are currently exploring a number of strategic
alternatives regarding its remaining assets and the use of its cash on-hand, and
are also continuing to identify and implement internal actions to improve the
Company's liquidity and operations. These alternatives include selling some of
their tax and financial planning practices, which in any such case could result
in a significant shift in the Company's business. The Company has recently sold
certain of its offices to Pinnacle Taxx Advisors LLC, ("Pinnacle") and has
recently completed the sale of a limited number of additional offices. However,
except for these transactions (which are discussed more fully in Note 20 to the
Consolidated Financial Statements), the consolidated financial statements do not
include any adjustments that might result due to these events or from the
uncertainty of a shift in the Company's business.
There is a risk related to the recent sale of the offices to Pinnacle
that Pinnacle could default on its post closing obligations to the Company.
Pinnacle's post closing obligations to the Company include: a Closing Payment
Promissory Note in the amount of $3,422,108; a Balance Promissory Note in the
amount of $1,323,355; and an equipment sublease with a payment of approximately
$28,000 per month. In addition, the Company will remain liable on most of the
office leases assigned to Pinnacle. The Company received the following security
and collateral from Pinnacle and its two principal members, Thomas Povinelli
("Povinelli") and David Puyear ("Puyear"):
1. The personal guarantees of Povinelli and Puyear on the Closing Payment
Promissory Note.
2. A collateral stock pledge and security interest from Povinelli on his
1,048,616 shares of Company common stock securing the Closing Payment
Promissory Note.
3. A direct Assignment from Royal Alliance Associates ("Royal") of 75% of
Pinnacle's commission overrides payable to Pinnacle each month up to
$250,000 securing the Closing Payment Promissory Note.
4. A collateral security interest in all of Pinnacle's assets.
5. An additional collateral security interest in all of Pinnacle's
commission overrides from Royal securing the Equipment Sublease, the
Balance Promissory Note and Pinnacle's obligations under the office
leases assigned to Pinnacle.
As of this date, the Company has received certain payments from Royal pursuant
to the assignment in item 3 above, but has not received certain payments
required under the Closing Payment Promissory Note and Equipment
12
Sublease. The Company has foreclosed on a portion of the stock described in item
2 above and is considering which additional remedies to pursue with respect to
such nonpayment. As a result of the transaction with Pinnacle, the Company must
generate sufficient cash flow with fewer offices to cover fixed expenses that
may not decrease proportionately.
The Company and Wachovia Bank, National Association, formerly First
Union National Bank ("Wachovia") recently entered into a forbearance agreement
(the "Forbearance Agreement"), whereby Wachovia agreed to forbear from acting on
certain defaults of financial covenants by the Company under the Company's
revolving credit note and term loan note. On March 5, 2003, the Company received
a notice of default from the attorneys for Wachovia. Wachovia alleged that the
Company was in default for the following reasons: selling eleven offices without
the written consent of Wachovia; failing to remit to Wachovia the proceeds of
the sales of the offices; and failing to provide to Wachovia the monthly reports
required under the Forbearance Agreement. By letter dated March 10, 2003,
counsel for Wachovia advised the Company that Wachovia rescinded the notice of
default (See Note 20 of the Notes to Consolidated Financial Statements).
Wachovia also consented to the sale of certain Company offices.
Wachovia's rescission and consent were made in reliance on the Company's
agreement that it would obtain Wachovia's prior consent for all future sales of
offices and that the cash payments received or to be received from the approved
sales would be remitted to Wachovia in reduction of the Company's scheduled
principal payments.
Upon a subsequent review of the Forbearance Agreement, the Company
notified the attorneys for Wachovia that it was not in compliance with the
following provisions of the Forbearance Agreement: late filing of several local
personal property tax returns and late payment of the taxes owed; late payment
of several local license fees and late payment of several vendors of materials
and supplies; and failure to make rent payments on a few vacant offices for
which the Company was negotiating workout payments with the landlords. The total
amount due for these payables is not material and the Company has been verbally
advised by counsel to Wachovia that Wachovia will not issue a notice of default
for any of the items.
If the Company does not comply with the financial covenants and other
obligations in its loan agreement with Wachovia, or its agreements with other
institutional lenders, and such lenders elected to pursue their available
remedies, the Company's operations and liquidity would be materially adversely
affected and the Company could be forced to cease operations. On September 24,
2002, the Company received a notice from the attorneys for Travelers Insurance
Company ("Travelers") alleging that the Company was in default under its debt
financing (the "Debt Facility") with Travelers due to nonpayment of a $100,000
penalty for failure to meet sales production requirements as specified in the
Debt Facility. The default notice stated that all unpaid interest and principal
under the Debt Facility was immediately due and payable but that Travelers
intended to comply with the terms of a subordination agreement between Travelers
and Wachovia. Such subordination agreement greatly restricts the default
remedies which Travelers could pursue against the Company. The Company sent the
attorneys for Travelers a written denial that the Company had failed to meet the
sales production requirements and that it was in default and Travelers has not
taken any action in furtherance of its allegation of default.
If the broker/dealers and Financial Planners that the Company acquires
or recruits do not perform successfully, the Company's operations may be
adversely affected. The Company plans to continue to expand into the area of
financial planning, both through the acquisition of independent securities
broker/dealers and by recruiting financial planners. The Company's revenue
growth will in large part depend upon the successful integration and
profitability of the broker/dealers acquired. The Company's growth will also
depend on the successful operation of independent financial planners who are
recruited to join the Company. The financial planning segment of the Company's
business has generated an increasing portion of the Company's revenues during
the past few years, and if such segment does not continue to be successful, the
Company's rate of growth may decrease.
If the tax preparation practices that the Company acquires do not
perform successfully, the Company's operations may be adversely affected. As
part of its strategy, the Company has historically pursued the acquisition of
tax preparation practices, however the Company's current strategy is not to
actively pursue acquisitions until such time that sufficient working capital is
available The success of the Company will in part depend upon the successful
operation of the practices acquired and the integration of the acquired
businesses into the Company. A rapid acquisition of offices that do not remain
profitable would reduce the Company's net income and could depress future
operating results. If the acquired companies do not perform as expected or the
Company cannot effectively integrate the operations of the acquired companies,
the Company's operating results could be materially adversely affected.
If the Company opens a number of new offices that do not perform
successfully, the Company's operations may be adversely affected. In order to
open new offices, the Company incurs significant expenses to purchase furniture,
equipment and supplies. The Company has found that a new office usually suffers
a loss in its first year of operation, shows no material profit or loss in its
second year of operation and does not attain profitability, if ever, until its
third year of operation. Therefore, the Company's operating results could be
materially adversely affected in any year that the Company opens a significant
number of new offices. However, the Company's current strategy does not
contemplate opening many new offices. In fact, in November 2002 the Company has
sold some of its network of offices to Pinnacle Taxx Advisors LLC, to improve
the Company's liquidity and operations.
If the financial market continues to slow, the Company's financial
planning segment will suffer decreased revenues as was the case in Fiscal 2002.
The Company's revenue and profitability may be adversely affected by declines in
the volume of securities transactions and in market liquidity, which generally
result in lower revenues from trading activities and commissions. Lower
securities price levels may also result in a reduced volume of transactions, as
well as losses from declines in the market value of securities held in trading,
investment and underwriting positions. In periods of low volume, the fixed
nature of certain expenses, including salaries and benefits, computer hardware
and software costs, communications expenses and office leases, will adversely
affect
13
profitability. Sudden sharp declines in market values of securities and the
failure of issuers and counterparts to perform their obligations can result in
illiquid markets in which the Company may incur losses in its principal trading
and market making activities.
If the Company is unable to secure adequate working capital financing
during the "off-season", the Company's operating results may be materially
adversely affected. The tax season occurs predominantly during the third Fiscal
quarter, and, therefore, that quarter is generally the Company's most
profitable. The Company has historically experienced significantly reduced
earnings during the remainder of the year. From July 1st to December 31st each
year, the Company generally requires significant working capital financing to
fund operations until cash flows from the upcoming tax season materialize. If
the Company was not able to secure such financing or if such financing was not
available on terms favorable to the Company, the Company's operating results
could be materially adversely affected, and the Company would have to curtail
its operations.
If competitors in the industry began to encroach upon the Company's
market share, the Company's operations may be adversely affected. The income tax
preparation and financial planning services industries are highly competitive.
The Company's competitors include companies specializing in income tax
preparation as well as companies that provide general financial services. The
Company's principal competitor is H+R Block, Inc. in the tax preparation field
and many well-known national brokerage and insurance firms in the financial
services field. Many of these competitors have larger market shares and
significantly greater financial and other resources than the Company. The
Company may not be able to compete successfully with such competitors.
Competition could cause the Company to lose existing clients, slow the growth
rate of new clients and increase advertising expenditures, all of which could
have a material adverse effect on the Company's business or operating results.
If a large number of the Company's departing employees and financial
planners were to enter into competition with the Company, the Company's
operations may be adversely affected. Departing employees and financial planners
may compete with the Company. Although the Company attempts to restrict such
competition contractually, as a practical matter enforcement of contractual
provisions prohibiting small-scale competition by individuals is difficult. In
the past, departing employees and financial planners have competed with the
Company. They have the advantage of knowing the Company's methods and, in some
cases, having access to the Company's clients. No assurance can be given that
the Company will be able to retain its most important employees and financial
planners or that the Company will be able to prevent competition from them or
successfully compete against them. If a substantial amount of such competition
occurs, the corresponding reduction of revenue may materially adversely affect
the Company's operating results.
If any of the Company's key personnel were to leave its employ, the
Company's operations may be adversely affected. The Company believes that its
ability to successfully implement its business strategy and operate profitably
depends on the continued employment of James Ciocia, its Chairman of the Board,
Michael P. Ryan, its President and Chief Executive Officer and President of its
Prime subsidiary, Ted Finkelstein, its Vice President and General Counsel,
Kathryn Travis, its Secretary, Carole Enisman, the Chief Operating Officer of
its Prime subsidiary, and Daniel Levy, the President of its North Ridge
subsidiary. If any of these individuals become unable or unwilling to continue
in his or her present position, the Company's business and financial results
could be materially adversely affected.
If the IRS were to impose a material fine under the Internal Revenue
Code, the Company may suffer a decline in operating results. The Company's
business of preparing tax returns subjects it to potential civil liabilities for
violations of the Internal Revenue Code or other regulations of the IRS. The
Company has never been assessed with material civil penalties or fines. However,
if a Company violation resulted in a material fine or penalty, the Company's
operating results could be materially adversely affected. In addition, the
Company does not maintain any professional liability or malpractice insurance
policies for tax preparation. The Company has never been the subject of a
malpractice lawsuit. However, the significant uninsured liability and the legal
and other costs relating to such claims could materially adversely affect the
Company's business and operating results.
In addition, making fraudulent statements on a tax return, willfully
delivering fraudulent documents to the IRS and unauthorized disclosure of
taxpayer information can constitute criminal offenses. If the Company were to be
charged with a criminal offense and found guilty, or if any of its employees or
executives were convicted of a
14
criminal offense, in addition to the costs of defense and possible fines, the
Company would likely experience an adverse effect to its reputation, which could
directly lead to a decrease in revenues from the loss of clients.
The Company does not hire a large number of CPA's, which could affect
the Company's ability to provide adequate I.R.S. representation services to the
marketplace. The Company utilizes a significant number of seasonal employees who
are not certified public accountants or tax attorneys, to provide tax
preparation services. Under state law, the Company is not allowed to provide
legal tax advice, and the Company does not employ nor does it retain any tax
attorneys on a full time basis. Because most of the Company's employees who
prepare tax returns are not certified public accountants, tax attorneys or
otherwise enrolled to practice before the IRS, such employees of the Company are
strictly limited as to the roles they may take in assisting a client in an audit
with the IRS. These limitations on services that the Company may provide could
hinder the Company's ability to market its services.
Furthermore, the small percentage of certified public accountants or
tax attorneys available to provide assistance and guidance to the Company's tax
preparers may increase the risk of the improper preparation of tax returns by
the Company. The improper preparation of tax returns could result in significant
defense expenses and civil liability.
If the Company were to lose its trademarks or other proprietary rights,
the Company could suffer decreased revenues. The Company believes that its
trademarks and other proprietary rights are important to its success and its
competitive position. The Company has registered its "Gilman + Ciocia" trademark
and its "e1040.com" trademark with the U.S. Patent and Trademark Office and
devotes substantial resources to the establishment and protection of its
trademarks and proprietary rights. However, the actions taken by the Company to
establish and protect its trademarks and other proprietary rights may be
inadequate to prevent imitation of its services and products by others or to
prevent others from claiming violations of their trademarks and proprietary
rights by the Company. In addition, others may assert rights in the Company's
trademarks and other proprietary rights. If the Company were to lose the
exclusive right to its trademarks, its operations would be materially adversely
affected.
The Company's decision not to pay dividends could negatively impact the
marketability of the Company's stock. Since its initial public offering of
securities in 1994, the Company has not paid dividends, and it does not plan to
pay dividends in the foreseeable future. The Company currently intends to retain
any earnings to finance the growth of the Company. It is very likely that
dividends will not be distributed in the near future, which may reduce the
marketability of the Company's Common Stock.
If a third party wanted to acquire control of the Company it could be
prevented by the Company's classified board and its ability to issue preferred
stock without shareholder approval and the marketability of the Company's stock
could be affected. Certain provisions of the Certificate of Incorporation could
make it more difficult for a third party to acquire control of the Company, even
if such change in control would be beneficial to stockholders. The Certificate
of Incorporation allows the Company to issue preferred stock without stockholder
approval. Such issuance could make it more difficult for a third party to
acquire the Company. The Certificate of Incorporation also provides for a
classified board of directors, which would prevent a third party from acquiring
a majority of the Common Stock from immediately electing a new board of
directors.
Low trading volume of the Company's stock increases volatility, which
could result in the impairment of the Company's ability to obtain equity
financing. As a result, historical market prices may not be indicative of market
prices in the future. In addition, the stock market has recently experienced
extreme stock price and volume fluctuation. The Company's market price may be
impacted by changes in earnings estimates by analysts, economic and other
external factors and the seasonality of the Company's business. Fluctuations or
decreases in the trading price of the Common Stock may adversely affect the
stockholders' ability to buy and sell the Common Stock and the Company's ability
to raise money in a future offering of Common Stock. The shares of our Common
Stock were delisted from the NASDAQ national market in August 2002, and the
market price of our shares has dramatically declined since the delisting. See
"Market for Common Equity and Related Stockholder Matters".
If restrictions that are in place on the future sale of the Common
Stock of the Company were released the market price of the stock may decline.
Various restrictions on the possible future sale of Common Stock may have an
adverse affect on the market price of the Common Stock. Approximately 4.5
million shares of the Common Stock outstanding are "restricted securities" under
Rule 144 of the Securities Act of 1933, as amended (the "Act").
15
In general, under Rule 144, a person who has satisfied a one year holding period
may, under certain circumstances, sell, within any three month period, a number
of shares of "restricted securities" that do not exceed the greater of one
percent of the then outstanding shares of Common Stock or the average weekly
trading volume of such shares during the four calendar weeks prior to such sale.
Rule 144 also permits, under certain circumstances, the sale of shares of Common
Stock by a person who is not an "affiliate" of the Company (as defined in Rule
144) and who has satisfied a two-year holding period, without any volume or
other limitation.
The sale of restricted Common Stock in the future, or even the
possibility that it may be sold, may have an adverse effect on the market price
for the Common Stock and reduce the marketability of the Common Stock.
If a material risk inherent to the securities industry was to be
realized the value of the Company's stock may decline. The securities industry,
by its very nature, is subject to numerous and substantial risks, including the
risk of declines in price level and volume of transactions, losses resulting
from the ownership, trading or underwriting of securities, risks associated with
principal activities, the failure of counterparties to meet commitments,
customer, employee or issuer fraud risk, litigation, customer claims alleging
improper sales practices, errors and misconduct by brokers, traders and other
employees and agents (including unauthorized transactions by brokers), and
errors and failure in connection with the processing of securities transactions.
Many of these risks may increase in periods of market volatility or reduced
liquidity. In addition, the amount and profitability of activities in the
securities industry are affected by many national and international factors,
including economic and political conditions, broad trends in industry and
finance, level and volatility of interest rates, legislative and regulatory
changes, currency values, inflation, and the availability of short-term and
long-term funding and capital, all of which are beyond the control of the
Company.
Several current trends are also affecting the securities industry,
including increasing consolidation, increasing use of technology, increasing use
of discount and online brokerage services, greater self reliance of individual
investors and greater investment in mutual funds. These trends could result in
the Company facing increased competition from larger broker/dealers, a need for
increased investment in technology, or potential loss of clients or reduction in
commission income. These trends or future changes could have a material adverse
effect on the Company's business, financial condition, and results of operations
or cash flows.
If new regulations are imposed on the securities industry the operating
results of the Company may be adversely affected. The SEC, the NASD, the NYSE
and various other regulatory agencies have stringent rules with respect to the
protection of customers and maintenance of specified levels of net capital by
broker/dealers. The regulatory environment in which the Company operates is
subject to change. The Company may be adversely affected as a result of new or
revised legislation or regulations imposed by the SEC, the NASD, other U.S.
governmental regulators or SROs . The Company also may be adversely affected by
changes in the interpretation or enforcement of existing laws and rules by the
SEC, other federal and state governmental authorities and SROs.
The B/D Subsidiaries are subject to periodic examination by the SEC,
the NASD, SROs and various state authorities. The B/D Subsidiaries' sales
practice operations, record keeping, supervisory procedures and financial
position may be reviewed during such examinations to determine if they comply
with the rules and regulations designed to protect customers and protect the
solvency of broker/dealers. Examinations may result in the issuance of letters
to the B/D Subsidiaries noting perceived deficiencies and requesting the B/D
Subsidiaries to take corrective action. Deficiencies could lead to further
investigation and the possible institution of administrative proceedings, which
may result in the issuance of an order imposing sanctions upon the B/D
Subsidiaries and/or their personnel.
The Company's business may be materially affected not only by
regulations applicable to it as a financial market intermediary, but also by
regulations of general application. For example, the volume and profitability of
the Company's or its clients' trading activities in a specific period could be
affected by, among other things, existing and proposed tax legislation,
antitrust policy and other governmental regulations and policies (including the
interest rate policies of the Federal Reserve Board) and changes in
interpretation or enforcement of existing laws and rules that affect the
business and financial communities.
If the Company were to be found liable to clients for misconduct
alleged in civil proceedings, the Company's operations may be adversely
affected. Many aspects of the Company's business involve substantial risks
16
of liability. There has been an increase in litigation and arbitration within
the securities industry in recent years, including class action suits seeking
substantial damages. Broker/dealers such as the B/D Subsidiaries are subject to
claims by dissatisfied clients, including claims alleging they were damaged by
improper sales practices such as unauthorized trading, churning, sale of
unsuitable securities, use of false or misleading statements in the sale of
securities, mismanagement and breach of fiduciary duty. The B/D Subsidiaries may
be liable for the unauthorized acts of their retail brokers and independent
contractors if they fail to adequately supervise their conduct. The B/D
Subsidiaries are currently defendants/respondents in several such proceedings.
If all of such proceedings were to be resolved unfavorably to the Company, the
Company's financial condition could be adversely affected. It should be noted,
however, that the B/D Subsidiaries maintain securities broker/dealer's
professional liability insurance to insure against this risk. From time to time,
in connection with hiring retail brokers, the Company is subject to litigation
by a broker's former employer. The adverse resolution of any legal proceedings
involving the Company could have a material adverse effect on its business,
financial condition, and results of operations or cash flows.
ITEM 2. PROPERTIES
As of June 30, 2002, the Company provided services to its clients at
121 local offices in 15 states: forty-one in New York, twenty-six in Florida,
twelve in New Jersey, seven in Arizona, six in Connecticut, five in
Massachusetts, five in Maryland, four in Ohio, four in Nevada, four in
Washington, three in Illinois, one in Texas, one in Colorado, one in Michigan
and one in Kentucky. A majority of the offices are leased in commercial office
buildings. Most of the Company's offices are leased pursuant to standard form
office leases. The leases range in terms remaining from one to seven years. The
Company's rental expense during Fiscal 2002 was $6.0 million. The Company
believes that any of its offices could be replaced with comparable office space,
however location and convenience is an important factor in marketing the
Company's services to its clients. Since the Company advertises in the
geographic area surrounding the office location, the loss of such an office that
is not replaced with a nearby office could adversely affect the Company's
business at that office. The Company generally needs approximately 1,000-3,000
square feet of usable floor space to operate an office, and its needs can be
flexibly met in a variety of real estate environments. Therefore, the Company
believes that its facilities are adequate for its current needs.
In August 2002, the Company consolidated the Executive Headquarters in
White Plains, NY into the Operations Center in Poughkeepsie, NY. The Operations
Center facility in Poughkeepsie, NY is owned by an entity controlled by Michael
Ryan, our CEO and President. The relocation of the Corporate Headquarters was a
result of the Company's ongoing cost-containment initiatives.
On November 26, 2002, the Company finalized a transaction whereby it
sold 47 of its offices to Pinnacle Taxx Advisors LLC (See Note 20 of the Notes
to Consolidated Financial Statements). In connection with the sale all operating
leases associated with the purchased offices were assigned to and assumed by
Pinnacle, including the former Executive Headquarters office in White Plains,
NY.
The Company owns a building in Babylon, New York. In September 2001,
the Company sold its other owned building in Palmer, Massachusetts. The net
proceeds from this sale were $106,000.
ITEM 3. LEGAL PROCEEDINGS
The Company has become aware that it is the subject of a formal
investigation by the Securities and Exchange Commission ("SEC"). The Company
believes that the investigation concerns, among other things, the restatement of
the Company's financial results for the fiscal year ended June 30, 2001 and the
fiscal quarters ended March 31, 2001 and December 31, 2001 (which have been
previously disclosed in the Company's amended quarterly and annual reports for
such periods), the Company's delay in filing a Form 10-K for the fiscal year
ended June 30, 2002 and the Company's past accounting and recordkeeping
practices. The Company had previously received informal, non-public inquiries
from the SEC regarding certain of these matters. On March 13, 2003 three of the
Company's executives received subpoenas from the SEC requesting them to produce
documents and provide testimony in connection with the formal investigation. In
addition, on March 19, 2003 the Company received a subpoena requesting documents
in connection with such investigation. The Company and its executives intend to
comply fully with the requests contained in the subpoenas and with the SEC's
investigation. The Company does not believe that the investigation will have a
material effect on the Company's consolidated financial statements.
The Company is engaged in lawsuits in the ordinary course of business
that management believes will not have a material effect on its financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its last annual meeting of shareholders on December
14, 2001. The following items were approved at the shareholder meeting:
1. Thomas Povinelli and Kathryn Travis were elected as Class C members of
the Board of Directors.
2. Doreen Biebusch was elected as a Class A member of the Board of
Directors.
3. The Company's 2001 Joint Incentive and Non-Qualified Stock Option Plan
was ratified and adopted.
17
4. Arthur Andersen, LLP was ratified as the Company's independent
certified public accountants for the fiscal year ending June 30, 2002.
Grant Thornton has since replaced Arthur Andersen, LLP as the
Company's independent certified public accountants (See item 9
"Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure").
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of our Common Stock were delisted from the NASDAQ national
market in August 2002, and now trade in the over-the-counter market on what is
commonly called the pink sheets under the symbol "GTAX.PK." As a result, an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the market value of the securities. We are now subject to Rule 15c2-11
promulgated by the Securities and Exchange Commission. If we fail to meet
criteria set forth in such Rule including making all required filings under the
Exchange Act, various practice requirements are imposed on broker-dealers who
sell securities governed by the Rule to persons other than established customers
and accredited investors. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to sale.
Consequently, the Rule may have a materially adverse effect on the ability of
broker-dealers to sell the Company's securities, which may materially affect the
ability of shareholders to sell the securities in the secondary market.
The following table sets forth the high and low sales prices for the
Common Stock during the periods indicated as reported by the NASDAQ stock
market.
SALES PRICES
QUARTER ENDED HIGH LOW
------------- ---- ---
September 30, 1999 $13.00 $10.25
December 31, 1999 $11.44 $ 7.75
March 31, 2000 $ 9.75 $ 5.75
June 30, 2000 $ 7.38 $ 3.50
September 30, 2000 $ 4.75 $ 3.56
December 31, 2000 $ 6.44 $ 2.50
March 31, 2001 $ 5.44 $ 2.50
June 30, 2001 $ 4.65 $ 2.75
September 30, 2001 $ 3.50 $ 1.90
December 31, 2001 $ 3.45 $ 1.95
March 31, 2002 $ 3.12 $ 1.15
June 30, 2002 $ 1.75 $ 1.01
DIVIDENDS
Since its initial public offering of securities in 1994, the Company
has not paid dividends, and it does not plan to pay dividends in the foreseeable
future. The Company currently intends to retain any earnings to finance the
growth of the Company.
HOLDERS OF COMMON STOCK
As of April 10, 2003, there were approximately 270 registered holders
of Common Stock. This does not reflect persons or entities that hold Common
Stock in nominee or "street" name through various brokerage firms. On the
closing of trading on April 10, 2003, the price of the Common Stock was $0.65
per share.
During the Fiscal years ended June 30, 2002 and 2001, the Company
issued the following common stock in privately negotiated transactions that were
not registered under the Securities Act of 1933:
18
On August 3, 2001, Ken Copans was issued 69,783 shares as compensation
in connection with the acquisition of his tax practice.
On September 12, 2001, Joan Kudlacik was issued 1,071 shares as
compensation in connection with the acquisition of her tax practice.
On September 30, 2001 John Kuntz was issued 11,773 shares as
compensation, in connection with the acquisition of his tax practice.
On October 8, 2001, January 8, 2002, and May 8, 2002, Ben Leonard was
issued 105,035, 101,457, and 101,458 shares, respectively as compensation in
connection with the acquisition of his tax practice.
On October 31, 2001 and May 7, 2002, Rappaport Gamma was issued 100,000
shares and 95,298 shares, respectively, in connection with his $1,000,000 note
to the Company. (See Note 9 of the Notes to Consolidated Financial Statements).
On December 18, 2001, Lee Povinelli was issued 3,500 shares in
connection with the exercise of stock options.
Shares were issued to sellers of tax practice assets during Fiscal year
2001 that the Company acquired as follows:
Date Shares
-------- --------
7/19/00 5,630
7/19/00 34,684
7/19/00 2,663
7/19/00 1,032
7/19/00 741
7/19/00 49,075
7/19/00 8,589
7/19/00 5,819
7/19/00 6,775
8/23/00 21,446
10/23/01 3,578
1/30/01 2,188
2/07/01 295,639
2/11/01 2,124
2/21/01 6,012
4/03/01 74,895
4/03/01 7,858
4/03/01 7,008
4/03/01 98,500
4/12/01 29,752
4/12/01 1,789
4/17/01 8,242
4/17/01 4,681
4/18/01 39,732
4/18/01 5,604
4/20/01 7,858
5/02/01 2,910
5/02/01 8,850
5/08/01 7,815
5/15/01 1,734
On March 27, 2001, Doreen Biebusch, a director of the Company, was
issued 2,907 shares as compensation for services rendered.
19
Between October 27, 2000 and February 27, 2001, 27,221 shares of stock
were privately issued to employees of the Company as yearly bonuses and for
services rendered.
On October 24, 2000, 6,889 shares were issued as consideration to a
vendor, for payment of services.
No underwriters or brokers participated in any of these transactions.
All such sales were privately negotiated with the individuals with whom the
Company had a prior relationship and were exempt from registration under the Act
pursuant to Section 4 (2) as a sale by an issuer not involving a public
offering.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities to be Weighted-average Number of securities remaining
issued upon exercise of exercise price of available for future issuance under
Plan category outstanding options, warrants outstanding options, equity compensation plans (excluding
and rights warrants and rights securities reflected in column (a)
Equity
compensation
plans approved 313,394 $6.30 1,186,842
by security
holders
Equity
compensation
plans not 4,505,660 $7.46 0
approved by
security holders
------------------------------- -------------------------------------
Total 4,819,054 1,186,842
The Company maintains records of option grants by year, exercise price,
vesting schedule and grantee. In certain cases the Company has estimated, based
on all available information, the number of such options that were issued
pursuant to each plan. The Company has not in the past consistently recorded the
plan pursuant to which the option was granted. The Company is implementing new
record keeping procedures regarding options that will ensure this information is
accurately recorded and processed. The material terms of each option grant vary
according to the discretion of the Board of Directors.
In addition, from time to time, the Company has issued, and in the
future may issue additional non-qualified options pursuant to individual option
agreements, the terms of which vary from case to case.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data with respect to our consolidated
balance sheets as of June 30, 2002 and 2001 and the related consolidated
statements of operations for the years ended June 30, 2002, 2001, and 2000 have
been derived from our audited consolidated financial statements which are
included herein and have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses from operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to this matter are also described in Note 1 of the Notes to
Consolidated Financial Statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The selected consolidated financial data with respect to our consolidated
balance sheets as of June 30, 2000, 1999, and 1998 and the related consolidated
statements of operations for the years ended June 30, 1999 and 1998 have been
derived from our audited consolidated financial statements, which are not
included herein. The following selected consolidated financial data should be
read in conjunction with the consolidated financial statements and the notes
thereto and the information contained in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SUMMARY OF CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
2001 RESTATED
2002 SEE NOTE 2(a) 2000 1999 1998
---- ------------ ---- ---- ----
Total Revenue $93,034,089 $104,900,310 $88,919,337 $50,443,406 $28,533,083
Net Income (Loss) (22,304,299) (212,739) (4,013,092) 2,181,143 2,011,345
Per Share:
Basic (2.58) (0.03) (0.53) 0.35 0.37
Diluted (2.58) (0.03) (0.53) 0.32 0.32
SUMMARY OF CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
2001 RESTATED
2002 SEE NOTE 2(a) 2000 1999 1998
---- ------------ ---- ---- ----
Working Capital
(Deficit) $ (13,398,895) $ 614,325 $(1,611,436) $ 5,249,516 $4,950,652
Total Assets 37,172,513 52,679,895 43,905,178 32,998,980 9,751,187
Long Term Debt 851,501 5,425,928 826,476 2,738,124 -0-
Total Stockholders'
Equity 7,711,069 27,924,433 24,712,841 24,959,941 9,017,587
Cash Dividends - - - - -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's financial statements and related notes thereto set forth in Item 8 of
this Annual Report. Except for the historical information contained herein, this
and other sections of this Annual Report contain certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
Annual Report, the words "anticipate," "believe," "estimate," "should," "expect"
and similar expressions as they relate to the Company or its management are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from the results
expressed or implied by these forward-looking statements. Factors that could
contribute to such differences are discussed in this Annual Report under the
headings "Description of Business- Risk Factors."
21
OVERVIEW
The Company is a preparer of federal, state and local income tax
returns for individuals predominantly in middle and upper income brackets. In
addition, while preparing tax returns clients often consider other aspects of
their financial needs, such as investments, insurance, pension and estate
planning. The Company capitalizes on this situation by making financial planning
services available to clients. The financial planners who provide such services
are employees or independent contractors of the Company and are Registered
Representatives of the Company's broker/dealer subsidiaries. The Company and/or
its broker/dealer subsidiaries earn a share of commissions (depending on what
service is provided) from the services that the financial planners provide to
the clients in transactions for securities, insurance and related products.
Almost all of the financial planners are also authorized agents of
insurance underwriters. The Company is also a licensed mortgage broker. As a
result, the Company also earns revenues from commissions for acting as an
insurance agent and a mortgage broker. In addition, the Company owns a 50%
equity interest in GTAX/CB, an insurance broker.
The Company's June 30, 2002 consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
suffered losses from operations that raise substantial doubt about its ability
to continue as a going concern. During the Fiscal year June 30, 2002, the
Company incurred net losses totaling $(22,304,299), and at June 30, 2002 was in
a working capital deficit position of $13,398,895. At June 30, 2002, the Company
had $2,223,806 of cash, and cash equivalents and $8,790,836 of trade receivables
to fund short-term working capital requirements. The Company's ability to
continue as a going concern and its future success is dependent upon its ability
to reduce costs, generate revenues and obtain financing, if necessary, in the
near term to: (1) satisfy its current obligations and commitments, and (2)
continue its growth.
The Company believes that it will be able to complete the necessary
steps in order to meet its cash flow requirements throughout fiscal 2003.
Management's plans in this regard include, but are not limited to, the
following:
Subsequent to year end, the Company has finalized a transaction
pursuant to an asset purchase agreement with Pinnacle Taxx Advisors LLC
("Pinnacle"), whereby Pinnacle, an entity controlled by Thomas
Povinelli and David Puyear, former executive officers of the Company,
purchased certain assets of the Company. The Company sold to Pinnacle
47 offices and all tangible and intangible assets which are associated
with the operations of such offices, together representing
approximately $17,690,000 in revenue, or approximately 19.0% of the
Company's annual revenue. The total purchase price payable by Pinnacle
is $4,745,463 (See Note 20 to the Consolidated Financial Statements).
In addition to the Pinnacle transaction, subsequent to June 30, 2002,
the Company has completed the sale of 11 additional offices to various
parties for an aggregate sales price of approximately $1,161,000
consisting of approximately $352,000 of cash and approximately $809,000
of promissory notes due to the Company (See Note 20 of the Notes to
Consolidated Financial Statements).
The Company and Wachovia Bank, National Association, formerly First
Union National Bank ("Wachovia") recently entered into a forbearance
agreement (the "Forbearance Agreement"), whereby Wachovia agreed to
forbear from acting on certain defaults of financial covenants by the
Company under the Company's revolving credit note and term loan note.
On March 5, 2003, the Company received a notice of default from the
attorneys for Wachovia. Wachovia alleged that the Company was in
default for the following reasons: selling eleven offices without the
written consent of Wachovia; failing to remit to Wachovia the proceeds
of the sales of the offices; and failing to provide to Wachovia the
monthly reports required under the Forbearance Agreement. By letter
dated March 10, 2003, counsel for Wachovia advised the Company that
Wachovia rescinded the notice of default (See Note 20 of the Notes to
Consolidated Financial Statements).
Wachovia also consented to the sale of certain Company offices.
Wachovia's rescission and consent were made in reliance on the
Company's agreement that it would obtain Wachovia's prior consent for
all future sales of offices and that the cash payments received or to
be received from the approved sales would be remitted to Wachovia in
reduction of the Company's scheduled principal payments.
Upon a subsequent review of the Forbearance Agreement, the Company
notified the attorneys for Wachovia that it was not in compliance with
the following provisions of the Forbearance Agreement: late filing of
several local personal property tax returns and late payment of the
taxes owed; late payment of several local license fees and late payment
of several vendors of materials and supplies; and failure to make rent
payments on a few vacant offices for which the Company was negotiating
workout payments with the landlords. The total amount due for these
payables is not material and the Company has been verbally advised by
counsel to Wachovia that Wachovia will not issue a notice of default
for any of the items.
If the Company does not comply with the financial covenants and other
obligations in its loan agreement with Wachovia, or its agreements with
other institutional lenders, and such lenders elected to pursue their
available remedies, the Company's operations and liquidity would be
materially adversely affected and the Company could be forced to cease
operations.
In addition to the above activities the following business initiatives
are also ongoing and are expected to provide additional working capital to the
Company:
1. Management has engaged in an extensive campaign to reduce corporate
overhead, consisting primarily of closing the White Plains executive
offices and consolidating those functions into the Poughkeepsie, New
York home office. This has resulted in savings of approximately
$170,000 per month.
2. The company's current strategy is not to actively pursue acquisitions.
3. The company has negotiated with certain strategic vendors to settle
current liabilities.
22
Management believes that these actions will be successful. However, there can be
no assurance that the Company will generate sufficient revenues or reduce costs
to provide positive cash flows from operations to permit the Company to realize
its plans. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Management and the Board of Directors are currently exploring a
number of strategic alternatives and are also continuing to identify and
implement internal actions to improve the Company's liquidity or financial
performance. These alternatives may include selling further assets, which in any
such case could result in significant changes in our business plan.
During the second fiscal quarter of fiscal 2003, the Company took
certain steps to improve internal controls in four offices relating to
disbursement authorization procedures. The affected offices represent
approximately $3,000,000 in tax preparation revenue and the general and
administrative disbursements in question totaled approximately $682,000. The
Company believes its current internal controls are adequate.
The Company's current strategy is not to actively pursue acquisitions.
Although the Company's current strategy involves selling certain tax preparation
and financial planning businesses and does not contemplate opening or acquiring
many new offices, the Company does have a formalized acquisition model and would
consider acquiring businesses that conform to such model if sufficient capital
is available for an acquisition. This acquisition model requires each acquired
practice to commit to delivering a minimum level of profitability in the first
year of post-acquisition operations. These minimum future performance and
profitability targets, established at the closing, limit future purchase
payments unless the profitability targets are met. In addition, the targets help
to keep the principals of the acquired practices focused on delivering
profitability, which is accretive to the Company's earnings. In addition to
establishing contingent purchase price performance criteria, the Company
generally uses its stock as a significant component of the initial and future
purchase payments. We are in the third year of a significant market decline, and
if the market price of our stock continues to decline it will make it more
difficult to use the our stock as currency for future acquisitions.
For the Fiscal year ended June 30, 2002, approximately 18.6% of the
Company's revenues were earned from tax preparation services, 80.8% were earned
from all financial planning and related services (with 93% from mutual funds,
annuities and securities transactions and 7% from insurance, mortgage brokerage
and other related services), and 0.6% were earned from e1040.com and other
services.
The Company's financial planning clients generally are introduced to
the Company through the Company's tax preparation services. The Company believes
that its tax return preparation business is inextricably intertwined with and is
a necessary adjunct to its financial planning activities. Neither segment would
operate as profitably by itself and the two segments leverage off each other
improving profitability and client retention.
The Company has become aware that it is the subject of a formal
investigation by the Securities and Exchange Commission ("SEC"). The Company
believes that the investigation concerns, among other things, the restatement of
the Company's financial results for the fiscal year ended June 30, 2001 and the
fiscal quarters ended March 31, 2001 and December 31, 2001 (which have been
previously disclosed in the Company's amended quarterly and annual reports for
such periods), the Company's delay in filing a Form 10-K for the fiscal year
ended June 30, 2002 and the Company's past accounting and recordkeeping
practices. The Company had previously received informal, non-public inquiries
from the SEC regarding certain of these matters. On March 13, three of the
Company's executives received subpoenas from the SEC requesting them to produce
documents and provide testimony in connection with the formal investigation. In
addition, on March 19, 2003 the Company received a subpoena requesting documents
in connection with such investigation. The Company and its executives intend to
comply fully with the requests contained in the subpoenas and with the SEC's
investigation. The Company does not believe that the investigation will have a
material effect on the Company's consolidated financial statements.
In Fiscal 1999, the Company formed its subsidiary e1040.com, which
acquired all of the assets of an existing online tax preparation business. The
revenue for the Fiscal year ended June 30, 2002 for e1040.com decreased to
approximately $69,000, from $792,000 for the Fiscal year ended June 30, 2001.
With an established online tax platform already in place, and the increase in
competition for online tax services, the Company does not expect to make
significant capital investments or incur extraordinary marketing expenses in
future years related to expanding e1040.com.
Restatements
The consolidated financial statements and the related notes thereto as of June
30, 2001 and for the year then ended have been restated to correct an
overstatement error of $600,000 in the previously reported revenue amount as
indicated below. During the quarter ended December 31, 2001 of Fiscal 2002,
management identified the overstatement error from Fiscal 2001 during a review
of its' intercompany accounts. Cash amounts of $600,000 advanced by a subsidiary
during the quarter ended March 30, 2001 of Fiscal 2001 were not eliminated
properly and erroneously reported as revenue.
23
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
AS PREVIOUSLY
REPORTED AS RESTATED
-------- -----------
BALANCE SHEET:
Accounts payable and accrued expenses $ 9,831,363 $ 10,431,363
Deferred tax assets, net of current 1,460,160 1,709,160
Retained earnings 1,911,027 1,560,027
STATEMENT OF OPERATIONS:
Revenue (a) $ 106,513,173 $ 104,900,310
Provision for income taxes 946,764 697,764
Net loss 138,261 (212,739)
NET INCOME (LOSS) PER SHARE:
Basic and diluted $ 0.02 $ (0.03)
(a) $1,012,863 representing net trading gains previously included in
financial planning revenue have been reclassified to other
income(expense) in the statements of operations for the year ended
June 30, 2001.
Retained earnings as of July 1, 2001 have been decreased by $351,000 for the
effect of the restatements on prior years.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
from the Company's statements of income expressed as a percentage of revenue and
the percentage change in such items for Fiscal Years 2002, 2001 and 2000. The
trends illustrated in the following table are not necessarily indicative of
future results. All numbers for Fiscal 2001 are as restated.
AS A PERCENTAGE OF REVENUE PERCENTAGE INCREASE
YEARS ENDED JUNE 30, (DECREASE) OF ACTUAL
AMOUNTS
2001 2002 TO 2001 TO
---- 2001 2000
2002 RESTATED 2000 ---- ----
---- -------- ----
(SEE NOTE
---------
2(A))
-----
Financial planning commissions 80.8% 81.6% 79.4% (12.2)% 21.2%
Tax preparation fees 18.6% 16.7% 17.8% (1.5)% 11.1%
e1040.com 0.1% 0.8% 1.3% (91.3)% (31.6)%
Direct mail services 0.5% 0.9% 1.5% (47.7)% (27.7)%
------- ------ ------
Total revenue 100% 100% 100% (11.3)% 18.0%
======= ====== ======
Salaries and commissions 83.9% 76.7% 76.8% (2.9)% 17.8%
General and administrative expense 16.6% 10.0% 11.7% 46.4% 1.5%
Advertising 2.4% 3.7% 10.9% (41.8)% (59.7)%
Brokerage fees & licenses 1.9% 1.7% 2.1% (1.7)% (5.5)%
Rent 6.4% 4.9% 4.1% 16.2% 42.1%
Depreciation and amortization 3.9% 3.0% 2.8% 15.7% 25.8%
Goodwill and other intangibles impairment loss 8.1% 0.0% 0.0% 100.0% 0.0%
------- ------ ------
Total operating expenses 123.2% 100.0% 108.4% 9.2% 8.9%
------- ------ ------
Loss from operations (23.2)% 0.0% (8.4)% (72,168.3)% (99.6)%
------- ------ ------
Other income (expense) (0.6)% 0.5% 1.5% (210.6)% (60.0)%
------- ------ ------
Income (loss) before income taxes (23.8)% 0.5% (6.9)% (4,670.7)% (107.9)%
Provision (benefit) for income taxes 0.2% 0.7% (2.4)% (80.6)% (132.5)%
------- ------ ------
Net loss (24.0)% (0.2)% (4.5)% 10,384.3% (94.7)%
======= ------ ======
24
FISCAL 2002 COMPARED TO FISCAL 2001(AS RESTATED)
Revenue. The Company's revenues for the Fiscal year ended June 30, 2002
were $93.0 million compared to $104.9 million for the Fiscal year ended June 30,
2001, a decrease of $11.9 million. This decrease was primarily attributable to a
decrease in financial planning services and lower tax preparation revenues. The
decline in revenues from tax preparation is attributable to a reduction in
on-line returns prepared and the impact of some tax preparer attrition and
reduced tax preparation marketing, offset by acquisitions. The reduction in
financial planning revenue for Fiscal 2002 was a product of the declining
financial markets. The declining financial markets resulted in declines in the
volume of securities transactions and in market liquidity, which resulted in
lower revenues from trading activities and commissions.
The Company's total revenues for the three primary business segments
(See Note 16 of Notes to Consolidated Financial Statements) consisted of $57.7
million and $60.3 million for the Company's tax and financial planning offices,
$69.7 million and $79.7 million for the Company's broker dealer subsidiaries
(which includes $34.5 million and $35.8 million of intercompany revenue related
to Company employee financial planning revenue which clears through the broker/
dealer subsidiaries) and approximately $69,000 and $792,000 for e1040.com for
the fiscal years ended June 30, 2002 and 2001, respectively.
The Company's tax and financial planning office segment consists of
$17.3 million and $17.6 million, for tax preparation services, $39.5 million and
$41.7 million for financial planning business done at an office level and $0.9
million and $1.0 million for third party direct mail business for the fiscal
years ended June 30, 2002 and 2001, respectively.
The Company's broker/dealer segment consists of financial planning
business done by Prime and North Ridge, before elimination of intercompany
financial planning revenue. Prime represented 91.5% and 92% and North Ridge
represented 8.5% and 8% of the broker/dealer segment total revenues for the
Fiscal years ended June 30, 2002 and 2001, respectively.
The $0.3 million or 1.5% year-to-year reduction in the tax preparation
revenue is attributed to an increase in price competition, offset in part by the
acquisition of new tax practices during Fiscal 2002 and the full-year effect of
the new tax practices acquired in Fiscal 2001. The $10.4 million or 12.2%
decrease in financial planning revenue and the corresponding decrease in the
broker/dealers segment is attributed to the decline in the financial markets.
The decline in the financial markets resulted in declines in the volume of
securities transactions and in market liquidity, which resulted in lower
revenues from trading activities and commissions. In Fiscal 2002, e1040.com
contributed approximately $69,000 of revenues compared to approximately $792,000
in Fiscal 2001. This significant 91.3% reduction was attributed to a reduced
advertising and media campaign budget, as well as increased price competition
for online tax services.
Operating expenses. The Company's operating expenses for the Fiscal
year ended June 30, 2002 were $114.6 million or 123.2% of revenues compared to
operating expenses of $104.9 million or 100.0% of revenues for the Fiscal year
ended June 30, 2001. Operating expenses for the Fiscal year ended June 30, 2002
had a decrease of $2.3 million in salaries and commissions and $1.6 million in
advertising expense, offset in part by an increase of $4.9 million in general
and administrative expenses; $0.8 million in rent; $0.5 million in depreciation
and amortization; and $7.5 million in goodwill and intangible assets impairment
losses.
Salaries and commissions expense. Salaries and commissions expense
consists primarily of salaries and commissions paid to financial planners for
financial planning services as well as related payroll taxes and employee
benefit costs. For the Fiscal year ended June 30, 2002 salaries and commissions
decreased $2.3 million or 2.9%, to $78.1 million from $80.4 million for the
Fiscal year ended June 30, 2001. The decrease in salaries and commission expense
is primarily attributed to a decrease in commissions paid to financial planners
as a result of the decreased sales of financial planning services.
General and administrative expense. General and administrative expense
consist primarily of expenses for general corporate functions including, outside
legal and professional fees, insurance, telephone, bad debt expenses and general
corporate overhead costs. General and administrative expenses for the Fiscal
year ended June 30, 2002 increased by $4.9 million or 46.4% to $15.4 million
from $10.5 million for the Fiscal year ended June 30, 2001. The
25
increase in general and administrative expense is attributed to legal fees
related to a proxy fight of concerned shareholders and due to the audit
committee doing an investigation into alleged accounting irregularities as well
as the opening of new offices acquired in Fiscal 2002 and the full-year effect
of Fiscal 2001 acquisitions, offset in part by the continued implementation of
cost containment initiatives.
Rent expense. For the Fiscal year ended June 30, 2002 rent expense
increased by $0.8 million or 16.2% to $5.9 million compared to $5.1 million for
the Fiscal year ended June 30, 2001. The increase in rent expense is primarily
attributed to the acquisition of new offices during Fiscal 2002, the full-year
inclusion of offices opened in Fiscal 2001 and the expansion of office space by
some of our existing offices.
Depreciation and amortization. For the Fiscal year ended June 30, 2002
depreciation and amortization expense increased by $0.5 million or 15.7% to $3.7
million compared to $3.2 million for the Fiscal year ended June 30, 2001. The
increase in depreciation and amortization is primarily attributed to additional
purchases of computer and other equipment and impairment of e1040 fixed assets,
offset in part by the Company's adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets" on July 1, 2001, which required the Company to stop
amortizing goodwill and indefinite lived intangible assets. From a segment
standpoint, the Company's depreciation and amortization expense for Fiscal year
2002 comprises 55.7% from the Company's tax and financial planning office
segment, 26.5% from the Company's broker/dealer segment and 17.8% from
e1040.com. For Fiscal year 2001, the Company's depreciation and amortization
expense comprises 58.0% from the Company's tax and financial planning office
segment, 34.3% from the Company's broker dealer segment and 7.7% from e1040.com.
The change in mix is associated with e1040.com goodwill being impaired in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
Advertising expense. Advertising expense for the Fiscal year ended June
30, 2002 was $2.3 million compared to $3.9 million for the Fiscal year ended
June 30, 2001. The decrease of $1.6 million or 41.8% in advertising cost was
attributed to lower print, media and banner advertisements and the continued
implementation of cost containment initiatives.
Goodwill and other intangible assets impairment loss. As a result of
the Company adopting SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill and other intangible assets were determined to be impaired by $7.5
million for the Fiscal year ended June 30, 2002. Under SFAS No. 142, goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed for impairment. There was no goodwill and impairment loss for the
Fiscal year ended June 30, 2001, as SFAS No.142 was not issued by FASB or
adopted by the Company, until July 2001.
Other income and (expenses). Other income (expenses) for the Fiscal
year ended June 30, 2002 was $(0.6) million compared to $0.5 million for the
Fiscal year ended June 30, 2001. The decrease in other income (expenses) of $1.1
million or (210.6)% is comprised of an increase of $2.1 million or 1119.3% in
interest and investment income recognized, offset by an increase of interest
expense of $0.5 million or 36.5% due to higher debt level in Fiscal 2002. Other
income (expense) decreased $2.7 million or (153.3)% from income of $1.7 million
in 2001 to expense of $0.9 million in 2002. Other income in 2001 includes
unrealized trading gains of approximately $1.0 million and approximately $0.7 of
gain on the recession of an acquisition contract recognized in Fiscal 2001.
Other expense of $(0.9) million in 2002 is primarily attributed to unrealized
losses on trading.
Income (loss) before taxes. The Company's loss before taxes for the
Fiscal year ended June 30, 2002 was ($22.2) million compared to income of $0.5
million for the Fiscal year ended June 30, 2001, a decrease of $22.7 million.
From a segment standpoint, the Company's income (loss) before taxes for the
Fiscal year ended June 30, 2002 is composed of a loss of $(17.2) million from
the Company's tax and financial planning office segment, loss of $(3.0) million
from the Company's broker/dealer segment and a loss of $(2.0) million from
e1040.com. For the Fiscal year ended June 30, 2001, the Company's income (loss)
before taxes is comprised of a loss of $(1.1) million from the Company's tax and
financial planning office segment, income of $2.3 million from the Company's
broker/dealer segment and a loss of $(0.7) million from e1040.com. The increased
loss at e1040.com was attributed to increased price competition, which lowered
revenue significantly. The loss at the Company's tax and financial planning and
the broker/dealer segments, is primarily attributed to lower financial planning
revenues without a
26
corresponding decrease in fixed costs, impairments of goodwill and other
intangibles and losses on trading securities.
Income tax provision. The Company's income tax provision for the Fiscal
year ended June 30, 2002 was $0.1 million compared to an income tax provision of
$0.7 million for the Fiscal year ended June 30, 2001 for a decrease of $0.6
million or 80.6%. The decrease in the income tax provision is the result of the
increased losses in Fiscal 2002 compared to profitability in Fiscal 2001. The
Company's effective income tax rate for Fiscal year 2002 was (0.6%) as compared
to 143.9% for Fiscal 2001.
Net loss. The Company's loss after income taxes for the Fiscal year
ended June 30, 2002 was $22.3 million compared to a loss of $0.2 million for the
Fiscal year ended June 2001, a decrease of $21.2 million. The decrease is
primarily attributed to a decline in revenues and impairment of goodwill and
other intangible assets.
The Company's business is seasonal, with a significant component of its
revenue earned during the tax season of January through April. The effect of
inflation has not been significant to the Company's business in recent years.
FISCAL 2001(AS RESTATED) COMPARED TO FISCAL 2000
Revenue. The Company's revenues for the Fiscal year ended June 30, 2001
were $104.9 million compared to $88.9 million for the Fiscal year ended June 30,
2000, an increase of $16.0 million or 18.0%. This increase was primarily
attributable to an increase in financial planning services and higher tax
preparation revenues.
The Company's total revenues for the Fiscal year ended June 30, 2001
for the three primary business segments (see Note 16 of the Notes to
Consolidated Financial Statements) consisted of $60.3 million for the Company's
tax and financial planning offices, $79.7 million for the Company's broker
dealer subsidiaries (which includes $35.8 million of intercompany revenue
related to Company employee financial planning revenue which clears through the
broker/ dealer subsidiaries) and $0.8 million for e1040.com. The Company's tax
and financial planning office segment consists of $17.6 million for tax
preparation services, $41.7 million for financial planning business done at an
office level and $1.0 million for third party direct mail business. The
Company's broker/dealer segment consists of financial planning business done by
Prime and North Ridge, before elimination of intercompany financial planning
revenue. Prime represented 92% and North Ridge represented 8% of the
broker/dealer segment total revenues.
The Company's total revenues for the Fiscal year ended June 30, 2000,
for the three primary business segments consisted of $48.6 million for the
Company's tax and financial planning offices, $64.9 million for the Company's
broker/dealer subsidiaries (which includes $25.7 million representing
intercompany revenue related to Company employee financial planning revenue
which clears through the broker/ dealer subsidiaries) and $1.2 million for
e1040.com. The Company's tax and financial planning office segment consisted of
$15.8 million for tax preparation services, $31.5 million for financial planning
business done at an office level and $1.3 million for third party direct mail
business. The Company's broker/dealer segment consists of gross business done by
Prime and North Ridge, before elimination of intercompany work. Prime
represented 89% and North Ridge represented 11% of the broker/dealer segment.
The $1.8 million or 11.1% growth in the tax preparation revenue is
attributed to the acquisition of new tax practices during Fiscal 2001 and the
full-year effect of the new tax practices acquired in Fiscal 2000. The $15.3
million or 21.5% growth in financial planning revenue and the corresponding
growth in the broker/dealers segment is attributed to the hiring of additional
Registered Representatives as well as an increase in same Registered
Representative average financial planning revenue. Of this growth, $10.3 million
or 67.1% was attributed to financial planning revenue within Company offices,
which contribute a higher operating margin to the Company.
In Fiscal 2001, the number of Registered Representatives employed by
the Company increased by 54 individuals who had in the aggregate approximately
$7.0 million of annual gross revenue commission production prior to joining the
Company. In Fiscal 2001, Prime and North Ridge earned prior to elimination of
intercompany revenues $79.7 million of total revenues compared to $64.9 million
in Fiscal 2000. e1040.com contributed $0.8 million of revenues in Fiscal 2001
compared to $1.2 million in Fiscal 2000. This reduction was attributed to a
27
dramatically reduced advertising and media campaign budget in Fiscal 2001 from
what was used in 2000 to publicly launch the website as well as price
competition.
Operating expenses. The Company's operating expenses for the Fiscal
year ended June 30, 2001 were $104.9 million or 100.0% of revenues, an increase
of $8.6 million or 8.9%, compared to operating expenses of $96.4 million or
108.4% of revenues for the Fiscal year ended June 30, 2000. The increase in
operating expenses was attributed to an increase of $12.1 million in salaries
and commissions; $0.2 million in general and administrative expenses; $1.5
million in rent and $0.6 million in depreciation and amortization, offset by a
decrease of $5.8 million in advertising and $0.1 million in brokerage fees and
licenses.
Included in Fiscal 2000 operating expenses were $7.0 million of
one-time costs primarily attributed to launching e1040.com, which included $5.2
million of advertising costs along with other one-time related charges. In
Fiscal 2001, various other expense categories increased associated with the
general increase in central management required to support the actual growth in
new business and acquisitions.
Salaries and commissions. Salaries and commissions increased $12.1
million or 17.8%, for the Fiscal year ended June 30, 2001 to $80.4 million from
$68.3 million for the Fiscal year ended June 30, 2000. The increase in salaries
and commission expense is primarily attributed to an increase in commissions
paid to financial planners as a result of the increased sales of financial
planning services and the addition of other salaried employees related to the
acquired tax practices.
General and administrative expense. General and administrative expense
increased $0.1 million or 1.5% for the Fiscal year ended June 30, 2001 to $10.5
million from $10.4 million for the Fiscal year ended June 30, 2000. The slight
increase in general and administrative expense is attributed to the opening of
14 new offices acquired in Fiscal 2001 and the full-year effect of Fiscal 2000
acquisitions, offset by the continued implementation of cost containment
initiatives initiated in the third quarter of Fiscal 2001.
Rent expense. Rent expense increased $1.5 million or 42.1% for the
Fiscal year ended June 30, 2001 to $5.1 million compared to $3.6 million for the
Fiscal year ended June 30, 2000. The increase in rent expense is primarily
attributed to the acquisition of new offices during Fiscal 2001, the full-year
inclusion of offices opened in Fiscal 2000, including the full-year inclusion of
rent expense for our corporate office in White Plains, NY,and the expansion of
office space by some of our existing offices.
Depreciation and amortization. Depreciation and amortization expense
increased by $0.6 million or 25.8% for the Fiscal year ended June 30, 2001 to
$3.2 million, compared to $2.5 million for the Fiscal year ended June 30, 2000.
The increase in depreciation and amortization is primarily attributed to
amortization associated with acquisitions in prior years and to additional
purchases of computer and other equipment. From a segment standpoint, the
Company's depreciation and amortization expense for the Fiscal year ended June
30, 2001, encompass 58.0% from the Company's tax and financial planning office
segment, 34.3% from the Company's broker/dealer segment and 7.7% from e1040.com.
For the Fiscal year ended June 30, 2000, the Company's depreciation and
amortization expense comprises 54.1% from the Company's tax and financial
planning office segment, 40.8% from the Company's broker dealer segment and 5.1%
from e1040.com. The change in mix is associated with placing more property,
plant and equipment in acquired tax offices.
Advertising expense. Advertising expense decreased $5.8 million or
(59.7%) for the Fiscal year ended June 30, 2001 to $3.9 million compared to $9.7
million for the Fiscal year ended June 30, 2000. The decrease in advertising was
almost entirely attributed to lower print, media and banner advertisements
associated with the media launch of the e1040.com website in Fiscal 2000, which
were not continued in Fiscal 2001.
Brokerage fees. Brokerage fees and license expense decreased by $0.1
million or (5.5%) for the Fiscal year ended June 30, 2001 to $1.8 million
compared to $1.9 million for the Fiscal year ended June 30, 2000. The decrease
in brokerage and license fees is primarily attributed to a shift in Fiscal 2001
of the Company's financial planning product mix.
Other income and (expenses). The decrease in other income (expenses) of
$0.8 million or (60.0%) is attributed to a reduction of $1.2 million in interest
and investment income recognized in Fiscal 2000 from a $1.0
28
million gain on the sale of marketable securities, and an increase of $0.5
million in interest expense on debt in Fiscal 2001, partially by an increase in
other income of $0.9 million primarily due to a gain on a rescission of an
acquisition contract and gains on trading. Of the increase in interest expense,
$0.2 million represents non-cash charges related to the amortization of warrant
debt discounts.
Income (loss) before taxes. The Company's income before taxes for the
Fiscal year ended June 30, 2001 was $0.5 million compared to a loss of ($6.2)
million for the Fiscal year ended June 30, 2000, an increase of $6.7 million.
From a segment standpoint, the Company's income (loss) before taxes for the
Fiscal year ended June 30, 2001 is composed of a loss of $(1.2) million from the
Company's tax and financial planning office segment, income of $2.3 million from
the Company's broker/dealer segment and a loss of $(0.7) million from e1040.com.
For the Fiscal year ended June 30, 2000, the Company's income (loss) before
taxes is comprised of a loss of $(2.0) million from the company's tax and
financial planning office segment, income of $1.8 million from the Company's
broker/dealer segment and a loss of $(6.0) million from e1040.com. The decreased
loss at e1040.com was attributed to the reduced advertising and media campaign
in Fiscal 2001 from what was spent in Fiscal 2000 to publicly launch the
website. The rise in profitability at the Company's tax and financial planning
and the broker/dealer segments is primarily attributed to higher financial
planning revenues, without a corresponding increase in fixed costs resulting in
higher profitability.
Income tax provision. The Company's income tax provision for Fiscal
2001 was $0.7 million compared to an income tax benefit of $(2.1) million in
Fiscal 2000 for an increase of $2.8 million. The increase in income taxes is the
result of the increased profitability in Fiscal 2001 compared to a loss year in
Fiscal 2000. The Company's effective income tax rate for Fiscal year 2001 was
143.9% as compared to (34.9)% for Fiscal 2000. The primary difference between
these rates and the statutory federal income tax rate of 34% relates to the
amortization of certain goodwill and other intangible assets not deductible for
income tax purposes, as well as the inclusion of state income taxes and
benefits.
Net loss. The Company's loss after income taxes for the Fiscal year
ended June 30, 2001 was $(0.2) million compared to a loss of $(4.0) million for
the Fiscal year ended June 30, 2000, an increase of $3.8 million. The increase
is primarily attributed to the higher operating margins in Company owned offices
and dramatically reduced operating losses associated with e1040.com.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues have been and are expected to continue to be
significantly seasonal. As a result, the Company must generate sufficient cash
during the tax season, in addition to its available bank credit, to fund any
operating cash flow deficits in the first half of the following Fiscal year.
Operations during the non-tax season are primarily focused on financial planning
services along with some on-going accounting and corporate tax revenue. Since
its inception, the Company has utilized funds from operations, proceeds from its
initial public offering and bank borrowings to support operations, finance
working capital requirements and complete acquisitions. In addition, the Company
received gross proceeds of approximately $3.0 million from the exercise of
warrants and options during Fiscal 1999. As of June 30, 2002 the company had
$2.2 million in cash and cash equivalents and $1.8 million in marketable
securities. PCS and North Ridge are subject to the SEC's Uniform Net Capital
Rule 15c 3-1 (PCS) and 15c 3-3 (North Ridge), which require the maintenance of
minimum regulatory net capital and that the ratio of aggregate indebtedness to
net capital, both as defined, shall not exceed the greater of 15 to 1 or
$100,000 and $25,000, respectively.
In August 2002, the Company entered into an agreement granting an
option to a group of current management, led by Thomas Povinelli, the Company's
former Chief Executive Officer and David Puyear, the Company's former Chief
Financial Officer, to leave the Company along with employees who wish to join
them. Under the terms of this agreement, Messrs. Povinelli and Puyear could
purchase a portion of the Company's offices and the tax and financial planning
revenue associated with such offices. On November 26, 2002 the Company finalized
a transaction pursuant to an asset purchase agreement (the "Purchase Agreement")
with Pinnacle Taxx Advisors LLC ("Pinnacle") dated as of September 1, 2002,
whereby Pinnacle, an entity controlled by Thomas Povinelli and David Puyear,
purchased certain assets of the Company. The Company sold to Pinnacle 47 offices
("Purchased Offices") and all tangible and intangible assets which are
associated with the operations of the offices. As part of the sale all employees
of the Purchased Offices were terminated by the Company as of November 15,
29
2002 and were hired by Pinnacle. The total unadjusted purchase price payable by
Pinnacle is $4,745,463. (See Note 20 of the Notes to Consolidated Financial
Statements).
In addition to the Pinnacle transaction, subsequent to June 30, 2002,
the Company has completed the sale of 11 additional offices to various parties
for an aggregate sales price of approximately $1,161,000 consisting of
approximately $352,000 of cash and $809,000 of promissory notes due to the
Company (See Note 20 of the Notes to Consolidated Financial Statements).
The Company's cash flows used in operating activities totaled $4.6
million for the Fiscal year ended June 30, 2002 compared to cash flows provided
by operating activities of $1.3 million for the Fiscal year ended June 30, 2001.
The increase of $5.9 million in cash used in operating activities is due
primarily to purchases of marketable securities and the net loss in Fiscal 2002,
comprised of reduced revenue and increased general and administrative expenses,
exclusive of bad debt expense, impairment charges, depreciation and amortization
related to our acquisitions and other non-cash charges.
Net cash used in investing activities totaled $406,000 for the Fiscal
year ended June 30, 2002 compared to cash flows used in investing activities of
$3.4 million for the Fiscal year ended June 30, 2001. The decrease in cash used
of $2.9 million is primarily attributed to a reduction in the number of
acquisitions in Fiscal 2002, as well as proceeds from the sale of properties.
This year-to-year decrease in cash used was offset by an increase in the amount
net purchases of marketable securities in Fiscal 2002.
The Company's cash flows provided by financing activities totaled $1.8
million for the Fiscal year ended June 30, 2002 compared to cash flows provided
by financing activities of $2.9 million for the Fiscal year ended June 30, 2001.
The decrease of $1.1 million in cash provided is due primarily to reduced
proceeds from banks and other loans as well as a decrease in the exercise of
stock options and warrants. This decrease in cash provided by financing was
partially offset by an increase in proceeds received from the re-issuance of
treasury stock and a decrease in the acquisition of treasury stock as well as a
decrease in payments of bank loans and capital lease obligations.
As of June 30, 2000, the Company had a $10.0 million credit facility
with Merrill Lynch. This facility consisted of three separate loans including: a
line of credit of $4.0 million and two revolver loans totaling $6.0 million. On
November 1, 2000, the Company closed an $11.0 million financing with Travelers
Insurance Company ("Travelers") and European American Bank ("EAB") and
simultaneously paid Merrill Lynch the entire balance owed it on the outstanding
credit facility, terminating its lending relationship with Merrill Lynch.
The EAB senior credit facility totaled $6.0 million and was
structured as a line of credit for a term that expired on October 30, 2001.
However, the Company had received an extension until the replacement facility
was finalized on December 26, 2001. On December 26, 2001, the Company closed a
$7.0 million financing to replace its EAB senior credit facility with Wachovia
Bank, National Association, formerly First Union National Bank ("Wachovia"). The
new financing consists of a $5.0 million term loan ("term loan") and a $2.0
million revolving letter of credit ("revolving credit loan"). The interest rate
on the term loan and the revolving credit loan is LIBOR plus 2.75%. The term
loan is being amortized over five years and the revolving credit loan has a term
of two years. At June 30, 2002, the term loan and revolving credit loan had an
outstanding principal balance of $6.6 million.
The loan agreements with Wachovia contained certain negative covenants
that required notification upon change in control and the Company to maintain,
among other things, specific minimum net tangible worth, maximum ratio of debt
to tangible net worth at March 31, 2002 and each Fiscal quarter thereafter,
loans and advances to offices, and net profit as of the close of any Fiscal
year. As of June 30, 2002 the Company was not in compliance with these
covenants, and, accordingly, classified all debt due to First Union as a current
liability. On September 19, 2002, the Company received a "Notice of Default and
Demand for Payment" The facility is secured by a pledge of all business assets
of the Company and guarantees by our former Chief Executive Officer, Thomas
Povinelli, Chairman, James Ciocia and current Chief Executive Officer Michael
Ryan.
On November 27, 2002, the Company and Wachovia Bank entered into a
forbearance agreement whereby Wachovia agreed to forbear form acting on certain
defaults of financial covenants by the Company under the Company's revolving
credit note and term loan note. On March 5, 2003, the Company received a notice
of default from the attorneys for Wachovia. Wachovia alleged that the Company
was in default for the following reasons: selling eleven offices without the
written consent of Wachovia; failing to remit to Wachovia the proceeds of the
sales of the offices; and failing to provide to Wachovia the monthly reports
required under the Forbearance Agreement. By letter dated March 10, 2003,
counsel for Wachovia advised the Company that Wachovia rescinded the notice of
default (See Note 20 of the Notes to Consolidated Financial Statements).
Wachovia also consented to the sale of certain Company offices.
Wachovia's rescission and consent were made in reliance on the Company's
agreement that it would obtain Wachovia's prior consent for all future sales of
offices and that the cash payments received or to be received from the approved
sales would be remitted to Wachovia in reduction of the Company's scheduled
principal payments.
Upon a subsequent review of the Forbearance Agreement, the Company
notified the attorneys for Wachovia that it was not in compliance with the
following provisions of the Forbearance Agreement: late filing of several local
personal property tax returns and late payment of the taxes owed; late payment
of several local license fees and late payment of several vendors of materials
and supplies; and failure to make rent payments on a few vacant offices for
which the Company was negotiating workout payments with the landlords. The total
amount due for these payables is not material and the Company has been verbally
advised by counsel to Wachovia that Wachovia will not issue a notice of default
for any of the items.
30
We have received a report from our independent accountants, relating to
our June 30, 2002 audited financial statements containing an explanatory
paragraph stating that our recurring losses from operations and requirement for
additional financing raise substantial doubt about our ability to continue as a
going concern. Management and the Board of Directors are currently exploring a
number of strategic alternatives and are also continuing to identify and
implement internal actions to improve the Company's liquidity or financial
performance. These alternatives may include selling further assets, which in any
such case could result in significant changes in our business plan.
CONTRACTUAL OBLIGATION AND COMMERCIAL COMMITMENTS
The table below summarizes our contractual obligations for the five
years subsequent to June 30, 2002 and thereafter. The amounts represent the
maximum future cash contractual obligations.
Payment Due by Period
---------------------
2004 2006 After
Contractual Obligations Total 2003 to 2005 to 2007 2007
- ----------------------- ----- ---- ------- ------- ----
Debt $13,820,502 $13,475,952 $ 210,556 $ 54,696 $ 79,298
Operating leases 13,217,023 4,131,487 6,114,181 2,109,202 862,153
Capital Leases 1,283,749 727,426 540,650 15,673 -
----------- ----------- ---------- ---------- --------
Total contractual cash obligations $28,321,274 $18,334,865 $6,865,387 $2,179,571 $941,451
Subsequent to year end, the Company entered into an agreement with
Pinnacle Taxx Advisors ("Pinnacle"), an entity controlled by Thomas Povinelli
and David Puyear, former executive officers of the Company, whereby the Company
sold to Pinnacle 47 offices ("Purchased Offices") and all tangible and
intangible assets which are associated with the operations of such offices (See
Note 20 of Notes to Consolidated Financial Statements). In connection with the
agreement all operating leases associated with the Purchased Offices were
assigned to Pinnacle. Aggregate operating lease commitment amounts included in
the table above with respect to the leases assigned to Pinnacle in November 2002
are $2,224,384, $1,739,060, $1,249,128, $655,763, 179,483 and $102,961 for the
Fiscal years ending June 30, 2003, 2004, 2005, 2006, 2007 and thereafter,
respectively.
The Company is also contractually obligated to certain employees and
executives pursuant to commission agreements and compensation agreements.
MARKET FOR COMPANY'S COMMON EQUITY
The shares of our Common Stock were delisted from the NASDAQ national
market in August 2002 and are now traded in the over-the-counter market on what
is commonly referred to as the "pink sheets". As a result, an investor may find
it more difficult to dispose of or obtain accurate quotations as to the market
value of the securities. In addition, we are now subject to Rule 15c2-11
promulgated by the SEC. If we fail to meet criteria set forth in such Rule (for
example, by failing to file periodic reports as required by the Exchange Act)
various practice requirements are imposed on broker-dealers who sell securities
governed by the Rule to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
Rule may have a materially adverse effect on the ability of broker-dealers to
sell the Company's securities, which may materially affect the ability of
shareholders to sell the securities in the secondary market.
The delisting could make trading our shares more difficult for investors,
potentially leading to further declines in share price. It would also make it
more difficult for us to raise additional capital. We will also incur additional
costs under state blue-sky laws if we sell equity due to our delisting.
31
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2002, 2001, 2000 and 1999,
inflation has not had a significant effect on our results of operations since
inception.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because
of the use of estimates inherent in the financial reporting process, actual
results could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment
than others in their application. These include: impairment of intangible
assets, valuation of customer receivables and income tax recognition of deferred
tax items. Our policy and related procedures for impairment of intangible
assets, valuation of customer receivables and income tax recognition of deferred
tax items are summarized below.
Impairment of intangible assets
Impairment of intangible assets results in a charge to operations
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of an asset to be held and used
is measured by a comparison of the carrying amount of the asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. The
measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows. The
Company tests goodwill for impairment annually or more frequently whenever
events occur or circumstances change, which would more likely than not reduce
the fair value of a reporting unit below its carrying amount. The measurement of
fair value in lieu of a public market for such assets or a willing unrelated
buyer relies on management's reasonable estimate of what a willing buyer would
pay for such assets. Management's estimate is based on its knowledge of the
industry, what similar assets have been valued in sales transactions and current
market conditions.
The Company adopted SFAS 142 in July 2001, which requires that goodwill
and intangible assets with indefinite lives will no longer be amortized but will
be subject to impairment review. Long-lived tangible assets and intangible
assets with definite lives will be subject to impairment under SFAS No. 144.
Valuation of customer receivables
Provisions for allowance for doubtful accounts are made based on
historical loss experience adjusted for specific credit risks. Measurement of
such losses requires consideration of the company's historical loss experience,
judgments about customer credit risk, and the need to adjust for current
economic conditions.
Income tax recognition of deferred tax items
We recognize deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. Significant management judgment is required in
determining our deferred tax assets and liabilities. Management makes an
assessment of the likelihood that our deferred tax assets will be recovered from
future taxable income, and to an amount that it believes is more likely than not
to be realized.
32
Revenue Recognition
The Company recognizes all revenues associated with income tax
preparation, accounting services and direct mail services upon completion of the
services. Financial planning services include securities and other transactions.
The related commission revenue and expenses are recognized on a trade date
basis. Commission revenue and expenses on sales of life insurance policies are
recognized when the policies are effective.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Other significant accounting policies
Other significant accounting policies, not involving the same level
of measurement uncertainties as those discussed above, are nevertheless
important to an understanding of the financial statements. These policies
require difficult judgments on complex matters that are often subject to
multiple sources of authoritative guidance. Certain of these matters are among
topics currently under reexamination by accounting standards setters and
regulators. Although no specific conclusions reached by these standard setters
appear likely to cause a material change in the Company's accounting policies,
outcomes cannot be predicted with confidence. Also see Note 1 to the
consolidated Financial Statements, which discusses accounting policies that must
be selected by management when there are acceptable alternatives.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), which supersedes both FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of (Statement 121) and the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("Opinion 30"), for the disposal of a segment
of a business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, SFAS 144 provides guidance on how a long-lived asset
that is used, as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike Statement 121, an impairment assessment under Statement 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for impairment
under Statement No. 142, Goodwill and Other Intangible Assets.
The Company adopted SFAS 144 on July 1, 2002. Adoption of SFAS 144 did
not have an immediate impact on long-lived assets held for use on the Company's
financial statements because the impairment assessment under SFAS 144 is largely
unchanged from Statement 121. The provisions of the SFAS 144 for assets held for
sale or other disposal generally are required to be applied prospectively after
adoption to newly initiated disposal activities. Therefore, management cannot
determine the potential effects that adoption of SFAS 144 will have on the
Company's financial statements. (See Note 20 to the Notes to Consolidate
Financial Statements).
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos.
4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4
required all gains and losses from the extinguishments of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145
requires gains and losses from certain debt extinguishments not to be reported
as extraordinary items when the use of debt extinguishments is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
33
requirements for motor carriers. Those transitions are completed; therefore SFAS
No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS No. 145 is
effective for Fiscal years beginning after May 15, 2002. The provisions relating
to sale-leaseback are effective for transactions after May 15, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and EITF 94-3 relates to the timing of liability
recognition. Under SFAS No. 146, a liability for a cost associated with an exit
or disposal activity is recognized when the liability is incurred. Under EITF
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation--Transition and Disclosure", amending
FASB Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation.
SFAS 148 provides two additional alternative transition methods for recognizing
an entity's voluntary decision to change its method of accounting for
stock-based employee compensation to the fair-value method. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 so that entities will have to
(1) make more-prominent disclosures regarding the pro forma effects of using the
fair-value method of accounting for stock-based compensation, (2) present those
disclosures in a more accessible format in the footnotes to the annual financial
statements, and (3) include those disclosures in interim financial statements.
SFAS 148's transition guidance and provisions for annual disclosures are
effective for fiscal years ending after December 15, 2002; earlier application
is permitted. Management is assessing the effects of SFAS 148 on the financial
statements of the Company.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), was issued. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. At June 30, 2002, the Company has certain
guarantees related to operating leases which have been included in the Company's
operating lease commitments included in Note 11 to the consolidated financial
statements. Management is currently evaluating the effect FIN 45 may have on the
Company's financial statements as a result of the sale of offices to Pinnacle,
which included the assumption by Pinnacle of certain leases of such offices, on
November 26, 2002.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, for certain
entities that do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by
their primary beneficiary. The primary beneficiary of a variable interest entity
is determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Management is evaluating the
impact, if any, that adoption of the provisions of FIN 46 will have upon its
financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk. To date the Company's exposure to market risk has been
limited and it is not currently hedging any market risk, although it may do so
in the future. The Company does not hold or issue any derivative financial
instruments for trading or other speculative purposes. The Company is exposed to
market risk associated with changes in the fair market value of the marketable
securities that it holds. The Company's revenue and profitability may be
adversely affected by declines in the volume of securities transactions and in
market liquidity, which generally result in lower revenues from trading
activities and commissions. Lower securities price levels may also result in a
reduced volume of transactions, as well as losses from declines in the market
value of securities held by the Company in trading, investment and underwriting
positions. Sudden sharp declines in market values of securities and the failure
of issuers and counterparts to perform their obligations can result in illiquid
markets in which the Company may incur losses in its principal trading and
market making activities.
Interest rate risk. The Company's obligations under its First Union
bank and Travelers credit facilities bear interest at floating rates and
therefore, the Company is impacted by changes in prevailing interest rates. A
100 basis point increase or decrease in market interest rates on the $10.7
million outstanding under this facility at June 30, 2002 would result in an
increase or decrease in the annual interest expense of approximately $107,000.
34
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Reports of Independent Public Accountants...................................................36
Consolidated Balance Sheets as of June 30, 2002 and 2001....................................38
Consolidated Statements of Operations
for the years ended June 30, 2002, 2001 and 2000.......................................39
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ended June 30, 2002, 2001 and 2000...............................40
Consolidated Statements of Cash Flows
for the years ended June 30, 2002, 2001 and 2000.......................................42
Notes to Consolidated Financial Statements..................................................44
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or Notes thereto.
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of Gilman + Ciocia, Inc.:
We have audited the accompanying consolidated balance sheet of Gilman +
Ciocia, Inc. and subsidiaries as of June 30, 2002, and the related consolidated
statements of operations, cash flows and stockholders' equity for the year 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 audit. The financial statements of Gilman + Ciocia, Inc.
as of June 30, 2001 and for each of the two years in the period ended June 30,
2001, were audited by other auditors who have ceased operations and whose report
dated September 28, 2001, expressed an unqualified opinion on those statements
prior to the restatements discussed in Note 2(a).
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects the financial position of Gilman + Ciocia, Inc.
and subsidiaries as of June 30, 2002 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of Gilman +
Ciocia, Inc. as of and for the year ended June 30, 2001 were audited by other
auditors who have ceased operations. As described in Note 2(a) these financial
statements have been restated. We audited the adjustments described in Note 2(a)
to the financial statements that were applied to restate the 2001 financial
statements. In our opinion, such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review, or apply any
procedures to the 2001 financial statements of the Company other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 financial statements taken as a whole.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 20(c) to the consolidated financial statements, the Company has
suffered recurring losses from operations and is in breach of covenants of a
Forbearance Agreement in connection with the Company's Loan Agreements, that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As discussed in Note 2(i) to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142") on July 1, 2001.
/s/ Grant Thornton LLP
New York, New York
December 31, 2002, except for the matters discussed in Note 1 paragraph 7 and
Note 20(c) paragraphs 5-7, for which the date is March 21, 2003 and Note 20(f)
for which the date is March 19, 2003.
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of Gilman + Ciocia, Inc.:
We have audited the accompanying consolidated balance sheets of Gilman
+ Ciocia, Inc. and subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the three years in the periods ended June 30, 2001. 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 auditing standards generally
accepted in the United States. 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 financial position of Gilman + Ciocia, Inc.
and subsidiaries as of June 30, 2001 and 2000 and the results of their
operations and their cash flows for each of the years ended June 30, 2001, 2000
and 1999 in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
September 28, 2001
New York, New York
This Report of Independent Certified Public Accountants is a copy of a
previously issued Arthur Andersen LLP ("Andersen") report and has not been
reissued by Andersen. The inclusion of this previously issued Andersen report is
pursuant to the "Temporary Final Rule and Final Rule; Requirements for Arthur
Andersen LLP Auditing Clients," issued by the U.S. Securities and Exchange
Commission in March 2002. Note that this previously issued Andersen report
includes references to certain fiscal years, which are not required to be
presented in the accompanying financial statements as of and for the fiscal
year ended June 30, 2002.
37
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
2001 RESTATED
JUNE 30, 2002 SEE NOTE 2(a)
----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,223,806 $ 5,413,674
Marketable securities 1,759,742 55,933
Accounts receivable, less allowance for doubtful accounts of $614,972 and
$291,000 as of June 2002 and 2001, respectively. 8,790,836 10,813,299
Receivables from officers, stockholders and employees 1,537,176 1,712,711
Income tax receivable 748,678 185,338
Deferred tax asset - 170,275
Prepaid expenses and other current assets 150,810 895,026
----------- -----------
Total current assets 15,211,048 19,246,256
Noncurrent assets:
Property and equipment, net of accumulated depreciation of $5,983,939 and
$4,700,147 as of June 2002 and 2001, respectively 4,091,156 5,052,979
Goodwill 5,264,858 5,498,608
Intangible assets, net of accumulated amortization of $5,467,287 and
$4,046,379 as of June 2002 and 2001, respectively 10,888,018 19,118,602
Deferred tax asset, net of current portion - 1,709,160
Other assets 1,717,433 2,054,290
----------- -----------
Total assets $37,172,513 $52,679,895
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $14,501,076 $10,431,363
Long-term debt 14,108,867 7,786,001
Deferred tax liability - 414,567
----------- -----------
Total current liabilities 28,609,943 18,631,931
Noncurrent liabilities:
Long-term debt, net of current portion 851,501 5,425,928
Deferred tax liability, net of current portion - 697,603
----------- -----------
Total liabilities 29,461,444 24,755,462
Commitments and contingencies (see Note 11)
Stockholders' equity:
Preferred stock, $0.001 par value; 100,000 shares authorized; no shares
issued and outstanding at June 30, 2002 and 2001, respectively - -
Common stock, $0.01 par value; 20,000,000 shares authorized; 9,203,027
and 8,654,829 shares issued at June 30, 2002 and 2001, respectively 92,030 86,548
Additional paid-in capital 29,534,307 27,711,953
Treasury Stock 263,492 and 337,519 shares of common stock, respectively,
at cost (1,065,996) (1,329,095)
Note receivable (105,000) (105,000)
Retained earnings (accumulated deficit) (20,744,272) 1,560,027
----------- -----------
Total stockholders' equity 7,711,069 27,924,433
----------- -----------
Total liabilities and stockholders' equity $37,172,513 $52,679,895
=========== ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
38
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
------------------------------------------------------
2001 RESTATED
2002 SEE NOTE 2(a) 2000
------------------------------------------------------
REVENUES:
Financial planning services $ 75,164,322 $ 85,585,058 $ 70,617,887
Tax preparation fees 17,295,265 17,557,112 15,808,075
e1040.com 69,095 791,621 1,156,640
Direct mail services 505,407 966,519 1,336,735
------------- ------------ ------------
Total revenues 93,034,089 104,900,310 88,919,337
OPERATING EXPENSES:
Salaries and commissions 78,081,085 80,417,361 68,283,595
General and administrative 15,427,653 10,536,979 10,384,053
Advertising 2,278,413 3,913,237 9,705,238
Brokerage fees and licenses 1,739,294 1,770,027 1,872,294
Rent 5,967,082 5,135,965 3,613,146
Depreciation and amortization 3,651,001 3,156,629 2,508,495
Goodwill and other intangible assets impairment loss 7,489,099 - -
------------- ------------ ------------
Total operating expenses 114,633,627 104,930,198 96,366,821
------------- ------------ ------------
Loss from operations (21,599,538) (29,888) (7,447,484)
OTHER INCOME (EXPENSE):
Interest and investment income 2,268,391 186,034 1,412,991
Interest expense (1,915,138) (1,403,210) (930,135)
Other income (expense) (922,968) 1,732,089 804,536
------------- ------------ ------------
Total other income (expense) (569,715) 514,913 1,287,392
------------- ------------ ------------
Income (loss) before provision (benefit) for income taxes (22,169,253) 485,025 (6,160,092)
Provision (benefit) for income taxes 135,046 697,764 (2,147,000)
------------- ------------ ------------
Net loss, as restated $(22,304,299) $ (212,739) $(4,013,092)
============= ============ ============
Net loss per share:
Basic and diluted net loss $ (2.58) $ (0.03) $ (0.53)
============= ============ ============
Weighted average number of common shares outstanding:
Basic and diluted shares outstanding 8,647,966 8,082,674 7,552,396
============= ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
39
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
RETAINED EARNINGS
ADDITIONAL PAID IN DEFERRED (ACCUMULATED
COMMON STOCK CAPITAL COMPENSATION DEFICIT)
------------ ------------------ ------------ ----------------
SHARES AMOUNT
------ ------
Balance at June 30, 1999 7,508,266 $ 75,083 $ 20,054,853 $ (27,409) $ 5,785,858
Compensate loss:
Net loss - - - - (4,013,092)
Changes in net unrealized
loss on securities - - - - -
Total comprehensive loss
Amortization of deferred - - - 27,409 -
Compensation
Purchase of treasury stock - - - - -
Re-issuance of treasury stock - - 8,156 - -
Payment / write-off of stock
subscriptions receivable - - - - -
Issuance of note receivable
for shares sold - - - - -
Issuance of common stock in
connection with exercise of
stock options 107,081 1,071 568,805 - -
Issuance of common stock and
options in connection with
business combinations 385,487 3,854 3,216,164 - -
Issuance of common stock in
connection with settlement of
30,000 litigation 30,000 300 6,281 - -
Income tax benefit upon
exercise of stock options - - 122,638 - -
---------- --------- ------------ ----------- -------------
Balance at June 30, 2000 8,030,834 $ 80,308 $ 23,976,897 $ - $ 1,772,766
Comprehensive loss:
Net loss, as restated - - - - (212,739)
Comprehensive loss
Purchase of treasury stock - - - - -
Re-issuance of treasury stock - - - - -
Re-issuance of treasury
stock-employee stock purchase
plan - - (122,252) - -
Issuance of warrants in
connection with refinancing - - 800,000 - -
STOCK
SUBSCRIPTIONS/ ACCUMULATED
NOTE OTHER TOTAL
RECEIVABLE FOR COMPREHENSIVE STOCKHOLDERS'
TREASURY STOCK SHARES SOLD LOSS EQUITY
-------------- -------------- ------------- -------------
SHARES AMOUNT
------ ------
Balance at June 30, 1999 199,645 $ (777,039) $ (159,646) $ 8,241 $ 24,959,941
Compensate loss:
Net loss - - - - (4,013,092)
Changes in net unrealized
loss on securities - - - (8,241) (8,241)
--------------
Total comprehensive loss (4,021,333)
--------------
Amortization of deferred - - - - 27,409
Compensation
Purchase of treasury stock 52,600 (257,385) - - (257,385)
Re-issuance of treasury stock (4,350) 22,294 - - 30,450
Payment / write-off of stock
subscriptions receivable - - 159,646 - 159,646
Issuance of note receivable
for shares sold - - (105,000) - (105,000)
Issuance of common stock in
connection with exercise of
stock options - - - - 569,876
Issuance of common stock and
options in connection with
business combinations - - - - 3,220,018
Issuance of common stock in
connection with settlement of
30,000 litigation - - - - 6,581
Income tax benefit upon
exercise of stock options - - - - 122,638
------- ------------- ----------- --------- -------------
Balance at June 30, 2000 247,895 $ (1,012,130) $ (105,000) $ - $ 24,712,841
Comprehensive loss:
Net loss, as restated - - - - (212,739)
--------------
Comprehensive loss (212,739)
--------------
Purchase of treasury stock 160,439 (648,503) - - (648,503)
Re-issuance of treasury stock (200) 1,025 - - 1,025
Re-issuance of treasury
stock-employee stock purchase
plan (70,615) 330,513 - - 208,261
Issuance of warrants in
connection with refinancing - - - - 800,000
40
RETAINED
EARNINGS
ADDITIONAL PAID IN DEFERRED (ACCUMULATED
COMMON STOCK CAPITAL COMPENSATION DEFICIT)
------------ ------------------ ------------ -----------
SHARES AMOUNT
------ ------
Issuance of common stock 10,000 100 30,105 - -
Issuance of common stock and
options in connection with
business combinations 594,617 5,947 2,921,748 - -
Issuance of common stock in
lieu of cash payment 5,250 52 52,466 - -
Stock based compensation 14,128 141 52,989 - -
--------- --------- ------------ ---------- -------------
Balance at June 30, 2001 8,654,829 $ 86,548 $ 27,711,953 $ - $ 1,560,027
Comprehensive loss:
Net loss - - - - (22,304,299)
Comprehensive loss - - - - -
Purchase of treasury stock - - - - -
Issuance of common stock in
connection with exercise of
stock options 3,500 35 9,590 - -
Re-issuance of treasury
stock-employee stock purchase
plan - - (54,516) - -
Issuance of warrants in
connection with refinancing - - 300,000 - -
Issuance of common stock in
connections with loan
agreement 195,298 1,953 448,047 - -
Issuance of common stock in
connection with business
combinations 390,576 3,906 1,239,468 - -
Rescindment of acquisition (41,176) (412) (120,235) - -
--------- --------- ------------ ---------- -------------
Balance at June 30, 2002 9,203,027 $ 92,030 $ 29,534,307 $ - $(20,744,272)
========= ========= ============ ========== ============
STOCK
SUBSCRIPTIONS/ ACCUMULATED
NOTE OTHER TOTAL
RECEIVABLE FOR COMPREHENSIVE STOCKHOLDERS'
TREASURY STOCK SHARES SOLD LOSS EQUITY
-------------- -------------- ------------- -------------
SHARES AMOUNT
------ ------
Issuance of common stock - - - - 30,205
Issuance of common stock and
options in connection with
business combinations - - - - 2,927,695
Issuance of common stock in
lieu of cash payment - - - - 52,518
Stock based compensation - - - - 53,130
--------- ------------- ------------ ---------- ------------
Balance at June 30, 2001 337,519 $ (1,329,095) $ (105,000) $ - $ 27,924,433
Comprehensive loss:
Net loss - - - - (22,304,299)
------------
Comprehensive loss - - - - (22,304,299)
------------
Purchase of treasury stock 47,937 (120,576) - - (120,576)
Issuance of common stock in
connection with exercise of
stock options - - - - 9,625
Re-issuance of treasury
stock-employee stock purchase
plan (121,964) 383,675 - - 329,159
Issuance of warrants in
connection with refinancing - - - - 300,000
Issuance of common stock in
connections with loan
agreement - - - - 450,000
Issuance of common stock in
connection with business
combinations - - - - 1,243,374
Rescindment of acquisition - - - - (120,647)
--------- ------------- ------------ ---------- ------------
Balance at June 30, 2002 263,492 $ (1,065,996) $ (105,000) $ - $ 7,711,069
========= ============= ============ ========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
41
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
---------------------------------------------------
2001 RESTATED
-------------
2002 SEE NOTE 2(a) 2000
---- ------------ ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,304,299) $ (212,739) $ (4,013,092)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,651,001 3,156,629 2,508,495
Goodwill and other intangible assets impairment loss 7,489,099 - -
Amortization of debt discount 267,258 166,248 -
Provision (benefit) for income taxes 135,046 456,000 (477,000)
Loss (gain) on a rescission of an acquisition contract 205,832 (600,000) -
Gain on sale of properties (218,015) - -
Amortization of deferred and other compensation - 50,057 1,011,356
Bad debt expense 1,879,280 - -
Loss from joint venture 4,808 - -
Changes in assets and liabilities:
Accounts receivable, net 1,321,801 (4,458,184) (2,685,654)
Prepaid and other current assets 744,216 155,860 (129,151)
Change in marketable securities (1,486,439) 17,111 (970,464)
Receivables from officers, stockholders and employees (300,170) (353,556) 592,678
Other assets (400,950) (127,450) (315,579)
Accounts payable and accrued expenses 4,336,352 687,301 4,636,655
Income taxes receivable (payable) 68,879 2,396,221 (1,551,927)
------------- ----------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,606,301) 1,333,498 (1,393,683)
------------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,004,689) (1,517,505) (1,818,944)
Cash paid for acquisitions, net of cash acquired (262,500) (1,837,545) (1,481,348)
Proceeds from sale of investments - - 1,215,141
Proceeds from sale of properties 861,220 - -
----------- ------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (405,969) (3,335,050) (2,085,151)
----------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock (120,576) (648,503) (257,385)
Proceeds from bank and other loans 10,250,000 12,273,175 10,505,100
Payments of bank loans and capital lease obligations (8,316,647) (8,780,944) (6,209,021)
Net proceeds from issuance of common stock and
exercise of common stock options and warrants 9,625 30,205 464,876
Proceeds from stock subscriptions - - 83,203
------------- ----------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES: 1,822,402 2,873,933 4,586,773
------------- ----------- -------------
Net change in cash and cash equivalents (3,189,868) 852,381 1,107,939
Cash and cash equivalents at beginning of period 5,413,674 4,561,293 3,453,354
------------- ----------- -------------
Cash and cash equivalents at end of period $ 2,223,806 $ 5,413,674 $ 4,561,293
============= ============ =============
42
YEAR ENDED JUNE 30,
---------------------------------------------------
2001 RESTATED
-------------
2002 SEE NOTE 2(a) 2000
---- ------------ ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 577,450 $ 992,896 $ 792,859
============= ============ =============
Income taxes $ 33,833 $ 309,773 $ 784,962
============= ============ =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Re-issuance of treasury stock at fair value 383,675 331,538 22,294
Common stock and options issued in connection with
business combination 893,374 2,927,695 3,220,018
Exercise of stock options - - 105,000
Equipment acquired under capital leases 422,254 414,240 1,209,478
Issuance of common stock upon loan obligation 450,000 - -
Note receivable on rescission of acquisition contract - 1,000,000 -
Value of warrants issued $ 300,000 $ 800,000 -
Details of business combinations:
Fair value of assets acquired $ 1,165,874 $ 5,455,552 $ 5,532,366
Less: liabilities assumed (10,000) (690,312) (831,000)
Less: Stock issued (893,374) (2,927,695) (3,220,018)
------------- ----------- -------------
Cash paid for acquisitions $ 262,500 $ 1,837,545 $ 1,481,348
============= ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
43
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, AND 2001
1. ORGANIZATION AND NATURE OF BUSINESS
(a) Description of the Company
Gilman + Ciocia, Inc. and subsidiaries (the "Company" or "G+C"), which is
incorporated in Delaware, provides income tax preparation and financial planning
services to individuals and businesses. The Company has six active wholly owned
subsidiaries, Prime Capital Services, Inc ("PCS") and North Ridge Securities,
Inc. ("North Ridge") which are registered broker-dealers pursuant to the
provisions of the Securities Exchange Act of 1934; Prime Financial Services,
Inc. ("PFS") and North Shore Capital Management, Inc. ("North Shore"), which
manage PCS and North Ridge, respectively, as well as sell life insurance and
fixed annuities; Asset and Financial Planning, Ltd. ("AFP"), an asset management
business; and e1040.com, Inc. ("e1040"), an internet tax preparation business.
The Company provides federal, state and local tax preparation and financial
planning services to individuals predominantly in the middle and upper income
brackets. As of June 30, 2002 the Company had 121 offices operating in 15
states. To complement its tax preparation services, the Company also provides
financial planning services to its tax preparation clients and others. These
financial planning services include securities brokerage services, insurance and
mortgage agency services.
On November 26, 2002 the Company finalized a transaction pursuant to an asset
purchase agreement with Pinnacle Taxx Advisors LLC ("Pinnacle"), whereby
Pinnacle, an entity controlled by Thomas Povinelli and David Puyear, former
executive officers of the Company, purchased certain assets of the Company (See
Note 20).
The Company's common stock was delisted from the NASDAQ national market in
August 2002, and is now traded in the over-the-counter market on what is
commonly referred to as the pink sheets. As a result, an investor may find it
more difficult to dispose of or obtain accurate quotations as to the market
value of the Company's securities. In addition, the Company is now subject to
Rule 15c2-11 promulgated by the Securities and Exchange Commission. If the
Company fails to meet criteria set forth in such Rule (such as failing to file
required periodic reports pursuant to the Exchange Act), various practice
requirements are imposed on broker-dealers who sell securities governed by the
Rule to persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transactions prior to sale. Consequently, the Rule may have a
materially adverse effect on the ability of broker-dealers to sell the Company's
securities, which may materially affect the ability of shareholders to sell the
securities in the secondary market.
The delisting has made trading the Company's shares more difficult for
investors, potentially leading to further declines in share price. It would also
make it more difficult for the Company to raise additional capital, although the
Company has no intentions to do so. The Company will also incur additional costs
under state blue-sky laws if it sells equity.
(b) Basis of Presentation and Going Concern
The Company's June 30, 2002 consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has suffered
losses from operations that raise substantial doubt about its ability to
continue as a going concern. During the Fiscal year June 30, 2002, the Company
incurred net losses totaling $22,304,299, and at June 30, 2002 was in a working
capital deficit position of $13,398,895. At June 30, 2002, the Company had
$2,223,806 of cash and cash equivalents and $8,790,836 of trade receivables to
fund short-term working capital requirements. The Company's ability to continue
as a going concern and its future success is dependent upon its ability to
reduce costs, generate revenues and, if required, obtain financing in the near
term to: (1) satisfy its current obligations and commitments, and (2) continue
its growth.
44
On November 27, 2002, the Company and Wachovia Bank, National Association,
formerly known as First Union National Bank ("Wachovia"), entered into a
forbearance agreement whereby Wachovia agreed to forbear from acting on certain
defaults of financial covenants by the Company under its $7,000,000 loan
facility with Wachovia. On March 5, 2003, the Company received a notice of
default from Wachovia listing three defaults by the Company under the
forbearance agreement. The notice of default was rescinded by Wachovia's
attorneys on March 10, 2003. Wachovia's debt forbearance is fully delineated in
Note 20 to the financial statements.
The Company believes that it will be able to complete the necessary steps in
order to meet its cash flow requirements throughout fiscal 2003. Management's
plans in this regard include, but are not limited to, the following:
Subsequent to year end, the Company has finalized a transaction
pursuant to an asset purchase agreement with Pinnacle Taxx Advisors LLC
("Pinnacle"), whereby Pinnacle, an entity controlled by Thomas
Povinelli and David Puyear, former executive officers of the Company,
purchased certain assets of the Company. The Company sold to Pinnacle
47 offices and all tangible and intangible assets which are associated
with the operations of such offices, together representing
approximately 17,690,000 in revenue, or approximately 19.0% of the
Company's annual revenue. The total unadjusted purchase price payable
by Pinnacle was $4,745,463 (See Note 20).
In addition to the Pinnacle transaction, subsequent to June 30, 2002,
the Company has completed the sale of 11 additional offices to various
parties for an aggregate sales price of approximately $1,161,000
consisting of approximately $352,000 of cash and $809,000 of promissory
notes due to the Company (See Note 20).
On November 27, 2002, the Company negotiated a forbearance agreement
with Wachovia Bank, National Association, formerly known as First Union
National Bank ("Wachovia") whereby Wachovia agreed to forbear from
acting on certain defaults of financial covenants by the Company under
debt owed to Wachovia and extended the due date of its debt until
November 1, 2003 (See Note 20).
In addition to the above activities the following business initiatives are also
ongoing and are expected to provide additional working capital to the Company:
1. Management has engaged in an extensive campaign to reduce corporate
overhead, consisting primarily of closing the White Plains executive
offices and consolidating those functions into the Poughkeepsie, New
York home office. This has resulted in savings of approximately
$170,000 per month.
2. The company's current strategy is not to actively pursue acquisitions.
3. The company has negotiated with certain strategic vendors to settle
current liabilities.
Management believes that these actions will be successful. However, there can be
no assurance that the Company will generate sufficient revenues or reduce costs
to provide positive cash flows from operations to permit the Company to realize
its plans. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Management and the Board of Directors are currently exploring a number of
strategic alternatives and are also continuing to identify and implement
internal actions to improve the Company's liquidity or financial performance.
These alternatives may include selling further assets, which in any such case
could result in significant changes in our business plan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Restatements
The consolidated financial statements as of June 30, 2001 and for the year then
ended have been restated to correct an overstatement error of $600,000 in the
previously reported revenue amount as indicated below. During the quarter ended
December 31, 2001 of Fiscal 2002, management identified the overstatement error
from Fiscal 2001 during a review of its' intercompany accounts. Cash amounts of
$600,000 advanced by a subsidiary during the quarter ended March 30, 2001 of
Fiscal 2001 were not eliminated properly and erroneously reported as revenue.
45
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
AS PREVIOUSLY
REPORTED AS RESTATED
-------- -----------
BALANCE SHEET:
Accounts payable and accrued expenses $ 9,831,363 $ 10,431,363
Deferred tax assets, net of current 1,460,160 1,709,160
Retained earnings 1,911,027 1,560,027
STATEMENT OF OPERATIONS:
Revenue (*) $ 106,513,173 $ 104,900,310
Provision for income taxes 946,764 697,764
Net income (loss)(**) 138,261 (212,739)
NET INCOME (LOSS) PER SHARE:
Basic and diluted $ 0.02 $ (0.03)
(*) $1,012,863 representing net trading gains previously included in
financial planning revenue have been reclassified to other
income(expense) on the accompanying statements of operations for the
year ended June 30, 2001.
(**) Retained earnings as of July 1, 2001 have been decreased by $351,000
for the effect of the restatements on prior years.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all majority owned subsidiaries from their respective dates of acquisition (Note
3). All significant intercompany transactions and balances have been eliminated.
(c) Reclassifications
Certain prior years' information has been reclassified to conform to current
year presentation.
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include
investments in money market funds and are stated at cost, which approximates
market value.
(f) Marketable Securities
The Company accounts for its short-term investments in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). The Company's short-term
investments consist of trading securities and are stated at quoted market
values, with unrealized gains and losses reported as investment income in
earnings. During the Fiscal years ended June 30, 2002, 2001, and 2000 the
Company recognized unrealized gains (losses) from trading securities of
$(957,031), $1,071,849 and $659,157, respectively. Realized gains, realized
losses and declines in value judged to be other-than-temporary, are included in
other income
46
(expense). All such gains and losses are calculated on the basis of
specific-identification method. During the Fiscal year ending June 30, 2001 the
Company recognized $58,986 in realized losses. Interest earned is included in
earnings. The original cost included in the carrying value of marketable
securities at June 30, 2002 is $1,933,554.
Securities sold, but not yet purchased, are stated at quoted market values with
unrealized gains and losses reflected in the statements of operations.
Subsequent market fluctuations of securities sold, but not yet purchased, may
require purchasing the securities at prices that may differ from the market
values reflected in the accompanying balance sheets. The liability attributable
to securities sold short, but not yet purchased, is $210,771 and is included in
accounts payable and accrued expenses.
(g) Accounts Receivable
The Company's accounts receivable consist primarily of amounts due related to
financial planning commissions and tax/accounting services performed. The
allowance for doubtful accounts represent an amount considered by management to
be adequate to cover potential losses, if any.
(h) Property and Equipment
Property and equipment are carried at cost. Amounts incurred for repairs and
maintenance are charged to operations in the period incurred.
Depreciation is calculated on a straight-line basis over the following useful
lives:
Buildings 31.5 years
Equipment 3- 5 years
Furniture and fixtures 5- 7 years
Leasehold improvements 5-10 years
Software 5 years
Assets under capital lease 3-7 years
(i) Goodwill and Other Intangible Assets
Goodwill and other intangibles, net relates to our acquisitions accounted for
under the purchase method. Intangible assets include covenants not to compete,
customer lists, goodwill, independent contractor agreements and other
identifiable intangible assets. Goodwill represents acquisition costs in excess
of the fair value of net tangible and identifiable intangible assets acquired as
required by SFAS No. 141 "Business Combinations". On July 1, 2001, the Company
adopted the full provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 requires that purchased goodwill and certain
indefinite-lived intangibles no longer be amortized, but instead be tested for
impairment at least annually. Prior to SFAS 142 goodwill was amortized over an
expected life of 20 years. This testing requires the comparison of carrying
values to fair value and, when appropriate, requires the reduction of the
carrying value of impaired assets to their fair value. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives. Amortization of finite lived intangible
assets is calculated on a straight-line basis over the following lives:
Customer Lists 5-20 years
Broker-Dealer Registration 20 years
Non-Compete Contracts 3-5 years
House Accounts 15 years
Administrative Infrastructure 7 years
Independent Contractor Agreements 15 years
As required, the Company performed the fair value impairment tests prescribed by
SFAS 142 during the Fiscal year ended June 30, 2002 (See Notes 6 & 7).
As of June 30, 2002, the remaining amount of the Company's goodwill, net of
amortization recorded prior to June 30, 2001, was approximately $5.3 million. As
required by SFAS 142, the following table shows the Company's Fiscal 2002
results, which are presented on a basis comparable to the Fiscal 2001 results,
adjusted to exclude amortization expense related to goodwill.
47
YEAR ENDED JUNE 30,
2001 RESTATED SEE
2002 NOTE 2(a) 2000
---------------- ------------------- ----------
Net loss - as reported $ (22,304,299) $ (212,739) (4,013,092)
Add back: Goodwill amortization
- 331,228 331,228
-------------- ----------- ----------
Net income (loss) - as adjusted (22,304,299) 118,489 (3,681,864)
Basic and diluted net loss per share:
Basic and diluted net loss per share - as reported $ (2.58) $ (0.03) (0.53)
Add back: Goodwill & other intangible amortization - 0.04 (0.04)
-------------- ----------- -----------
Net income (loss) per share - as adjusted $ (2.58) $ 0.01 (0.49)
============== =========== ===========
Weighted average shares:
Basic and diluted 8,647,966 8,082,674 7,552,396
(j) Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", ("SFAS 144") the Company reviews its' recorded long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable and provides currently
for any identified impairments. SFAS 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", and provides guidance on classification and accounting for such assets when
held for sale or abandoned. (See Note 2v).
(k) Website Development and Internal Use Software Costs
In accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," as well as
Emerging Issues Task Force ("EITF') 00-02, "Accounting for Website Development
Costs," the Company capitalized costs incurred in the application development
stage related to the development of its website and its internal use software in
the amount of approximately $162,000 and $670,000 in Fiscal 2002 and 2001,
respectively. Amortization expense is computed on a straight-line basis over a
period of three to five years, the expected useful life, and amounted to
approximately $52,000 and $163,000 for the years ended June 30, 2002 and 2001
(See Note 5).
(l) Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting services and direct mail services upon completion of the services.
Financial planning services include securities and other transactions. The
related commission revenue and expenses are recognized on a trade date basis.
Commission revenue and expenses on sales of life insurance policies are
recognized when the policies are effective.
(m) Advertising Costs
The costs to develop direct-mail advertising are accumulated and expensed upon
the first mailing of such advertising in accordance with SOP 93-7, "Reporting on
Advertising Costs." The costs to develop tax season programs and associated
printing and paper costs are deferred in the first and second Fiscal quarters
and expensed in the third Fiscal quarter upon the first use of such
advertisements in the advertising programs.
(n) Interest income(expenses)
Interest expense relates to interest owed on the Company's debt. Interest
expense is recognized over the period the debt is outstanding at the stated
interest rates (See Note 9). Interest income relates primarily to interest
earned on bonds by the broker dealer segment. Interest is recognized from the
last interest payment date up to but not including the settlement date of the
sale.
48
(o) Income Taxes
Income taxes have been provided using the liability method. Deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
estimated tax rates and laws to taxable years in which such differences are
expected to reverse.
(p) Stock-based Compensation
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"),
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation awards to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, the compensation cost for stock options awarded to employees and
directors is measured as excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee or director
must pay to acquire the stock. As required, the Company follows SFAS 123 to
account for stock-based compensation awards to outside consultants. Accordingly,
the compensation costs for stock option awards granted to outside consultants
and non-employee financial planners is measured at the date of grant based on
the fair value of the award using the Black-Scholes option-pricing model (See
Note 12).
(q) Net Income (Loss) Per Share
Net income (loss) per common share amounts ("basic EPS") are computed by
dividing net earnings (loss) by the weighted average number of common shares
outstanding and exclude any potential dilution. Net income (loss) per common
share amounts assuming dilution ("diluted EPS") are computed by reflecting
potential dilution from the exercise of stock options and warrants (See Note
14).
(r) Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, marketable securities, accounts receivable, notes receivable, and
accounts payable, approximated fair value as of June 30, 2002 because of the
relatively short-term maturity of these instruments and their market interest
rates.
(s) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of trade receivables. The majority of the Company's trade
receivables are commissions earned from providing financial planning services
that include securities/brokerage services, insurance and mortgage agency
services. As a result of the diversity of services, markets and the wide variety
of customers, the Company does not consider itself to have any significant
concentration of credit risk.
(t) Comprehensive Loss
The Company's comprehensive loss included unrealized losses on marketable
securities of $8,241 for the Fiscal year ended June 30, 2000.
(u) Segment Disclosure
The Company discloses financial and detailed information about its operating
segments in a manner consistent with internal segment reporting used by the
Company to allocate resources and assess financial performance (Note 16).
(v) Recent Accounting Pronouncements
In August 2001, SFAS 144 was issued, which supersedes both SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("SFAS 121") and the accounting and reporting
49
provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" ("Opinion 30"), for the
disposal of a segment of a business (as previously defined in that Opinion).
SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS 121. For example, SFAS 144 provides
guidance on how a long-lived asset that is used, as part of a group should be
evaluated for impairment, establishes criteria for when a long-lived asset is
held for sale, and prescribes the accounting for a long-lived asset that will be
disposed of other than by sale. SFAS 144 retains the basic provisions of Opinion
30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity (rather than a
segment of a business). Unlike SFAS 121, an impairment assessment under SFAS 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS 142. As required, the Company adopted SFAS 144 on July 1,
2002. Adoption of SFAS 144 did not have an immediate impact on long-lived assets
held for use on the Company's financial statements because the impairment
assessment under SFAS 144 is largely unchanged from SFAS 121. The provisions of
the SFAS 144 for assets held for sale or other disposal are required to be
applied prospectively after July 1, 2002 to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
SFAS 144 will have on the Company's financial statements in the future. (See
Note 20)
In April 2002, SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment
of SFAS No. 13, and Technical Corrections" ("SFAS 145") was issued. SFAS No. 4
required all gains and losses from the extinguishments of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS 145
requires gains and losses from certain debt extinguishments not to be reported
as extraordinary items when the use of debt extinguishments is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
requirements for motor carriers. Those transitions are completed; therefore SFAS
145 rescinds SFAS No. 44. SFAS 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS 145 is effective
for Fiscal years beginning after May 15, 2002. The provisions relating to
sale-leaseback are effective for transactions after May 15, 2002. The Company
adopted SFAS 145 on July 1, 2002. The adoption of SFAS 145 is not expected to
have a material impact on the Company's prospective financial position or
results of operations.
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") was issued. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The principal difference between SFAS 146 and EITF 94-3
relates to the timing of liability recognition. Under SFAS 146, a liability for
a cost associated with an exit or disposal activity is recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The provisions
of SFAS 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS 146 is not expected to have a
material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), "Accounting for
Stock-Based Compensation--Transition and Disclosure", amending FASB Statement
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation. SFAS 148
provides two additional alternative transition methods for recognizing an
entity's voluntary decision to change its method of accounting for stock-based
employee compensation to the fair-value method. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 so that entities will have to (1) make
more-prominent disclosures regarding the pro forma effects of using the
fair-value method of accounting for stock-based compensation, (2) present those
disclosures in a more accessible format in the footnotes to the annual financial
statements, and (3) include those disclosures in interim financial statements.
SFAS 148's transition guidance and provisions for annual disclosures are
effective for fiscal years ending after December 15, 2002; earlier application
is permitted. Management is assessing the effects of SFAS 148 on the financial
statements of the Company.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. Management is currently evaluating the effect
FIN 45 may have on the Company's financial statements as a result of the sale of
offices to Pinnacle, which included the assumption by Pinnacle of certain leases
of such offices, on November 26, 2002.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolildated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Management is evaluating the
impact, if any, that adoption of the provisions of FIN 46 will have upon its
financial condition or results of operations.(Unaudited)
3. BUSINESS COMBINATIONS
In November 1998, the Company acquired all of the outstanding stock of North
Ridge and North Shore (collectively "NSR") for $5.3 million. The acquired
business is a financial organization, which provides its clients with a wide
range of financial investment services.
50
On April 5, 1999, the Company consummated the acquisition of all of the issued
and outstanding capital stock of PCS and AFP. In addition, PFS acquired certain
assets of another entity. PCS, AFP and PFS are collectively hereinafter referred
to as "Prime." The Company delivered at the closing of this acquisition, 751,004
shares of its Common Stock (the "Purchase Shares"), for all the outstanding
shares of the common stock of PCS and AFP and for the other assets acquired by
PFS.
Throughout Fiscal 2000, the Company acquired five financial planning practices
with a valuation of $2.2 million, and seventeen tax practices with a valuation
of $5.3 million. The acquisitions were made in both cash and stock or all stock.
The purchase price is usually determined on the basis of historical revenue
stream; however, the purchase value may be adjusted downward, if the 2000
adjusted pretax profits fail to meet certain revenue targets as set forth in the
purchase agreements. In Fiscal 2000, the Company recorded $5.5 million as the
measurable fair value of the assets acquired with the balance recorded in
2001 and 2002 if performance targets are met in accordance with the purchase
agreements. In Fiscal 2001, no purchase price adjustments were made.
Throughout Fiscal 2001, the Company acquired four financial planning practices
with a valuation of $3.4 million, and thirteen tax practices with a valuation of
$3.3 million. The acquisitions were made with an initial purchase payment of
approximately 50% at closing with a combination of cash and stock or all stock.
The remaining 50% of the purchase payment will be paid if the acquired practice
meets or exceeds the agreed upon profitability targets post closing for a period
of generally five years. In Fiscal 2001, the Company recorded $5.4 million as
the measurable fair value of the assets acquired with the balance recorded in
2002 through 2006 if performance targets are met in accordance with the purchase
agreements. In Fiscal 2001, the Company rescinded one acquisition contract
resulting in a gain upon rescission of $0.6 million with a total recovery of
$1.0 million, including the return of the initial acquisition capital. The $1.0
million note receivable has a term of 3 years and bears interest of 6% per year.
This note will be repaid through the withholding of future financial planning
production of the debtor, cleared by the Company.
During Fiscal 2002, the Company acquired two tax and financial planning
practices with an aggregate valuation of approximately $1.1 million. The
acquisition of Copans & Company CPAs P.C ("Copans") on July 1, 2001 was
completed for consideration of $216,250 in cash, 69,683 shares of the Company's
stock valued at $256,250 and a contingent payment of up to $512,500 which is
payable in 5 annual installments with interest at 9% contingent on the Copans
practice meeting annual EBITDA of at least $205,000. The purchase price for the
acquisition of the tax practice of Richard E. Almy, CPA ("Almy") on January 31,
2002 was $62,500 in cash and a contingent payment of up to $62,500 which is
payable in 5 annual installments with interest at 9%, contingent on the Almy
practice meeting annual EBITDA of at least $125,000.
In Fiscal 2002 the Company rescinded two previous acquisitions. On July 1, 2001
Tri Star Sports & Entertainment Group, Inc. repurchased certain assets from the
Company for $350,000 in cash and 41,176 shares of the Company's common stock
valued at $120,647, resulting in a loss on disposal to the Company of $169,974.
On April 30, 2002 Helen White repurchased certain assets from the Company
resulting in a recovery of $65,000 in cash and a loss on disposal to the Company
of $36,269.
All of the above acquisitions have been accounted for by the purchase method.
The pro forma results for Fiscal 2002 and 2001, assuming the acquisitions had
been made at the beginning of the Fiscal year, would not be materially different
from reported results.
51
4. RECEIVABLES FROM OFFICERS, STOCKHOLDERS AND EMPLOYEES
Receivables from officers, stockholders and employees consist of the following:
AS OF JUNE 30,
2002 2001
------------------- ----------------
Demand loans to officers, non-interest bearing $ 174,514 $ 146,853
Notes receivable from stockholders of the Company. Interest is
charged at rates between 6% and 10% per annum, due in 1-5
years. - 218,154
Demand loans from employees and advances to financial planners. 1,894,083 (a) 1,573,383
-------------- -------------
2,068,597 1,938,390
-------------- -------------
Less: current portion 1,537,176 1,712,711
-------------- -------------
Long-term portion (included in other assets) $ 531,421 $ 225,679
============== =============
(a) The balance at June 30, 2002 includes notes receivable and accrued interest
from financial planners and employees of $1,401,951 and $492,132 of commission
advances in excess of earnings.
Interest income from officers and stockholders was approximately $0, $10,750 and
$60,000 for the Fiscal years ended June 30, 2002, 2001 and 2000, respectively.
5. PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment consist of the following:
AS OF JUNE 30,
2002 2001
---------------- ----------------
Buildings $ 317,737 $ 405,867
Equipment 6,602,160 6,159,885
Furniture and fixtures 1,051,956 1,017,326
Leasehold improvements 1,103,882 971,806
Software 999,360 1,198,242
------------ ------------
10,075,095 9,753,126
Less: Accumulated depreciation and amortization 5,983,939 4,700,147
------------ ------------
Total $ 4,091,156 $ 5,052,979
============ ============
Property and equipment under capitalized leases was $2,185,006 and $1,865,367 at
June 30, 2002 and June 30, 2001, respectively. Accumulated amortization related
to capital leases was $1,110,673 and $546,311 at June 30, 2002 and June 2001,
respectively.
Depreciation expense for property and equipment was $1.6 million, $1.3 million,
and $1.0 million for the Fiscal years ended June 30, 2002, 2001 and 2000,
respectively.
6. GOODWILL
Goodwill included on the accompanying balance sheets as of June 30, 2002 and
2001 was $5,264,858 and $5,498,608, respectively. The Company's goodwill at June
30, 2002 all relates to acquisitions of its broker dealer subsidiaries completed
during or prior to the fiscal year ended June 20, 1999, which were accounted for
under the purchase method.
In accordance with SFAS 142, the Company ceased amortizing goodwill on July 1,
2001. Additionally, as required by SFAS 142 the Company performed the fair value
impairment tests during the Fiscal year ended June 30, 2002. The impairment
review required under SFAS 142 involves a two-step process as follows:
o Step 1 -- Comparison of the fair value of our reporting units to the
carrying value, including goodwill of each of those units. For each
reporting unit where the carrying value, including goodwill, exceeds
the unit's
52
fair value, we move on to step 2. If a unit's fair value exceeds the
carrying value, no further work is performed and no impairment charge
is necessary.
o Step 2 -- Perform an allocation of the fair value of the reporting
unit to its identifiable tangible and non-goodwill intangible assets
and liabilities. This derives an implied fair value for the reporting
unit's goodwill. We then compare the implied fair value of the
reporting unit's goodwill with the carrying amount of the reporting
unit's goodwill. If the carrying amount of the reporting unit's
goodwill is greater than the implied fair value of its goodwill, an
impairment loss must be recognized for the excess.
The impairment testing for goodwill in the broker-dealer reporting unit was
performed using future discounted cash flows. In the third quarter of fiscal
2002, the Company recognized an impairment loss of $233,750 of goodwill
associated with the e1040.com business as the result of a change in business
strategy.
7. INTANGIBLE ASSETS
During the Fiscal years ended June 30, 2002, 2001 and 2000 the Company acquired
aggregate intangible assets valued at $1,165,874, $5,455,552 and $5,532,366
respectively, in connection with acquisitions which are accounted for under the
purchase method.
Intangible assets consist of the following:
AS OF JUNE 30,
2002 2001
---------- -----------
Customer Lists $7,934,359 $14,574,981
Broker-Dealer Registration 200,000 200,000
Non-Compete Contracts 920,946 1,090,000
House Accounts 900,000 900,000
Administrative Infrastructure 700,000 700,000
Independent Contractor Agreements 5,700,000 5,700,000
---------- -----------
16,355,305 23,164,981
Less: Accumulated amortization 5,467,287 4,046,379
---------- -----------
Total 10,888,018 19,118,602
========== ===========
Amortization expense for the Fiscal years ended June 30, 2002 and 2001 was
computed on a straight-line basis over periods of five to twenty years, and it
amounted to $1.4 million and $1.4 million, respectively. Annual amortization
expense will be approximately $950,000 subsequent to fiscal 2002.
As required, the Company performed the fair value impairment tests prescribed by
SFAS 142 during the Fiscal year ended June 30, 2002. Fair value was determined
based on recent comparable sale transactions and future cash flow projections.
As a result, during the Fiscal year ended June 30, 2002 the company recognized
impairment losses of $7,086,295 on customer lists and $169,054 on non-compete
contracts associated with the Company's tax preparation business segment.
Accumulated amortization at June 30, 2002 for customer lists and independent
contractor agreements was $2,921,966 and $1,305,677, respectively.
8. ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
AS OF JUNE 30,
2002 2001
----------- ------------
Accounts payable $ 4,123,665 $ 1,555,630
Commissions payable 5,377,134 4,873,584
Accrued compensation 2,432,800 1,753,427
Accrued expenses and other 2,567,477 2,248,722
----------- ------------
$ 14,501,076 $ 10,431,363
53
9. DEBT
Debt consists of the following:
AS OF JUNE 30,
2002 2001
----------- ------------
Wachovia Bank (a) $ 6,583,333 $ -
European American Bank Facility (b) - 5,973,175
Traveler's Insurance Company Facility (c)
($4,750,000 and $5,000,000 less unamortized
debt discount of $677,185 and $663,752 at
June 30, 2002 and 2001, respectively) 4,072,815 4,366,248
Unsecured promissory notes (d) 1,944,191 1,250,000
Unsecured promissory note (e) ($1,000,000
less unamortized debt discount of $250,000
at June 30, 2002 750,000 -
Note Payable (f) 80,061 -
Note Payable (g) 165,000 -
Notes payable for client settlements,
payable over periods of up to 7 years at
varying interest rates between 0% to 10% 225,102 283,988
Capitalized lease obligations (Note 10) 1,139,866 1,338,518
----------- -----------
14,960,368 13,211,929
Less: Current portion 14,108,867 7,786,001
----------- -----------
Total $ 851,501 $ 5,425,928
=========== ===========
(a) On December 26, 2001, the Company closed a $7.0 million financing with
Wachovia Bank, National Association, formerly known as First Union National
Bank, which replaced an EAB senior credit facility. The $7.0 million was
structured as a $2.0 million revolving credit note with a two-year term and the
balance of $5.0 million was structured as a five-year fully amortizing term loan
note. The loan agreements contained certain negative covenants that required the
Company to maintain, among other things specific minimum net tangible worth,
maximum ratio of debt to tangible net worth at March 31, 2002 and each Fiscal
quarter thereafter, and net profit as of the close of any Fiscal year. As of
June 30, 2002 the Company was not in compliance with these covenants, and,
accordingly, classified all debt due to Wachovia as a current liability (See
Note 20). The facility is secured by a pledge of all business assets of the
Company and guaranteed by the Company's former Chief Executive Officer, Thomas
Povinelli, and the Company's current Chairman, James Ciocia and current Chief
Executive Officer, Michael Ryan. The interest rate charged on the loans is LIBOR
plus 2.75%.
(b) On November 1, 2000 ("effective date"), the Company closed a $6.0 million
senior credit facility ("senior credit facility") with European American Bank
("EAB"). The interest rate on the senior credit facility was, either LIBOR plus
275 basic points or prime plus 0.75%. The effective interest rate for Fiscal
2001 was 9%. The term of the senior credit facility was twelve months. The
senior credit facility was retired in December 2001with a portion of the
proceeds from the Wachovia Bank debt financing. The outstanding principal and
interest balance at June 30, 2001 under the senior credit facility was $6.0
million. The interest rate on the debt facility ranged from prime plus or minus
2.25% and had a term of five years. The effective interest rate for Fiscal 2002
and 2001 was 9.00%.
(c) On November 1, 2000 the Company also closed a $5 million debt financing
("Debt Facility") with Travelers Insurance Company ("Travelers"). As part of the
debt facility financing with Travelers, the Company issued warrants to purchase
725,000 shares of the Company's common stock. Of this amount, 425,000 warrants
were issued to purchase at $4.23 per share, representing the average closing
price for 20 days before the effective date. The 425,000 warrants are
exercisable before May 2, 2003. The remaining warrants to purchase 300,000
shares of the Company's common stock were awarded on February 28, 2002 with a
strike price of $2.43 and will expire on October 31, 2005. The value as
determined by an external appraisal of these warrants issued on February 28,
2002, was set at $300,000. The warrant valuations were treated as a debt
discount and are being amortized over the five-year term of the Debt Facility
under the effective interest rate method. The amortization of the debt discount
for the Fiscal years ended June 30, 2002 and June 30, 2001, was approximately
$256,600 and $166,000, respectively. On September 24, 2002, the Company received
a notice from the attorneys for Travelers alleging that the Company was
54
in default under its debt facility with Travelers due to nonpayment of a
$100,000 penalty for failure to meet sales production requirements as specified
in the debt facility. Although the notice states that all unpaid interest and
principal under the Debt Facility are immediately due and payable and that
Travelers reserves its rights and remedies under the debt facility, it also
states that Travelers intends to comply with the terms of a subordination
agreement between Travelers and Wachovia. Such subordination agreement greatly
restricts the remedies which Travelers could pursue against the Company (See
Note 20).
(d) Represents non-negotiable unsecured promissory notes totaling $1.9 million
and $1.3 million as June 30, 2002 and 2001, respectively, bearing interest at
rates from 10% to 22% per year.
(e) Represents loan from Rappaport Gamma, Ltd. ("Rappaport") of $1,000,000 on
October 30, 2001, pursuant to a written note without collateral and without
stated interest (the "Loan"). The Loan is due and payable on October 30, 2002
(See Note 20). Additionally, the Loan provided that: Rappaport receive 100,000
shares of Rule 144 restricted shares of common stock of the company upon the
funding of the Loan, subject to adjustment so that the value of the 100,000
shares was $300,000 when the Rule 144 restrictions are removed; there was a
penalty of 50,000 shares to be issued to Rappaport if the Loan is not paid when
due and an additional penalty of 10,000 shares per month thereafter until the
Loan was paid in full. The 100,000 shares were issued on October 31, 2001 at a
value of $3 per share. On December 26, 2001, Rappaport subordinated the Loan to
the $7,000,000 being loaned to the Company by Wachovia. In consideration of the
subordination, the Loan was modified by increasing the 10,000 shares penalty to
15,000 shares per month and by agreeing to issue 50,000 additional shares to
Rappaport if the Loan was not paid in full by March 31,2002, subject to
adjustment so that the value of the shares issued is $150,000 when the Rule 144
restrictions are removed. The Loan was not paid by March 31, 2002. Accordingly,
Rappaport was issued 95,298 common shares with a value of $150,000 on May 7,
2002 for the March 31, 2002 penalty. The value of the 100,000 and 95,298 shares
issued were treated as a debt discount and arebeing amortized over the expected
maturity of the Loan under the effective interest rate method. The amortization
of the debt discount associated with the Loan for the Fiscal year ended June 30,
2002 was approximately $200,000.
(f) Represents note payable related to leasehold improvements, which bears
interest at 7% per annum.
(g) Represents a non-negotiable secured promissory note totaling $165,000
bearing interest at 14% per year issued in connection with the acquisition of an
accounting practice. The note is secured by the assets of the accounting
practice acquired by the Company and is payable to the seller.
Fair Value and Debt Maturities
The fair value of the Company's long term debt is estimated based on the
current rates offered to the Company for debt of the same remaining maturities.
The Company estimates its current cost of borrowing at 12% per annum. Management
believes the fair value of the Company's debt to be approximately $12,497,687 as
June 30, 2002. The stated maturities of all long term debt due after June 30,
2003 are as follows:
Fiscal year ended June 30:
2004 496,587
2005 205,752
2006 41,272
2007 28,592
Thereafter 79,298
----------
Total $ 851,501
==========
55
10. CAPITAL LEASE OBLIGATIONS
The Company is the lessee of certain equipment under capital leases expiring
through 2006. The assets and liabilities under capital leases are carried at the
lower of the present value of minimum lease payments or the fair market value of
the asset. The assets are depreciated over the shorter of their estimated useful
lives or their respective lease terms. Depreciation of assets under capital
leases is included in depreciation expense.
Minimum future lease payments under capital leases as of June 30, 2002 are as
follows:
2003 $ 727,426
2004 348,365
2005 192,285
2006 15,673
-----------
1,283,749
-----------
Less: Amount representing finance charges 143,883
-----------
Present value of net minimum lease payments $ 1,139,866
===========
Capital equipment leases have the lease rate factor (finance charge) built in to
the monthly installment and range from 9% to 11.7%.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under various non-cancelable lease agreements for the
rental of office space through 2009. The lease agreements for office space
contain escalation clauses based principally upon real estate taxes, building
maintenance and utility costs.
The following is a schedule by Fiscal year of future minimum rental payments
required under operating leases as of June 30, 2002:
2003 $ 4,131,487
2004 3,435,534
2005 2,678,647
2006 1,474,389
2007 634,813
Thereafter 862,153
-------------
Total $ 13,217,023
=============
Subsequent to year end, the Company entered into an agreement with Pinnacle Taxx
Advisors ("Pinnacle"), an entity controlled by Thomas Povinelli and David
Puyear, former executive officers of the Company, whereby the Company sold to
Pinnacle 47 offices ("Purchased Offices") and all tangible and intangible assets
which are associated with the operations of such offices (See Note 20). In
connection with the agreement, some operating leases were assigned to and
assumed by Pinnacle. In addition, Pinnacle executed an equipment sublease
agreement to reimburse the Company for operating leases for the offices sold
which could not be assigned to Pinnacle. Aggregate operating lease commitment
amounts included in the table above with respect to the leases assigned to
Pinnacle in November 2002 include $2,224,384, $1,739,060, $1,249,128, $655,763,
$179,483 and $102,961 for the years ending June 30, 2003, 2004, 2005, 2006, 2007
and thereafter, respectively.
Rent expense for the Fiscal years ended June 30, 2002, 2001 and 2000 was $6.0
million, 5.1 million, and $3.6 million, respectively.
56
Professional Liability or Malpractice Insurance
The Company does not maintain any professional liability or malpractice
insurance policy for income tax preparation. The Company does maintain an
"Errors and Omissions" insurance policy for its security business. Although the
Company believes it complies with all applicable laws and regulations, no
assurance can be given that the Company will not be subject to professional
liability or malpractice suits.
Clearing Agreements
The Company is a party to clearing agreements with unaffiliated correspondent
brokers, which in relevant part states that the Company will assume customer
obligations in the event of a default. At June 30, 2002, the clearinghouse
brokers held approximately $550,000 of cash as a deposit requirement, which is
included in current liabilities on the accompanying balance sheet at June 30,
2002 as a reduction to amounts due to such brokers.
Net Capital Requirements
PCS and North Ridge are subject to the SEC's Uniform Net Capital Rule 15c
3-1(PCS) and 15c 3-3 (North Ridge), which require the maintenance of minimum
regulatory net capital and that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed the greater of 15 to 1 or $100,000
and $25,000, respectively. As of June 30, 2002 the Company was in compliance
with these regulations.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, PCS and North Ridge execute, as agents,
transactions on behalf of customers. If the agency transactions do not settle
because of failure to perform by either the customer or the counter parties, PCS
and North Ridge may be obligated to discharge the obligation of the
non-performing party and, as a result, may incur a loss if the market value of
the security is different from the contract amount of the transactions.
PCS and North Ridge do not anticipate nonperformance by customers or counter
parties in the above situation. The Company's policy is to monitor its market
exposure and counter party risk. In addition, PCS and North Ridge have a policy
of reviewing, as considered necessary, the credit standing of each counter party
and customer with which it conducts business.
Litigation
The Company is engaged in lawsuits in the ordinary course of business
that it believes will not have a material effect on its financial position.
12. STOCKHOLDERS' EQUITY
Stock Option Agreements and Stock Option Plans
The Company has granted stock options to employees, directors and consultants
pursuant to individual agreements or to its incentive and non-qualified stock
option plans. ("See Item 5: Market for Common Equity and Related Stockholder
Matters")
In September 1993, the Company's Board of Directors and Stockholders adopted the
Company's "1993 Joint Incentive and Non Qualified Stock Option Plan I" (the
"1993 Plan"). The 1993 Plan provides for the granting, at the discretion of the
Board of Directors, of: (i) options that are intended to qualify as incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees and (ii) options not intended to so qualify to
employees, officers and directors. The total number of shares of common stock
for which options may be granted under the 1993 Plan is 816,000 shares. The
number of shares granted, prices, terms of exercise, and expiration dates are
determined by the Board of Directors. The 1993 Plan will terminate in September
2003.
57
During Fiscal 2000, options totaling 395,998 were granted under the 1993 Plan
and of these options 87,833 were exercised. At June 30, 2000, all of the 816,000
options have been granted and 432,612 have been exercised. During Fiscal 2001,
options to purchase 220,000 shares were cancelled under this Option Plan and
24,621 of these options were subsequently granted. At June 30, 2001, 195,379
options are available to be granted under the 1993 Plan and 432,612 have been
exercised.
On April 20, 1999, the Board of Directors of the Company adopted the Company's
"1999 Common Stock and Incentive and Non-Qualified Stock Option Plan" (the "1999
Plan"), pursuant to which the Company may grant options to purchase up to an
aggregate of 300,000 shares. The 1999 Plan was approved by the Company's
stockholders on June 22, 1999 such options may be intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Options"), or they may be intended
not to qualify under such section ("Non-Qualified Options").
Under the 1999 Plan, the Company granted options to purchase 136,064 and 229,877
shares in Fiscal 2001 and 2000, respectively. During Fiscal 2001, 64,941 options
to purchase shares were cancelled. None of the shares granted in Fiscal 2001 and
2000 were exercised and zero options are available to be granted under the 1999
Plan.
On October 17, 2001, the Board of Directors of the Company adopted the Company's
"2001 Common Stock and Incentive and Non-Qualified Stock Option Plan" (the "2001
Plan"). The Company's stockholders approved the plan on December 14, 2001. Under
the 2001 Plan, the Company may grant options to purchase up to 1,250,000 shares
of Common Stock to key employees of the Company, its subsidiaries, directors,
consultants and other individuals providing services to the Company. Such
options may be Incentive Stock Options or Non-Qualified Stock Options. The per
share price of any Share or Option shall not be less than 50% of the fair market
value of the Company's Common Stock at the date of issuance of the Share or
granting of the option.
In addition, from time to time, the Company has issued, and in the future may
issue additional non-qualified options pursuant to individual option agreements,
the terms of which vary from case to case.
The Company maintains records of option grants by year, exercise price, vesting
schedule and grantee. In certain cases the Company has estimated, based on all
available information, the number of such options that were issued pursuant to
each plan. The material terms of such option grant vary according to the
discretion of the Board of Directors.
The Company charged earnings for compensation expense of $27,409 during the year
ended June 30, 2000 in connection with the issuance of stock options. There has
been no charge to earnings during the years ended June 30, 2002 and 2001 related
to the issuance of stock options.
58
The table below summarizes plan and non-plan stock option activity:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------- ------------------
Outstanding, June 30, 1999 2,725,500 $ 8.12
Granted 941,205 $ 8.64
Exercised (87,833) 4.78
Cancelled (85,000) 5.13
----------- ------------
Outstanding, June 30, 2000 3,493,872 $ 8.36
=========== ============
Granted 1,728,428 $ 6.47
Exercised - -
Cancelled (541,827) 9.59
----------- ------------
Outstanding, June 30, 2001 4,680,473 $ 7.58
=========== ============
Granted 514,500 5.83
Exercised (3,500) 2.75
Cancelled (371,879) 7.68
----------- ------------
Outstanding, June 30, 2002 4,819,594 $ 7.39
=========== ============
Exercisable June 30, 2000 1,952,167 $ 7.40
Exercisable June 30, 2001 1,450,031 $ 8.04
Exercisable June 30, 2002 3,464,489 $ 7.71
The weighted average fair values of options granted during the years ended June
30, 2002, 2001 and 2000 are $1.17 $2.47, and $4.61 per option, respectively.
Options outstanding and exercisable at June 30, 2002 and related weighted
average exercise prices and life information are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- NUMBER WEIGHTED-
ACTUAL RANGE OF NUMBER CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE 6/30/02 EXERCISE PRICE
- --------------- ----------- ------------ -------------- ------- --------------
$0.01 - $2.50 70,000 6 $2.15 - -
$2.51 - $5.00 980,022 4 3.81 770,000 3.96
$5.01 - $7.50 1,363,500 6 6.36 796,250 6.31
$7.51 - $10.00 1,855,804 3 8.51 1,347,971 8.47
Above $10.00 550,268 3 13.14 550,268 13.14
--------- - ------ --------- ------
4,819,594 3 $ 7.39 3,464,489 $ 7.71
========= = ====== ========= ======
59
The Company applies APB 25 in accounting for its stock compensation plans, under
which no compensation cost has been recognized. Had compensation cost for the
stock compensation plans been determined in accordance with the fair value
accounting method prescribed under SFAS 123, the Company's net loss and net
(loss) per share would have been as follows:
FOR THE FISCAL YEAR ENDED JUNE 30,
2002 2001 2000
-------------------------------------------------
Net loss:
As reported $ (22,304,299) $ (212,739) $(4,013,092)
Pro forma (24,909,006) (3,022,786) (8,217,792)
Basic and diluted net loss per share:
As reported (2.58) (0.03) (0.53)
Pro forma (2.88) (0.37) (1.09)
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following assumptions:
FOR THE FISCAL YEAR ENDED JUNE 30,
2002 2001 2000
---------------------------------------
Expected life (years) 3 5 3
Free interest rate 2.28% 5.82% 6.2%
Volatility 65.68 90.01 71.00
Dividend Yield 0% 0% 0%
Treasury Stock
During Fiscal 2002, the Company acquired 47,937 shares of its common stock for
an aggregate cost of approximately $121,000 and reissued 121,964 shares to
employees in connection with the Company's employee stock purchase plan. During
Fiscal 2001, the Company acquired 160,439 shares of its common stock for an
aggregate cost of approximately $649,000 and reissued 70,815 shares to
employees. During Fiscal 2000, the Company acquired 52,600 shares of its common
stock for an aggregate cost of approximately $257,000 and reissued 4,350 shares
to employees.
Stock Subscriptions Receivable and Note Receivable for Shares Sold
In Fiscal 2000, the Company's proceeds on stock subscriptions received were
approximately $83,000. The Company wrote-off the balance or approximately
$76,000 of the remaining outstanding stock subscription receivable in Fiscal
2000. For the years ended June 30, 2002, 2001 and 2000, the Company recognized
interest income on stock subscriptions receivable of $0, $0, and $3,406,
respectively.
In Fiscal 2000, an employee exercised options for 21,000 shares at $5 per share
and simultaneously signed a note for $105,000, equal to the total exercise
price. The promissory note bears interest at a fixed rate of 9% per annum and is
not secured by the shares. The Company has classified the note, as a reduction
of stockholders' equity while the note remains outstanding at June 30, 2002.
This note was included in the assets sold to Pinnacle on November 26, 2002 (See
Note 20).
Employee Stock Purchase Plan
On February 1, 2000, the Board of Directors of the Company adopted the Company's
"2000 Employee Stock Purchase Plan" (the "2000 ESPP Plan") and on May 5, 2000,
the 2000 ESPP Plan became effective upon approval by the stockholders. Under the
2000 ESPP Plan, the Company will sell shares of its Common Stock to participants
at a price equal to 85% of the closing price of the Common Stock on (i) the
first business day of a Plan Period or (ii) the Exercise Date (the last day of
the Plan Period), whichever closing price shall be less. Plan Periods are
six-month
60
periods commencing January 1st and July 1st. The 2000 ESPP Plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended. There were two offering periods in Fiscal
2002. The first offering period commenced on July 2, 2001 and closed on December
31, 2001, and the second offering period started again on January 2, 2002 and
closed on June 28, 2002. In Fiscal 2002, the Company issued 54,368 and 67,596
shares of common stock pursuant to the 2000 ESPP Plan at a price of $2.39 per
share and $1.95 per share, respectively. In September 2002, for the offering
period commencing on January 1, 2002 and closing on June 30, 2002, the Company
issued 84,834 shares of common stock pursuant to the 2000 ESPP Plan at a price
of $0.91 per share. As of June 30, 2002, 66 employees participate in the
automatic withholding election for the 2000 ESPP Plan.
13. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan for the benefit of its eligible employees.
There is no minimum length of service required to participate in the plan and
employees of the Company are eligible to begin participation on designated
quarterly enrollment dates provided that they have reached 21 years of age. The
Company makes annual matching contributions to the plan at its discretion. The
aggregate cost of contributions made by the Company to the 401(k) plan was
$29,486, $32,439 and $30,815 during the Fiscal years ended June 30, 2002, 2001
and 2000, respectively.
As of June 30, 2002 the Company was subject to penalties from the United States
Department of Labor related to the 401(k) plan. During the period from January
1, 2002 through June 30, 2002, prior management borrowed several 401(k) Plan
payments from the withholdings of Company employees. As of June 30, 2002, the
principal amount borrowed by prior management from employee withholding payments
and owed by the Company to the 401(k) Plan was approximately $332,000. Since
August 16, 2002 when new management was installed, all withholding payments from
employees to the 401(k) Plan have been made on a timely basis. In addition, new
management paid back all amounts borrowed from the employee withholding payments
with the final repayment being made on November 6, 2002. The Company will
reimburse all employee 401(k) accounts for any lost profits resulting from the
Company borrowings and the Company will make contributions to the employee
accounts so that each account would have a minimum 4% return during the period
that the borrowings were outstanding. The Company has reviewed the borrowings
with the United States Department of Labor which is determining if any interest
or penalties should be imposed.
14. LOSS PER SHARE
Basic net loss per share are computed using the weighted average number of
common shares outstanding. The dilutive effect of potential common share
outstanding is included in the diluted net earnings per share. The computations
of basic and diluted net earnings per share are as follows:
FISCAL YEAR ENDED JUNE 30,
2001 RESTATED
-----------------
2002 SEE NOTE 2(a) 2000
---- -------------- ----
Net loss $(22,304,299) $ (212,739) $ (4,013,092)
Basic and diluted weighted average shares 8,647,966 8,082,674 7,552,396
Basic and diluted net loss per share $ (2.58) $ (0.03) $ (0.53)
The total number of shares related to the outstanding options and warrants
excluded from the calculation of diluted net loss per share was 4,819,594,
4,680,473, and 3,493,872 for Fiscal 2002, 2001 and 2000, respectively, because
the Company incurred losses in the past three years.
15. RELATED PARTY TRANSACTIONS
The four principal stockholders, Messrs. Ciocia, Povinelli and Ryan and Ms.
Travis personally guaranteed the repayment of the Company's loan from Travelers
Life & Annuity. Additionally, Messrs. Ciocia, Povinelli and Ryan have personally
guaranteed the repayment of the Company's loan from Wachovia. Such stockholders
received no consideration for such guarantees other than their salaries and
other compensation.
61
Seth A. Akabas is a partner in the law firm of Akabas & Cohen and also a
director of the Company. Akabas & Cohen is outside counsel for the Company.
During the Fiscal year ended June 30, 2002, 2001 and 2000, the Company paid
$76,286, $104,106 and $113,338 in legal fees to Akabas & Cohen.
Edward H. Cohen is of counsel to, and a retired partner of, the law firm Katten
Muchin Zavis Rosenman and also a director of the Company. Since August 2002,
Katten Muchin Zavis Rosenman ("KMZR") has been outside counsel to the Company
and has also, in the past, represented Michael Ryan personally. No fees were
paid by the Company to KMZR during the Fiscal years ended June 30, 2002, 2001
and 2000.
In July 2000, the Company borrowed $250,000 at 12% interest from Mysemia, a
general partnership in which Seth A. Akabas is a general partner with a 33%
interest. No interest or principal has been paid on such loan to date. This loan
is payable ten business days after demand and is included in the current portion
of long term debt on the accompanying balance sheet as of June 30, 2002 and
2001. As of June 30, 2002 $62,055 in accrued interest is due to Mysemia. The
debt plus accrued interest due to Mysemia were assumed by Pinnacle on November
26, 2002 (See Note 20).
In January 2001, the Company borrowed $250,000 from Doreen M. Biebusch, a
Director of the Company. Interest is accrued at a rate of 18% through April 15,
2001 and was increased to 22% after April 15, 2001. As of June 30, 2002 the
balance due on the note payable is $150,000 plus accrued interest of $50,392.
This debt plus accrued interest due to Ms. Biebusch were assumed by Pinnacle on
November 26, 2002 (See Note 20). In addition, JDJ Resources, a company in which
Ms. Biebusch is an owner, charged the Company approximately $22,000 in Fiscal
2002 for consulting fees.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
general partners in a limited partnership, Prime Income Partners, L.P. which
owns a building in Poughkeepsie, New York. This building is occupied by Prime
Financial Services, Inc. and as of August 2002 also serves as the Company's
executive headquarters. During the Fiscal year ended June 30, 2002 the Company
paid $314,561 to Prime Income Partners, L.P. for rent and related charges.
Management believes the amounts charged to the Company for rent to be
commensurate with the rental rate that would be charged to an independent third
party.
In February 2002, Prime Management Corp. loaned the Company $1.0 million at a
stated interest rate of 10% which was repaid in full plus accrued interest of
$14,855 in April 2002. During the Fiscal year ended June 30, 2001 the Prime
Management Corp. loaned the Company an aggregate of $600,000. As of June 30,
2002 the Company owes Prime Management Corp. $244,191. Michael Ryan, the
Company's Chief Executive Officer and President, is one of the general partners
of Prime Management Corp.
As of June 30, 2002 the Company has a note payable, with a stated interest rate
of 15% per annum,to Thomas Povinelli, the Company's former Chief Executive
Officer in the amount of $700,000 plus accrued interest of $116,870. This note
plus accrued interest due to Mr. Povinelli were assumed by Pinnacle on November
26, 2002 (See Note 20).
On November 26, 2002, the Company finalized a transaction pursuant to an asset
purchase agreement with Pinnacle Taxx Advisors LLC ("Pinnacle"), whereby
Pinnacle, an entity controlled by Thomas Povinelli and David Puyear, former
executive officers of the Company, purchased certain assets of the Company. (See
Note 20)
16. SEGMENTS OF BUSINESS
The Company's reportable segments are strategic business units that offer
different products and services or are managed separately because the business
requires different technology and marketing strategies. The Company has three
reportable segments including Company Tax Preparation and Financial Planning
Offices, Broker/Dealer Operations and e1040.com.
Company Tax Preparation and Financial Planning Offices provide integrated tax
and financial services through Company managed offices. The Company's
Broker/Dealer's operations represents the financial planning and securities
business that clears through either PCS or North Ridge. All Company employed
registered representatives
62
are licensed with one of these broker/dealers. e1040.com is an online tax
preparation service that provides tax customers tax return preparation under a
fully automated option or with live tax preparer assistance.
The accounting policies of the segments are the same as those described in the
summary of accounting policies. The Company evaluates performance based on
operating earnings of the respective business segments.
The following table sets forth information covering the Company's operations by
reportable segment as of and for the Fiscal years ended June 30, 2002, 2001 and
2000. The intercompany revenue relates to Company employee financial planning
revenue, which clears through the broker/dealer segment.
FOR THE FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------
2001 RESTATED
-------------
2002 SEE NOTE 2(a) 2000
---- ------------ ----
Revenues
Company Tax and Financial Planning Offices:
Tax Preparation Business and third party direct mail
services $ 18,209,132 $ 18,523,631 $ 17,144,810
Financial Planning Business 39,514,112 41,734,630 31,457,053
------------- ------------- -------------
Total Company Tax and Financial Planning Offices 57,723,244 60,258,261 48,601,863
Broker Dealer Operations 69,732,198 79,681,887 64,870,735
e1040.com 69,095 791,621 1,156,640
Intercompany revenue (34,490,448) (35,831,459) (25,709,901)
------------- ------------- -------------
Total revenue $93,034,089 $ 104,900,310 $88,919,337
Income (loss) from operations:
Company Tax Offices $ (18,263,149) $ (975,931) $ (2,774,737)
Broker Dealer Operations (1,997,946) 1,604,833 1,350,915
e1040.com (1,338,443) (658,790) (6,023,662)
------------- ------------- -------------
Total income (loss) from $(21,599,538) $ (29,888) $ (7,447,484)
Interest expense:
Company Tax Offices $ (1,161,116) $ (831,009) $ (439,245)
Broker Dealer Operations (78,660) (552,332) (475,284)
e1040.com (675,362) (19,869) (15,606)
------------- ------------- -------------
Total interest expense $ (1,915,138) $ (1,403,210) $ (930,135)
Interest income:
Company Tax Offices $ 104,433 $ 12,802 $ 92,692
Broker Dealer Operations 2,163,958 210,544 138,853
e1040.com - - -
------------- ------------- -------------
Total interest income $ 2,268,391 $ 223,346 $ 231,545
Other income (expenses), net:
Company Tax Offices $ 33,739 $ 640,900 $ 1,159,512
Broker Dealer Operations (957,031) 1,050,113 826,470
e1040.com 324 3,764 -
------------- ------------- -------------
Total other income (expenses) $ (922,968) $ 1,694,777 $ 1,985,982
63
FOR THE FISCAL YEAR ENDED JUNE 30,
2001 RESTATED
-------------
2002 SEE NOTE 2(a) 2000
---- ------------ ----
Income (loss) before taxes:
Company Tax Offices $ (17,116,092) $ (1,153,237) $ (1,961,778)
Broker Dealer Operations (3,039,680) 2,313,158 1,840,953
e1040.com (2,013,481) (674,896) (6,039,267)
------------- ------------ ------------
Total income (loss) before taxes $ (22,169,253) $ 485,025 $ (6,160,092)
Depreciation and amortization:
Company Tax Offices $ 2,034,609 $ 1,831,026 $ 1,356,476
Broker Dealer Operations 967,078 1,082,397 1,023,457
e1040.com 649,314 243,206 128,562
------------- ------------ ------------
Total depreciation and amortization $ 3,651,001 $ 3,156,629 $ 2,508,495
Identifiable assets:
Company Tax Offices $ 44,132,556 $ 45,772,431 $ 41,319,358
Broker Dealer Operations 21,794,777 23,787,300 22,826,533
e1040.com 7,883 821,864 736,613
Intercompany eliminations (28,762,703) (17,701,700) (20,977,326)
------------- ------------ ------------
Total identifiable assets $ 37,172,513 $ 52,679,895 $ 43,905,178
Capital expenditures:
Company Tax Offices $ 733,749 $ 1,234,618 $ 2,211,389
Broker Dealer Operations 270,940 397,006 574,136
e1040.com - 300,121 517,130
------------- ------------ ------------
Total capital expenditures $ 1,004,689 $ 1,931,745 $ 3,302,655
17. TAXES ON INCOME
The provisions for income taxes and income tax benefits in the consolidated
financial statements for the June 30 Fiscal years consist of the following:
FOR THE FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------
2001 RESTATED
-------------
2002 SEE NOTE 2(a) 2000
---- ------------ ----
Current:
Federal $ (593,000) $ (11,000) $ (1,945,000)
State and local (39,000) 253,000 275,000
------------ ------------ --------------
Total current tax (benefit) provision $ (632,000) $ 242,000 $ (1,670,000)
Deferred:
Federal $ 154,000 $ 437,000 $ 11,000
State and local 613,000 19,000 (488,000)
------------ ------------ --------------
Total deferred tax provision (benefit) $ 767,000 $ 456,000 $ (477,000)
------------ ------------ --------------
Total income tax provision (benefit) $ 135,000 $ 698,000 $ (2,147,000)
============ ============ ==============
64
Deferred tax assets and liabilities consist of the following as of:
JUNE 30,
--------------------------------------------------
2001 RESTATED
-------------
2002 SEE NOTE 2(a) 2000
---- ------------ ----
Compensation expense recognized for financial reporting $ 46,000 $ 46,000 $ 163,000
purposes in connection with common stock option grants
Book amortization of intangible in excess of tax 3,046,000 422,000 274,000
Provision for bad debt 601,000 125,000 36,000
Employee advances (313,000) (385,000) -
Installment gain - (140,000) -
Deferred rent (28,000) (28,000) -
Tax depreciation in excess of book (142,000) (178,000) (175,000)
Marketable securities (2,000) (2,000) -
Software development costs (115,000) (292,000) (96,000)
Investments accounted for under the equity method (66,000) (74,000) (23,000)
Accrued expenses 432,000 - -
Net operating loss carryforwards for federal and state
tax purposes 5,125,000 1,273,000 491,000
------------ ---------- ----------
Total deferred tax assets, net $ 8,584,000 $ 767,000 $ 670,000
============ ========== ==========
Less: valuation allowance (8,584,000) - -
------------ ---------- ----------
Total net deferred tax assets $ - $ 767,000 $ 670,000
============ ========== ==========
A valuation allowance has been established against the deferred tax assets as of
June 30, 2002 as the Company has suffered large recurring losses from
operations, and management believes that the future tax benefit associated with
the deferred tax asset may not be realized.
The Company has federal and state net operating loss carryforwards as of June
30, 2002 of approximately $11,118,000 and $18,796,000, respectively, which will
be carried forward and may be utilized in subsequent periods to offset taxable
income. If the Company experiences a change of ownership as defined by Internal
Revenue Code section 382, use of the net operating loss may be limited.
At June 30, 2002 the Company's operating loss carryforwards expire as follows:
Years of expiration Federal State
------------------- ----------- -----------
2020 $1,890,000 $ 7,981,000
2021 37,000 236,000
2022 9,191,000 10,579,000
----------- -----------
$11,118,000 $18,796,000
The income tax receivable of $749,000 as of June 30, 2002 consists of
approximately $249,000 state refunds and $500,000 of federal income tax refunds.
A reconciliation of the federal statutory rate to the provision for income taxes
is as follows:
FISCAL YEAR ENDED JUNE 30,
2001 RESTATED SEE
2002 NOTE 2(a) 2000
---- -------- ----
Federal income taxes (benefit) computed
at statutory rates (7,538,000) (34.0%) $ 165,000 34.0% $(2,094,000) (34.0%)
State and local taxes (benefit), net of
federal tax benefit (1,344,000) (6.1%) 44,000 9.1% (141,000) (2.2%)
Amortization of intangible assets with no
benefit 530,000 2.4% 378,000 77.9% 254,000 4.1%
AMT credit disallowed per IRS exam and
previously benefited - - 172,000 35.5% (172,000) (2.8%)
Income tax receivable not previously
recognized - - (99,000) (20.4%) - -
Other (97,000) (0.4%) 38,000 7.8% 6,000 0.0%
Valuation Reserve 8,584,000 38.7% - - - -
------------ ------ ------- ------ ----------- ------
Total income tax (benefit)/provision $ 135,000 0.6% 698,000 143.9% $(2,147,000) (34.9%)
============ ====== ======= ====== =========== ======
65
18. BAD DEBT RESERVE AND RELATED ACTIVITY IS AS FOLLOWS:
The bad debt reserve and related activity is as follows:
Balance at Write-offs,
Beginning Bad Debt Net of Balance at
of Year Expense Recoveries Other End of Year
------- ------- ---------- ----- -----------
Year ended June 30, 2002 $291,000 $323,972 - - $614,972
Year ended June 30, 2001 264,800 26,200 - - 291,000
Year ended June 30, 2000 87,500 177,300 - - 264,800
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL PER SHARE WEIGHTED
YEAR: INCOME (LOSS) TAX PROVISION NET (LOSS) AVERAGE
2002 REVENUE BEFORE TAXES (BENEFIT) INCOME BASIC DILUTED
---- ------- ------------ --------- ------ ----- -------
Q1 (a) $ 21,374,162 $ (3,806,830) $ (2,056,000) $ (1,750,830) $ (0.21) $ (0.21)
Q2 (a) 19,778,846 (3,105,052) (1,691,735) (1,413,317) (0.16) (0.16)
Q3 (b) 28,862,310 (435,848) 1,340,065 (1,775,913) (0.20) (0.20)
Q4 (c) 23,018,771 (14,821,523) 2,542,716 (17,364,239) (2.01) (2.01)
-------------- ------------- ------------- -------------- -------- --------
TOTAL $ 93,034,089 $(22,169,253) $ 135,046 $ (22,304,299) $ (2.58) $ (2.58)
============= ============= ============= ============== ======== ========
(a) As restated. See Note 2(a).
(b) The net loss was primarily attributable to a reduction in tax preparation
fees.
(c) The net loss was primarily attributable to the recognition of other
intangible assets impairment losses, the write down of the Company's
deferred tax asset and increases in general and administrative expenses.
FISCAL PER SHARE WEIGHTED
YEAR: INCOME (LOSS) TAX PROVISION NET (LOSS) AVERAGE
2001 REVENUE BEFORE TAXES (BENEFIT) INCOME BASIC DILUTED
---- ------- ------------ --------- ------ ----- -------
Q1 $ 21,339,780 $ (2,178,774) $ (769,107) $ (1,409,667) $(0.18) $(0.18)
Q2 19,449,289 (2,156,397) (1,229,146) (927,251) (0.11) (0.11)
Q3 (b) 32,301,173 2,928,346 1,653,441 1,274,905 0.16 0.16
Q4 (a) 31,810,068 1,891,850 1,042,576 849,274 0.10 0.10
------------- ------------- ------------- ------------ ------- -------
TOTAL (c) $ 104,900,310 $ 485,025 $ 697,764 $ (212,739) $ (.03) $ (.03)
============= =========== ============= ============ ======= =======
(a) During the fourth quarter of Fiscal year 2001, the Company rescinded an
acquisition resulting in approximately $600,000 of other income (see Note
3).
(b) As restated. See Note 2(a).
(c) $1,012,863 representing net trading gains previously included in financial
planning revenue have been reclassified to other income on the accompanying
statements of operations for the year ended June 30, 2001.
FISCAL PER SHARE WEIGHTED
YEAR: INCOME (LOSS) TAX PROVISION NET (LOSS) AVERAGE
2000 REVENUE BEFORE TAXES (BENEFIT) INCOME BASIC DILUTED
---- ------- ------------ --------- ------ ----- -------
Q1 $ 12,736,729 $ (2,854,804) $ (1,226,852) $ (1,627,952) $(0.22) $(0.22)
Q2 14,337,566 (2,629,952) (1,124,176) (1,505,776) (0.20) (0.20)
Q3 36,552,830 76,811 33,029 43,782 0.01 0.01
Q4 25,292,212 (752,147) 170,999 (923,146) (0.12) (0.12)
------------- ------------- ------------- ------------- ------- -------
TOTAL (a) $ 88,919,337 $ (6,160,092) $ (2,147,000) $ (4,013,092) $(0.53) $(0.53)
============= ============= ============= ============= ======= =======
(a) $659,517 representing net trading gains previously included in financial
planning revenue have been reclassified to other income on the accompanying
statements of operations for the year ended June 30, 2000.
20. SUBSEQUENT EVENTS
SALES OF ASSETS
(a) PINNACLE TAXX ADVISORS
On November 26, 2002, the Company finalized a transaction pursuant to an
asset purchase agreement (the "Purchase Agreement") with Pinnacle Taxx
Advisors LLC ("Pinnacle") dated as of September 1, 2002, whereby Pinnacle,
an entity controlled by Thomas Povinelli and David Puyear, former executive
officers of the Company, purchased
66
certain assets of the Company. The effective date of the closing under the
Purchase Agreement was September 1, 2002. The Company sold to Pinnacle 47
offices ("Pinnacle Purchased Offices") and all tangible and intangible net
assets (the "Purchased Assets") which are associated with the operations of
the Pinnacle Purchased Offices, together representing approximately
$17,690,000 in revenue, or approximately 19.0% of the Company's annual
revenue. Included in the net assets sold to Pinnacle was approximately
$1,550,000 in debt plus accrued interest of approximately $280,000, which
have been assumed by Pinnacle. As part of the sale of the Purchased Offices
137 employees of the Purchased Offices were terminated by the Company as of
November 15, 2002 and were hired by Pinnacle. In addition, all registered
representatives of the Purchased Offices licensed with Prime Capital
Services, Inc. (a wholly owned broker dealer subsidiary of the Company)
transferred their registrations to Royal Alliance Associates ("Royal").
The total purchase price payable by Pinnacle is $4,745,463, subject to
final adjustments. The sum of $3,422,108, (the "Closing Payment"), was paid
pursuant to a promissory note (the "Initial Note") which was given by
Pinnacle to the Company at the date of closing (the "Closing"), with
interest at 10% commencing 30 days from the Closing. The Initial Note is
guaranteed by Mr. Povinelli and Mr. Puyear, and Mr. Povinelli has pledged
his entire holdings of the Company's common stock to secure the Initial
Note. The Initial Note is due and payable on the earlier of February 26,
2003 or on the date that Pinnacle closes a debt or equity financing. The
balance of the purchase price of $1,323,355, subject to adjustment and less
certain debts of the Company that Pinnacle assumed, will be paid pursuant
to a second promissory note (the "Second Note") which is secured by
Pinnacle's assets and a collateral assignment of 75% of Pinnacle's
commission overrides to be paid to Pinnacle from Royal each month up to
$250,000, pursuant to an agreement between Pinnacle and Royal. The Second
Note is payable in three equal consecutive annual installments, with
interest calculated at the prime rate of Pinnacle's primary lender in
effect as of the Closing, on the first, second and third anniversaries of
the Closing.
As a result of the transaction with Pinnacle a gain of approximately $5.3
million has been calculated by management, however due to the uncertainties
associated with payment on the Initial Note and Second Note, the Company
will defer the gain recognition until proceeds from payment by Pinnacle or
collateral are received on the Initial Note and Second Note. As of this
date, the Company has received certain payments from Royal pursuant to the
assignment above but has not received certain payments required under the
Closing Payment and equipment subleases. The Company has foreclosed on a
portion of Mr. Povinelli's shares of the Company's common stock securing
the Closing Payment and is considering which additional remedies to pursue
with respect to such nonpayment.
(b) OTHER SALES OF ASSETS
In addition to the Pinnacle transaction, subsequent to June 30, 2002, the
Company has completed the sale of 11 additional offices to various parties
(the "Other Purchased Offices") and all tangible and intangible net assets
which are associated with the operations of the Other Purchased Offices,
together representing approximately $7,397,000 or approximately 8.0% of the
Company's annual revenue. The aggregate sales price for the Other Purchased
Offices was approximately $1,161,000 consisting of $352,000 cash and
$809,000 of promissory notes due to the Company.
Approximate revenues and operating expenses of the Pinnacle Purchased
Offices and Other Purchased Offices included on the accompanying statement
of operations for the year ended June 30, 2002 were as follows:
67
DIRECT OPERATING RESULTS
------------------------
Revenues:
Financial planning services $15,717,000
Tax preparation fees 9,370,000
E1040.com -
Direct mail services -
----------
Total revenue 25,087,000
----------
Operating Expenses:
Salaries and commissions $15,516,000
General and administrative 2,059,000
Advertising 923,000
Rent 2,363,000
Depreciation and amortization 515,000
Goodwill and intangible assets impairment loss 2,499,000
----------
Total operating expenses 23,875,000
----------
DEBT FORBEARANCE
(c) WACHOVIA
On November 27, 2002, the Company and Wachovia Bank, National Association,
formerly known as First Union National Bank ("Wachovia") entered into a
forbearance agreement dated as of November 27, 2002 (the "Forbearance
Agreement"), whereby Wachovia agreed to forbear from acting on certain
defaults of financial covenants by the Company under the revolving credit
note dated December 27, 2001 in the original principal amount of
$2,000,000, and under a term loan note dated December 27, 2001 in the
original principal amount of $5,000,000. The revolving credit note and the
term loan note are together referred to as the "Loan". The Company had
changed its control without Wachovia's consent and failed to meet
requirements under the Loan to pay scheduled debt service and to maintain
certain financial ratios including senior funded debt to EBITDA. The
Company paid such debt service to Wachovia and, pursuant to the terms of
the Forbearance Agreement, Wachovia agreed to forbear from enforcing its
default remedies and extended the time of payment for the Loan to November
1, 2003 ("Maturity Date"). Pursuant to the Forbearance Agreement the
interest rate charged on the Loans was increased by 1% to LIBOR plus 3.75%.
With respect to the revolving credit note, absent Wachovia's demand under
the terms and conditions of the Forbearance Agreement, during the period of
forbearance the Company is obligated to make interest payments monthly
until the Maturity Date. Principal payments in the amount of $250,000 each
are due on March 10, 2003, April 10, 2003, May 10, 2003 and June 10, 2003,
with the remaining principal balance due on the Maturity Date.
With respect to the term loan note, absent Wachovia's demand under the
terms and conditions of the Forbearance Agreement, during the period of
forbearance the Company is obligated to make its regular payments of
principal in the amount of $83,333 plus interest until the Maturity Date
when remaining principal balance is due. Additionally, in June, 2003
Wachovia in its sole and absolute discretion will recalculate the principal
amount and revise the repayment schedule beginning in July, 2003 until the
Maturity Date when the remaining balance, if any, is due.
Pursuant to the Forbearance Agreement, commencing on May 1, 2003, the
Company is obligated to make payments on the 10th day of each month to the
Wachovia in an amount equal to 50% of the amount of cash and marketable
securities possessed by the Company that exceeds $1,500,000 on the last day
of the preceding month. However, amounts contained in the broker-dealer
reserve to the extent of regulatory requirements and historical levels
shall not be included in the calculation of cash and marketable securities
for purposes of this payment.
On March 5, 2003, the Company received a notice of default from the
attorneys for Wachovia. Wachovia alleged that the Company was in default
for the following reasons: selling eleven offices without the written
consent of Wachovia; failing to remit to Wachovia the proceeds of the sales
of the offices; and failing to provide to Wachovia the monthly reports
required under the Forbearance Agreement. By letter dated March 10, 2003,
counsel for Wachovia advised the Company that Wachovia rescinded the notice
of default.
Wachovia also consented to the sale of certain Company offices. Wachovia's
rescission and consent were made in reliance on the Company's agreement
that it would obtain Wachovia's prior consent for all future sales of
offices and that the cash payments received or to be received from the
approved sales would be remitted to Wachovia in reduction of the Company's
scheduled principal payments.
Upon a subsequent review of the Forbearance Agreement, on March 21, 2003
the Company notified the attorneys for Wachovia that it was not in
compliance with the following provisions of the Forbearance Agreement: late
filing of several local personal property tax returns and late payment of
the taxes owed; late payment of several local license fees and late payment
of several vendors of materials and supplies; and failure to make rent
payments on a few vacant offices for which the Company was negotiating
workout payments with the landlords. The total amount due for these
payables is not material and the Company has been verbally advised by
counsel to Wachovia that Wachovia will not issue a notice of default for
any of the items.
If the Company does not comply with financial covenants and other
obligations in its loan agreement with Wachovia, or its agreements with
other institutional lenders, and such lenders elected to pursue their
available remedies, the Company's operations and liquidity would be
materially adversely affected and the Company could be forced to cease
operations.
(d) TRAVELERS
On September 24, 2002, the Company received a notice from the attorneys for
Travelers alleging that the Company was in default under its Debt Facility
with Travelers due to nonpayment of a $100,000 penalty for failure to meet
sales production requirements as specified in the Debt Facility. The
default notice stated that all unpaid interest and principal under the Debt
Facility was immediately due and payable but that Travelers intended to
comply with the terms of a subordination agreement between Travelers and
Wachovia. Such subordination agreement greatly
68
restricts the default remedies which Travelers could pursue against the
Company. The Company sent the attorneys for Travelers a written denial that
the Company had failed to meet the sales production requirements and that
it was in default and Travelers has not taken any action in furtherance of
its allegation of default.
(e) DEBT PENALTY
The Loan in the amount of $1,000,000 due to Rappaport on October 31, 2002
was not paid. Accordingly, as required, Rappaport was issued 50,000 common
shares in December 16, 2002 and will be issued 15,000 common shares per
month commencing in November, 2002 until the Loan is paid in full. (See
Note 9). Additionally, when the Rule 144 holding period was satisfied in
October 2002 with respect to certain shares of the Company's common stock
previously issued to Rappaport in connection with the Loan, the stock price
was $.40 per share. As a result, Rappaport was issued an additional 650,000
common shares to be added to the 100,000 shares issued upon the funding of
the Loan so that the total value of the original shares issued was
$300,000.
(f) SEC INVESTIGATION
The Company has become aware that it is the subject of a formal
investigation by the Securities and Exchange Commission ("SEC"). The
Company believes that the investigation concerns, among other things, the
restatement of the Company's financial results for the fiscal year ended
June 30, 2001 and the fiscal quarters ended March 31, 2001 and December 31,
2001 (which have been previously disclosed in the Company's amended
quarterly and annual reports for such periods), the Company's delay in
filing a Form 10-K for the fiscal year ended June 30, 2002 and the
Company's past accounting and recordkeeping practices. The Company had
previously received informal, non-public inquiries from the SEC regarding
certain of these matters. On March 13, three of the Company's executives
received subpoenas from the SEC requesting them to produce documents and
provide testimony in connection with the formal investigation. In addition,
on March 19, 2003 the Company received a subpoena requesting documents in
connection with such investigation. The Company and its executives intend
to comply fully with the requests contained in the subpoenas and with the
SEC's investigation. The Company does not believe that the investigation
will have a material effect on the Company's consolidated financial
statements.
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On August 27, 2002, the Company engaged Grant Thornton LLP ("Grant
Thornton") to serve as the Company's independent auditors for the year ended
June 30, 2002. The Company's independent auditors were previously Arthur
Andersen LLP ("Andersen"). The ratification of the appointment of auditors for
fiscal year 2003 will be considered by the Company's stockholders at the 2002
Annual Meeting anticipated to be held in December 2002.
The Company's relationship with Andersen terminated on August 27, 2002
with the engagement of Grant Thornton and the general discontinuance over the
past several months of public audit services by Andersen.
During the years ended June 30, 2002 and June 30, 2001 and for the
interim period through the date the relationship ended, there were no
disagreements with Andersen on any matter of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to Andersen's satisfaction, would have caused them to make reference to
the subject matter of the disagreement in connection with their reports.
The audit reports of Andersen on the Company's consolidated financial
statements as of and for the fiscal years ended June 30, 2001 and June 30, 2000
did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
However, the Company has restated its financial results for the fiscal year
ended June 30, 2001, and the second and third quarters thereof, and Andersen has
not audited such restated financial results. Grant Thornton has conducted its
own audit of the adjustments that led to the restated financial results for
fiscal 2001.
During the fiscal year ended June 30, 2001 Andersen did not advise the
registrant of any reportable events under Item 304(a)(1)(v) of Regulation S-K,
except that on May 14, 2002 Andersen sent a letter to Doreen Biebusch, the
chairperson of the Company's audit committee. The letter notified Ms. Biebusch
that Andersen had been informed of an internal disagreement between the
Company's controller and the Company's chief financial officer at the time, with
respect to a $600,000 negative adjustment to gross revenue relating to the
second and possibly the third quarter of fiscal 2001, and requested that the
Company hire independent counsel to conduct an investigation of the matter. A
copy of this letter is attached as Exhibit 99.1. The $600,000 negative
adjustment was reflected in the Company's restated financial results for the
fiscal year ended June 30, 2001 and the second and third quarters thereof. The
Company has since revised its internal controls and financial reporting
procedures. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition". Andersen did not send any communications to the
Company regarding this matter subsequent to its letter of May 14, 2002 due to
its general discontinuance of public audit services.
70
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth information regarding the executive
officers and directors of the Company:
NAME AGE POSITION
---- --- --------
James Ciocia 45 Chairman of the Board and Director
Michael P. Ryan 44 Chief Executive Officer, President and
Director
Kathryn Travis 53 Secretary, Vice President and Director
Ted Finkelstein 49 Vice President and General Counsel
Michael Mannion 43 Chief Accounting Officer
Thomas Povinelli 42 Former Director
Doreen M. Biebusch 45 Director
Steven Gilbert 46 Director
Edward H. Cohen 64 Director
Seth Akabas 46 Director
Louis P. Karol 44 Director
EXECUTIVE OFFICERS AND DIRECTORS
JAMES CIOCIA, CHAIRMAN. Mr. Ciocia is a principal founder of the Company having
opened the Company's first tax preparation office in 1981. In addition to
serving the Company as its Chief Executive Officer until November 6, 2000, Mr.
Ciocia is a registered representative of Prime. Mr. Ciocia holds a B.S. in
Accounting from St. John's University and he is a member of the International
Association for Financial Planners. Mr. Ciocia is serving a term as a director,
which expired in 2002 and continues until a qualified successor is appointed or
elected.
MICHAEL P. RYAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Ryan was appointed
the Company's Chief Executive Officer on August 8, 2002. Mr. Ryan co-founded
Prime Capital Services, Inc. and has, except for a one month period in July and
August or 2002, served as its President since 1987. In addition, Carole Enisman
Mr. Ryan's spouse,has served as Executive Vice President of Prime Capital
Services, Inc. since April 5, 1999. Mr. Ryan is a Certified Financial Planner
and a founding member and past President of the Mid-Hudson Chapter of the
International Association for Financial Planning. Mr. Ryan is a Registered
Principal with the National Association of Securities Dealers and serves on the
Independent Firms Committee of the Securities Industry Association (SIA). Mr.
Ryan holds a B.S. in Finance from Syracuse University. Mr. Ryan was first
elected as a director on June 22, 1999, resigned as a director on April 3, 2002
and was re-appointed to the Board on August 9, 2002. He will stand for election
as a Class C director at the next Annual Meeting of Stockholders.
KATHRYN TRAVIS, SECRETARY, VICE PRESIDENT AND DIRECTOR. Ms. Travis began her
career with the Company in 1986 as an accountant and has served as Secretary,
Vice President and a director since November 1989. Ms. Travis currently
supervises all tax preparation personnel and she is a registered representative
of Prime. Ms. Travis holds a B.A. in Mathematics from the College of New
Rochelle. Ms. Travis is serving a term which expired in 2002 and continues until
a qualified successor is appointed or elected.
THOMAS POVINELLI, FORMER CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Povinelli
began his tenure with the Company as an accountant in 1983 and he served as
Chief Operating Officer from November 1984 to November 6, 2000. On November 6,
2000, Mr. Povinelli was appointed as the Company's Chief Executive Officer and
resigned that office on September 23, 2002. Mr. Povinelli is also a registered
representative of Royal Alliance, Inc. Mr. Povinelli holds a B.S. in Accounting
from Iona College. Mr. Povinelli has resigned as a director.
DAVID D. PUYEAR, FORMER CHIEF FINANCIAL OFFICER. Mr. Puyear joined the Company
as its Chief Financial Officer (CFO) on July 6, 2000 and resigned that office on
September 23, 2002. Prior to joining the Company, Mr. Puyear served as a CFO for
the past four years with two private equity investment advisory firms located in
New York City and Boston. From 1999 until mid-2000, Mr. Puyear served as CFO of
J.E.R. Partners, an
71
institutional advisory firm with assets under management in excess of $3
billion, and from 1993 until 1999. From 1996 to 1999, Mr. Puyear served as a
Controller and CFO of AEW Capital Management, an institutional advisory firm
with assets under management in excess of $13 billion. From 1986 to 1993, Mr.
Puyear worked for KPMG Peat Marwick where he served as audit manager,
specializing in financial services and technology. Mr. Puyear holds a B.S. in
accounting from Moorehead State University and passed all parts of the CPA exam
in 1986.
TED FINKELSTEIN, VICE PRESIDENT AND GENERAL COUNSEL. Ted Finkelstein is the
General Counsel and Vice President of the Company. He has a Bachelor of Science
degree in Accounting. He is a Cum Laude graduate of Union University, Albany Law
School and also has a Master of Laws in Taxation from New York University Law
School. Ted has over 20 years of varied legal experience including acting as
outside counsel for Prime Capital Services, Inc. for almost 15 years. Ted has
been General Counsel and Vice President of the Company since June, 2001.
MICHAEL T. MANNION, CHIEF ACCOUNTING OFFICER. Michael joined the Company in
October 2001, serving as Corporate Controller before being appointed Chief
Accounting Officer in February 2003. His responsibilities include financial
reporting, internal controls and back office support for field office
operations. He has over 15 years of senior level financial and operations
experience. Prior to joining the Company, Michael served as Controller and
Treasurer for the distance-learning firm, Technology Education Network, Inc.,
working with such companies as IBM and Microsoft to provide cost effective
training solutions. Prior to that, he served as Vice President of Finance &
Administration for The Lake Group, a $100MM direct marketing firm, which managed
list rental assets for such companies as McGraw-Hill, Dow Jones and American
Express. Prior to that, he served as Corporate Controller for The PRC Group, a
$150MM real estate company. Michael began his career with Amper, Politziner &
Mattia, CPA's. He holds a BS in accounting from Rowan State University (NJ).
SETH A. AKABAS, DIRECTOR. Mr. Akabas has served as a partner at the law firm of
Akabas & Cohen since June 1991. Mr. Akabas holds a B.A. in Economics from
Princeton University and a J.D. from the Columbia University School of Law. Mr.
Akabas was first elected a director on April 1, 1995 and he is serving a term
that expires in 2003.
LOUIS P. KAROL, DIRECTOR. Mr. Karol is a partner of the law firm of Karol,
Hausman & Sosnick. Mr. Karol holds a B.S. from George Washington University, a
J.D. from the Benjamin N. Cardozo School of Law and an L.L.M in Taxation from
the New York University School of Law. Mr. Karol currently serves on the Board
of Directors of the Long Island Chapter of the International Association of
Financial Planning and he is a Certified Public Accountant. Mr. Karol was first
elected as a director on April 1, 1995 and is serving a term which expired in
2002 and continues until a qualified successor is appointed or elected.
DOREEN M. BIEBUSCH, DIRECTOR. Ms. Biebusch has twenty years of financial and
managerial experience. Doreen Biebusch is a partner and founder of JDJ
Resources, Inc, a financial and administrative management firm that specializes
in high net worth family management. From 1997 to 2000, Ms. Biebusch served as
the Chief Financial Officer for AEGIS, an international real estate and private
equity investment advisor. Prior to joining AEGIS, Ms. Biebusch worked at
Aldrich Eastman Waltch ("AEW"), an institutional investment management firm from
1988 to 1997 and as the Chief Financial Officer for that organization from 1992
to 1996. In her tenure at AEW, Ms. Biebusch was the Portfolio Controller for a
$1 billion real estate partnership, developing a solid foundation in asset
management, performance measurement and client service. From 1981 to 1988, Ms.
Biebusch was the senior audit manager at KPMG. Ms. Biebusch holds a Master of
Business Administration degree from Babson College and a Bachelor of Arts degree
in English from Skidmore College. Ms. Biebusch is serving a term which expired
in 2002 and continues until a qualified successor is appointed or elected.
STEVEN GILBERT, DIRECTOR. Mr. Gilbert is the Company's Executive Vice President,
Financial Services and head of the Company's Clearwater, Florida office. His
responsibilities include the training of sales representatives and general
management of the Company's Clearwater office. Mr. Gilbert has also historically
been one of the Company's most productive sales representatives.
EDWARD H. COHEN, DIRECTOR. Mr. Cohen has, since February 2002, been counsel to,
and for more than five years prior thereto was a partner in, the New York City
law firm of Katten Muchin Zavis Rosenman (with
72
which he has been affiliated since 1963). Mr. Cohen is a director of
Phillips-Van Heusen Corporation, a manufacturer and marketer of apparel and
footwear, Franklin Electronic Publishers, Incorporated, an electronic publishing
company, Levcor International, Inc., a converter of textiles for sale to
domestic apparel manufacturers, and Merrimac Industries, Inc., a manufacturer of
passive RF and microwave components for industry, government and science.
AUDIT COMMITTEES-BOARD OF DIRECTORS
The Audit Committee, which was composed of Doreen M. Biebusch, Seth A. Akabas
and Louis P. Karol was disbanded on August 18, 2002 and the entire Board
undertook its duties.
COMPENSATION COMMITTEE
The Compensation Committee, which was composed of Doreen M. Biebusch, Seth A.
Akabas and Louis P. Karol was disbanded on August 18, 2002 and the entire Board
undertook its duties.
The Company's executive officers serve at the discretion of the Board of
Directors.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the SEC initial reports of ownership and
reports of changes in ownership of Common Stock. The SEC requires such officers,
Directors and greater than 10% stockholders to furnish to the Company copies of
all forms that they file under Section 16(a).
To the Company's knowledge, all officers, directors and/or greater than 10%
stockholders of the Company complied with all Section 16(a) filing requirements
during the fiscal year ended June 30, 2002 or, in the case of Michael Ryan,
failed to timely file certain statements of changes in Beneficial Ownership on
Form 4. Mr. Ryan filed a late Statement of Changes in Beneficial Ownership on
Form 4 on April 10, 2002 and has fully complied with all Section 16(a) filing
requirements since that date.
73
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the compensation of the Chief Executive Officer,
and the four other most highly compensated executive officers (collectively, the
"Named Executive Officers"), and information with respect to annual and
long-term compensation earned during the last three Fiscal Years:
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS NUMBER OF
SHARES
NAME AND FISCAL OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS LOANS COMPENSATION OPTIONS
- ------------------ ---- ------ ----- ----- ------------ -------
James Ciocia
Chairman of the Board 2002 $430,000 $312,693 - - -
2001 $438,712 - (1) $ 6,694 -
2000 $367,754 $ 314,809 (2) $16,455 -
Michael P. Ryan
Chief Executive Officer and
Director 2002 $430,000 $490,384 - (1) $ 9,600 250,000
2001 $350,000 - (1) $ 9,600 250,000
2000 $240,000 $216,597 - (1) $ 9,600 -
Kathryn Travis
Secretary, Vice President and
Director 2002 $281,538 - (1) $ 9,259 -
2001 $313,712 - (1) $ 9,259 -
2000 $154,230 $ 118,030 (1) $ 10,758 -
David Puyear
Former Chief Financial Officer 2002 $201,923 - - -
2001 $209,000 - - 200,000
Thomas Povinelli
Former Chief Executive Officer and
Director 2002 $380,385 - (1) $ 7,200 -
2001 $358,366 - (1) $ 7,200 -
2000 $365,384 $ 311,086 (2) $ 4,596 -
Ted Finkelstein
Vice President and General Counsel
2002 $ 184,615 - - -
2001 $ 7,692 - - -
*Represents loans taken in previous years that are being applied to the
individual's current W-2 statement.
(1) Auto expense.
(2) Represents commission override payment.
74
INSURANCE
As of June 30, 2002 the Company maintains a $2.0 million life insurance policy
on James Ciocia and Thomas Povinelli.
DIRECTORS
The Company is currently reviewing its compensation policy with its independent
directors of the Company in connection with a disagreement between the Company
and two of its independent directors regarding independent director
compensation. Historically, independent directors have not received
compensation.
OPTION GRANTS
The following table sets forth information regarding options to purchase shares
of Common Stock granted to the Named Executive Officers during Fiscal 2002.
OPTION GRANTS IN FISCAL 2002
INDIVIDUAL GRANTS
-----------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS GRANTED IN 2002 ($/SHARE) GRANT DATE DATE FAIR VALUE
---- --------------- ------- --------- ---------- ---- ----------
Michael P. Ryan 250,000 48.6% $ 8.00 7/1/2001 7/1/2006 $187,500
75
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND 2002 YEAR-END OPTION
VALUES
The following table sets forth for each of the Named Executive Officers (a) the
number of options exercised during Fiscal 2002, (b) the total number of
unexercised options for Common Stock (exercisable and un-exercisable) held at
June 30, 2002, and (c) the value of those options that were in-the-money on June
30, 2002 based on the difference between the closing price of our Common Stock
on June 30, 2002 and the exercise price of the options on that date.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED STOCK OPTIONS AT IN-THE-MONEY STOCK OPTIONS
FISCAL YEAR-END (#) AT FISCAL YEAR-END
SHARES
ACQUIRED
ON VALUE UN- UN-
NAME EXERCISE(#) REALIZED EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
- ---- ----------- -------- ----------- ----------- ----------- -----------
James Ciocia
Chairman of - - 62,508 - - -
the Board
Michael P. Ryan
Chief Executive - - 500,000 - - -
Officer and
Director
Kathryn Travis
Secretary, Vice - - 30,340 - - -
President and
Director
Ted Finkelstein Vice
President and
General Counsel - - - - - -
Thomas Povinelli
Former Chief - - 61,521 - - -
Executive Officer
and Director
David Puyear Former
Chief Financial - - - 200,000 - -
Officer
STOCK OPTION PLANS
The Company maintains records of option grants by year, exercise price,
vesting schedule and grantee. In certain cases the Company has estimated, based
on all available information, the number of such options that were issued
pursuant to each plan. The Company has not in the past consistently recorded the
plan pursuant to which the option was granted. The Company is implementing new
record keeping procedures regarding options that will ensure this information is
accurately recorded and processed. The material terms of each option grant vary
according to the discretion of the Board of Directors.
On September 14, 1993, the Company adopted the "1993 Joint Incentive
and Non-Qualified Stock Option Plan" ("1993 Plan") pursuant to which the Company
may grant options to purchase up to an aggregate of 816,000
76
shares. Such options may be intended to qualify as "incentive stock options"
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or they may be intended not to qualify under
such Section ("Non-Qualified Options").
The 1993 Plan is administered by the committee of three independent
directors of the Board of Directors of the Company, which has the authority to
determine the persons to whom the options may be granted, the number of shares
of Common Stock to be covered by each option, the time or times at which the
options may be granted or exercised, whether the options will be Incentive Stock
Options or Non-Qualified Stock Options, and other terms and provisions of the
options. The exercise price of the Incentive Stock Options granted under the
1993 Plan may not be less than the fair market value of a share of Common Stock
on the date of grant (110% of such value if granted to a person owning in excess
of ten percent of the Company's securities). Options granted under the 1993 Plan
may not have a term longer than 10 years from the date of grant (five years if
granted to a person owning in excess of ten percent of the Company's securities)
and may not be granted more than ten years from the date of adoption of the 1993
Plan.
On April 20, 1999, the Board of Directors of the Company adopted the
Company's 1999 Common Stock and Incentive and Non-Qualified Stock Option Plan
(the "1999 Plan"). The Company's stockholders approved the plan on June 22,
1999.
Under the 1999 Plan, the Company may grant options to purchase up to
300,000 shares of Common Stock to key employees of the Company, its
subsidiaries, directors, consultants and other individuals providing services to
the Company. Such options may be Incentive Stock Options or Non-Qualified Stock
Options.
The Board of Directors administers the 1999 Plan. The 1999 Plan allows
the Board of Directors of the Company to designate a committee of at least two
non-employee directors to administer the 1999 Plan for the purpose of complying
with Rule 16(b)(3) under the Securities Exchange Act of 1934, as amended, with
respect to future grants under the 1999 Plan. Until such delegation, the Board
will select the persons who are to receive options and the number of shares to
be subject to each option (the administrator of the 1999 Plan, including the
Board of Directors and/or a committee is referred to herein as the "Committee").
In selecting individuals for options and determining the terms, the Board may
consider any factors that it deems relevant, including present and potential
contributions to the success of the Company. Options granted under the 1999 Plan
must be exercised within a period fixed by the Board, which may not exceed ten
years from the date of grant. Options may be made exercisable immediately or in
installments, as determined by the Board.
The purchase price of each share for which an Incentive Stock Option is
granted and the number of shares covered by such Option will be within the
discretion of the Committee based upon the value of the grantee's services, the
number of outstanding shares of Common Stock, the market price of such Common
Stock, and such other factors as the Committee determines are relevant; provided
however, that such purchase price may not be less than the par value of the
Common Stock. The purchase price of each share for which an Incentive Stock
Option is granted under the 1999 Plan ("Incentive Option Price") shall not be
less than the amount which the Committee determines, in good faith, at the time
such incentive stock option is issued or granted, constitutes 100% of the then
fair market value of a share of Common Stock.
Grantees under the 1999 Plan may not transfer options otherwise than by
will or the laws of descent and distribution, but the Committee has the right to
determine whether the individual Option shall be transferable. No transfer of an
Option permitted by terms of such Option or by will or the laws of descent and
distribution will bind the Company unless the Company has been furnished with
written notice thereof and a copy of the will and/or such other evidence as the
Company may deem necessary to establish the validity of the transfer and the
acceptance by the transferee or transferees of the terms and conditions of such
Option. In the case of an Option, during the lifetime of the grantee, unless
transferred as permitted by the 1999 Plan and the Option, the Option may only be
exercised by the grantee, except in the case of disability of the grantee
resulting in termination of employment, in which case the Option may be
exercised by such grantee's legal representative.
The Committee will adjust the total number of shares of Common Stock
which may be purchased upon the exercise of Options granted under the 1999 Plan
for any increase or decrease in the number of outstanding shares of Common Stock
resulting from a stock dividend, subdivision, combination or reclassification of
shares or any other
77
change in the corporate structure or shares of the Company; provided, however,
in each case, that, with respect to Incentive Stock Options, no such adjustment
shall be authorized to the extent that such adjustment would cause the 1999 Plan
to violate Section 422(b)(1) of the Code. If the Company dissolves or liquidates
or upon any merger or consolidation, the Committee may make such adjustment with
respect to Options or act as it deems necessary or appropriate to reflect or in
anticipation of such dissolution, liquidation, merger or consolidation,
including, without limitation, the substitution of new options or the
termination of existing options.
Under the 1999 Plan, the Company will grant to each employee and those
affiliated financial planners who have entered into commission sharing
agreements with the Company, including officers and directors, options to
purchase 100 shares of Common Stock for each whole $25,000 of revenues for tax
preparation and commissions generated by such individual for the Company in the
calendar years 1998, 1999 and 2000. Each option will be exercisable for a period
of five years to acquire one share of Common Stock at the market price on the
date of grant of the option. In Fiscal 2000, the Company granted options to
purchase 229,877 shares under the 1999 Plan. During Fiscal 2001, 65,941 options
to purchase shares were cancelled and 136,064 options to purchase shares were
granted, with zero options available to be granted.
For Federal income tax purposes, an optionee will not recognize any
income upon the grant of a non-qualified stock option or an incentive stock
option.
Upon the exercise of a non-qualified stock option, the optionee will
realize ordinary income equal to the excess (if any) of the fair market value of
the shares purchased upon such exercise over the exercise price. The Company
will be allowed a deduction from income in the same amount and at the same time
as the optionee realizes such income. Upon the sale of shares purchased upon
such exercise, the optionee will realize capital gain or loss measured by the
difference between the amount realized on the sale and the fair market value of
the shares at the time of exercise of the option. In the case of options granted
to executive and principal officers, directors and stockholders owning greater
than 10% of the outstanding Common Stock, income will be recognized upon
exercise of a non-qualified option only if the option has been held for at least
six months prior to exercise. If such option is exercised within six months
after the date of grant, then such an officer, director or a stockholder holding
greater than 10% will recognize income six months after the date of grant,
unless he or she files an election under Section 83(b) of the Code to be taxed
on the date of exercise.
In contrast, upon the exercise of a qualified incentive stock option,
an optionee will not realize income, and the Company will not be allowed a
deduction. If the optionee retains the shares issued to him upon exercise of an
incentive stock option for more than one year after the date of issuance of such
shares and two years after the date of grant of the option, then any gain or
loss realized on a subsequent sale of such shares will be treated as long-term
capital gain or loss. If, on the other hand, the optionee sells the shares
issued upon exercise within one year after the date of issuance or within two
years after the date of grant of the option, then the optionee will realize
ordinary income, and the Company will be allowed a deduction from income, to the
extent of the excess of the fair market value of the shares on the date of
exercise or the amount realized on the sale (whichever is less) over the
exercise price. Any excess of the sale price over the fair market value of such
shares on the date of exercise will be treated as capital gain. In addition, the
difference between the fair market value of the shares on the date of exercise
and the exercise price constitutes an item of tax preference for purposes of
calculating an alternative minimum tax, which under certain circumstances could
cause tax liability as a result of an exercise.
On October 17, 2001, the Board of Directors of the Company adopted the
Company's "2001 Common Stock and Incentive and Non-Qualified Stock Option Plan"
(the "2001 Plan"). The Company's stockholders approved the plan on December 14,
2001. Under the 2001 Plan, the Company may grant options to purchase up to
1,250,000 shares of Common Stock to key employees of the Company, its
subsidiaries, directors, consultants and other individuals providing services to
the Company. Such options may be Incentive Stock Options or Non-Qualified Stock
Options. The per share price of any Share or Option shall not be less than 50%
of the fair market value of the Company's Common Stock at the date of issuance
of the Share or granting of the option.
EMPLOYEE STOCK PURCHASE PLAN
On February 1, 2000, the Board of Directors of the Company adopted the
Company's "2000 Employee Stock Purchase Plan" (the "2000 ESPP Plan") and on May
5, 2000, the 2000 ESPP Plan became effective upon
78
approval by the stockholders. Under the 2000 ESPP Plan, the Company will sell
shares of its Common Stock to participants at a price equal to 85% of the
closing price of the Common Stock on (i) the first business day of a Plan Period
or (ii) the Exercise Date (the last day of the Plan Period), whichever closing
price shall be less. Plan Periods are six-month periods commencing January 1st
and July 1st. The 2000 ESPP Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. The Board of Directors believes that the 2000 ESPP Plan will further
encourage broader stock ownership by employees of the Company and thereby
provide an incentive for employees to contribute to the profitability and
success of the Company. In particular, the Board intends that the plan offer a
convenient means for employees who might not otherwise own Common Stock in the
Company to purchase and hold Common Stock, and that the discounted sale feature
of the 2000 ESPP Plan provides a meaningful inducement to participate. The
Company believes that the employees' continuing economic interest, as
shareholders, in the performance and success of the Company will further enhance
the entrepreneurial spirit of the Company, which can greatly contribute to the
long-term growth and profitability of the Company. As of June 30, 2002, 66
employees participate in the automatic withholding election for the 2000 ESPP
Plan.
Description of the 2000 Plan
The 2000 Plan will be administered by the Company's Board of Directors
(the "Board") or by a Committee appointed by the Board (the "Committee"). The
Board or the Committee has authority to make rules and regulations for the
administration of the Plan and its interpretation and decisions with regard
thereto shall be final and conclusive. The Board may at any time, and from time
to time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section 423 of
the Code, such amendment shall not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with Section 423 of the Code.
All employees are eligible to participate in any one or more of the
offerings of Options to purchase Common Stock under the 2000 ESPP Plan provided
that: (a) they are customarily employed by the Company or a Designated
Subsidiary for more than 20 hours a week and for more than five months in a
calendar year; and (b) they have been employed by the Company or a Designated
Subsidiary for at least thirty days prior to enrolling in the Plan; and (c) they
are employees of the Company or a Designated Subsidiary on the first day of the
applicable Plan Period. No employee may be granted an Option under the 2000 ESPP
Plan if such employee, immediately after the Option is granted, owns 5% or more
of the total combined voting power or value of the stock of the Company or any
subsidiary of the Company. For purposes of the preceding sentence, the
attribution rules of Section 424(d) of the Code shall apply in determining the
stock ownership of an employee, and all stock that the employee has a
contractual right to purchase shall be treated as stock owned by the employee.
The Company will make one or more offerings ("Offerings") to employees
to purchase stock under the 2000 ESPP Plan. Offerings will begin each January 1
and July 1, or the first business day thereafter (the "Offering Commencement
Dates"). Each Offering Commencement Date will begin a six-month period (a "Plan
Period") during which payroll deductions will be made and held for the purchase
of Common Stock at the end of the Plan Period. The Board or the Committee may,
at its discretion, choose a different Plan Period of twelve (12) months or less
for subsequent Offerings.
The Company will maintain payroll deduction accounts for all
participating employees. With respect to any Offering made under the 2000 ESPP
Plan, an employee may authorize a payroll deduction in any dollar amount from a
minimum of 2% up to a maximum of 10%, only in a whole integral percentage, or
such lesser amount as the Board or Committee shall determine before the start of
each Plan Period, of the Compensation he or she receives during the Plan Period
or such shorter period during which deductions from payroll are made.
No employee may be granted an Option that permits his rights to
purchase Common Stock under the 2000 ESPP Plan and any other employee stock
purchase plan (as defined in Section 423(b) of the Code) of the Company and its
subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value
of such Common Stock (determined at the Offering Commencement Date of the Plan
Period) for each calendar year in which the Option is outstanding at any time.
79
An employee may decrease or discontinue his payroll deduction once
during any Plan Period by filing a new payroll deduction authorization form.
However, an employee may not increase his payroll deduction during a Plan
Period. If an employee elects to discontinue his payroll deductions during a
Plan Period, but does not elect to withdraw his funds, the funds deducted prior
to his election to discontinue will be applied to the purchase of Common Stock
on the Exercise Date (as defined below).
Interest will not be paid, unless required by law, on any employee
accounts, except to the extent that the Board or the Committee, in its sole
discretion, elects to credit employee accounts with interest at such per annum
rate as it may from time to time determine.
An employee may at any time prior to the close of business on the last
business day in a Plan Period and for any reason permanently draw out the
balance accumulated in the employee's account and thereby withdraw from
participation in an Offering. Partial withdrawals are not permitted. The
employee may not begin participation again during the remainder of the Plan
Period. The employee may participate in any subsequent Offering in accordance
with terms and conditions established by the Board or the Committee.
Each employee who continues to be a participant in the Plan on the
Exercise Date shall be deemed to have exercised his Option at the option price
on such date and shall be deemed to have purchased from the Company the number
of full shares of Common Stock reserved for the purpose of the Plan that his
accumulated payroll deductions on such date will pay for, but not in excess of
the maximum number determined in the manner set forth above.
Any balance remaining in an employee's payroll deduction account at the
end of a Plan Period will be automatically refunded to the employee without
interest, unless required by law.
Certificates representing shares of Common Stock purchased under the
Plan may be issued only in the name of the employee, in the name of the employee
and another person of legal age as joint tenants with rights of survivorship, or
(in the Company's sole discretion) in the name of a brokerage firm, bank or
other nominee holder designated by the employee. The Company may, in its sole
discretion and in compliance with applicable laws, authorize the use of book
entry registration of (12) shares in lieu of issuing stock certificates.
Federal Income Tax Consequences
The Company believes that under the present law the following federal
income tax consequences would generally result under the Plan. Rights to
purchase shares under the Plan are intended to constitute "options" issued
pursuant to an "employee stock option plan" within the meaning of Section 423 of
the Code: No taxable income results to the participant upon the grant of right
to purchase or upon the purchase of shares for his or her account under the Plan
(although the amount of a participant's payroll contributions under the Plan
will be taxable as ordinary income to the participant). If the participant
disposes of shares less than two years after the first day of an offering period
with respect to which he or she purchased such shares, then at the time of
disposition the participant will recognize as ordinary income an amount equal to
the excess of the fair market value of the shares on the date of purchase over
the amount of the participant's payroll contributions used to purchase the
shares. If the participant holds the shares for at least two years after the
first day of an offering period with respect to which he or she purchased such
shares, then at the time of the disposition the participant will recognize as
ordinary income an amount equal to the lesser of (i) the excess of the fair
market value of the shares on the first day of the offering period over the
option price on that date, and (ii) the excess of the fair market value of the
shares on the date of disposition over the amount of the participant's payroll
contributions used to purchase such shares. In addition, the participant will
recognize a long-term or short-term capital gain or loss, as the case may be, in
an amount equal to the difference between the amount realized upon any sale of
the Common Stock minus the cost (i.e., the purchase price plus the amount, if
any, taxed to the participant as ordinary income, as noted in (3) above). If the
statutory holding period described above is satisfied, the Company will not
receive any deduction for federal income tax purposes with respect to any
discount in the sale price of Common Stock or matching contribution applicable
to such participant. If such statutory holding period is not satisfied, the
Company generally should be entitled to deduction in an amount equal to the
amount taxed to the participant as ordinary income.
During Fiscal 2002, approximately $206,000 was deducted from employee
payroll purchasing 121,964 shares in the Company.
80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 7, 2003, certain
information regarding the ownership of the Company's Common Stock by (i) each of
the Company's current Directors and (ii) all of the Company's directors and
officers as a group. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock. For each individual or group included in the table, percentage ownership
is calculated by dividing the number of shares beneficially owned by such person
or group as described above by the sum of the 9,943,447 shares of Common Stock
outstanding as of February 24, 2003 and the number of shares of Common Stock
that such person or group had the right to acquire within 60 days of February
24, 2003, including, but not limited to, upon the exercise of options.
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------------------ -------------------- -----
Michael P. Ryan
11 Raymond Avenue
Poughkeepsie, NY 12603 2,559,671 (1) 25.1%
Prime Partners, Inc.
11 Raymond Avenue
Poughkeepsie, NY 12603 2,053,671 (1) 21.2%
Ralph Porpora
11 Raymond Avenue
Poughkeepsie, NY 12603 2,058,844 (2) 21.3%
Thomas Povinelli
1311 Mamaroneck Avenue
White Plains, NY 10605 62,061 (3) *
Steven Gilbert
2420 Enterprise Road, Suite 100
Clearwater, FL 33763 757,913 (4) 7.4%
James Ciocia
35-50 Francis Lewis Blvd. Suite 205
Flushing, NY 11358 537,194 (5) 5.5%
Kathryn Travis
375 North Broadway
Suite 203
Jericho, NY 11753 199,321 (6) 2.2%
Edward H. Cohen
c/o Katten Muchin Zavis Rosenman - *
575 Madison Avenue New York, NY 10022
Seth A. Akabas 488
Madison Avenue
New York, NY 10022 9,065 (7) *
Louis P. Karol
600 Old Country Road
Garden City, NY 11530 3,180 *
81
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------------------ -------------------- -----
Ted Finkelstein
11 Raymond Avenue 2,339 *
Poughkeepsie, NY 12603
Doreen M. Biebusch
31 Milk Street
Boston, MA 02109 3,907 *
All Directors and officers as a group
(9 persons) 4,141,081 37.9%
* Less than 1.0%
(1) 6,000 shares are owned by Mr. Ryan personally, 16,200 shares are
beneficially owned by Mr. Ryan's wife, Carole Enisman, 5,700 shares owned by
Prudential Serls Prime Properties (of which Mr. Ryan is a director and 25%
shareholder) and 2,053,671 shares are beneficially owned by Prime Partners, Inc.
and its wholly owned subsidiaries (including 474,686 shares which Prime
Partners, Inc. has the right to acquire pursuant to the Ciocia Agreement and
168,981 shares which Prime Partners, Inc. has the right to acquire pursuant to
the Travis Purchase Agreement, all at an exercise price per share equal to the
greater of 160% of market price or $75, Mr. Ryan has full authority to vote
these shares pursuant to separate Voting Trust Agreements). Includes 250,000
shares issuable to Mr. Ryan upon exercise of stock options at a price of $6.00
per share and 250,000 shares issuable to Mr. Ryan upon exercise of stock options
at a price of $8.00 per share. Mr. Ryan owns 50% percent of the capital stock
of, and serves as an officer and director of, Prime Partners, Inc. Mr. Ryan
disclaims beneficial ownership of the 16,200 shares beneficially owned by Ms.
Enisman, and the 5,700 shares owned by Prudential Serls Prime Properties.
(2) Includes 2,035,671 shares beneficially owned by Prime Partners, Inc.
and its wholly owned subsidiaries (including 474,686 shares which Prime
Partners, Inc. has the right to acquire pursuant to the Ciocia Purchase
Agreement and 168,981 shares which Prime Partners, Inc. has the right to acquire
pursuant to the Travis Purchase Agreement, all at an exercise price per share
equal to the greater of 160% of market price or $75. Mr. Ryan has full authority
to vote these shares pursuant to separate Voting Trust Agreements), 2,442 shares
issuable upon the exercise of options at a price of $8.1875 per share and 2,731
shares issuable upon the exercise of options at a price of $2.875 per share. Mr.
Porpora owns 50% percent of the capital stock of, and serves as an officer and
director of, Prime Partners, Inc.
(3) Includes 60,000, 830 and 691 shares issuable upon the exercise of
currently exercisable options at a price of $9.50, $10.124 and $8.1875,
respectively, per share. In January 2003 the Company foreclosed on 1,048,616
shares of common stock pledged by Mr. Povinelli to secure obligations of
Pinnacle Taxx Advisors, LLC. Such shares are being held pending a resolution of
such obligations. These shares are considered to still be outstanding.
(4) Includes 169,854 shares owned by Gilbert Family Limited Partnership of
which Steven Gilbert is a 97% beneficiary. In addition, includes 340,000 shares,
100,000 shares, 75,000 shares, 12,310 shares, 9,9l0 shares, 5,969 shares, 37,500
shares and 7,370 shares issuable upon exercise of options at $3.50, $4.75,
$13.75, $10.l2, $9.8125, $8.1875, $8.00 and $2.875, respectively, per share.
Does not include 70,000 shares issuable upon the exercise of options that do not
vest until December 2003.
(5) Includes 60,000, 1,470 and 1,038 shares issuable upon the exercise of
options at a price of $9.50, $l0.l25, and $8.1875, respectively, per share. Also
includes 474,686 shares which Prime Partners Inc. has the right to acquire
pursuant to the Ciocia Agreement. Michael Ryan has full authority to vote these
shares pursuant to a separate Voting Trust Agreement.
(6) Includes 30,000 and 340 shares issuable upon the exercise of currently
exercisable options at a price of $9.50 and $l0.l25, respectively, per share.
Also includes 168,981 shares, which Prime Partners Inc. has the right to acquire
pursuant to the Travis Agreement. Michael Ryan has full authority to vote these
shares pursuant to a separate Voting Trust Agreement.
82
(7) Includes 8,061 shares owned by the law firm of Akabas & Cohen of which
Mr. Akabas is a partner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The four principal stockholders, Messrs. Ciocia, Povinelli and Ryan and Ms.
Travis personally guaranteed the repayment of the Company's loan from Travelers
Life & Annuity. Additionally, Messrs. Ciocia, Povinelli and Ryan have personally
guaranteed the repayment of the Company's loan from First Union National Bank.
Such stockholders received no consideration for such guarantees other than their
salaries and other compensation.
Seth A. Akabas is a partner in the law firm of Akabas & Cohen and also a
director of the Company. Akabas & Cohen is outside counsel for the Company.
During the Fiscal year ended June 30, 2002, 2001 and 2000, the Company paid
$72,286, $104,106 and $113,338 in legal fees to Akabas & Cohen.
Edward H. Cohen is of counsel to, and a retired partner of, the law firm Katten
Muchin Zavis Rosenman and also a director of the Company. Since August 2002,
Katten Muchin Zavis Rosenman ("KMZR") has been outside counsel to the Company
and has also, in the past, represented Michael Ryan personally. No fees were
paid by the Company to KMZR during the Fiscal years ended June 30, 2002, 2001
and 2000.
In July 2000, the Company borrowed $250,000 at 12% interest from Mysemia, a
general partnership in which Seth A. Akabas is a general partner with a 33%
interest. No interest or principal has been paid on such loan to date. This loan
is payable ten business days after demand and is included in the current portion
of long term debt on the accompanying balance sheet as of June 30, 2002 and
2001. As of June 30, 2002 $62,055 in accrued interest is due to Mysemia. The
debt plus accrued interest due to Mysemia were assumed by Pinnacle Taxx Advisors
LLC on November 26, 2002.
In January 2001, the Company borrowed $250,000 from Doreen M. Biebusch, a
Director of the Company. Interest is accrued at a rate of 18% through April 15,
2001 and was increased to 22% after April 15, 2001. As of June 30, 2002 the
balance due on the note payable is $150,000 plus accrued interest of $50,392.
This debt plus accrued interest due to Ms. Biebusch were assumed by Pinnacle
Taxx Advisors LLC on November 26, 2002. In addition, JDJ Resources, a company in
which Ms. Biebusch is an owner, charged the Company approximately $22,000 in
Fiscal 2002 for consulting fees.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
general partners in a limited partnership, Prime Income Partners, L.P. which
owns a building in Poughkeepsie, New York. This building is occupied by Prime
Financial Services, Inc. and as of August 2002 also serves as the Company's
executive headquarters. During the Fiscal year ended June 30, 2002 the Company
paid $314,561 to Prime Income Partners, L.P. for rent and related charges.
Management believes the amounts charged to the Company for rent to be
commensurate with the rental rate that would be charged to an independent third
party.
In February 2002, Prime Management Corp. loaned the Company $1.0 million at a
stated interest rate of 10% which was repaid in full plus accrued interest of
$14,855 in April 2002. During the Fiscal year ended June 30, 2001 the Prime
Management Corp. loaned the Company an aggregate of $600,000. As of June 30,
2002 the Company owes Prime Management Corp. $244,191. Michael Ryan, the
Company's Chief Executive Officer and President, is one of the general partners
of Prime Management Corp.
As of June 30, 2002 the Company has a note payable, with a stated interest rate
of 15% per annum, to Thomas Povinelli, the Company's former Chief Executive
Officer in the amount of $700,000 plus accrued interest of $116,870. This note
plus accrued interest due to Mr. Povinelli were assumed by Pinnacle Taxx
Advisors LLC on November 26, 2002.
On November 26, 2002, the Company finalized a transaction pursuant to an asset
purchase agreement with Pinnacle Taxx Advisors LLC ("Pinnacle"), whereby
Pinnacle, an entity controlled by Thomas Povinelli and David Puyear, former
executive officers of the Company, purchased certain assets of the Company. (See
Note 20 of Notes to Consolidated Financial Statements)
83
PART IV
ITEM 15. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial
Statements at Item 8 on page 35 of this report.
(2) Financial Statement Schedule: See notes to Consolidated Financial
Statements at Item 8 on page 35 of this report
(3) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference:
3.1 Registrant's Articles of Incorporation, as amended, incorporated
by reference to the like numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under the Securities Act of
1933, as amended, File No. 33-70640-NY.
3.2 Registrant's Amended Articles of Incorporation, incorporated by
reference to the exhibit in the Registrant's Proxy Statement on
Form14-A under the Securities Exchange Act of 1934, as amended,
filed on June 22, 1999.
3.3 Registrant's By-Laws, incorporated by reference to the like
numbered exhibit in the Registrant's Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended, File No.
33-70640-NY.
10.1 1993 Joint Incentive and Non-Qualified Stock Option Plan of the
Registrant, incorporated by reference to the like numbered
exhibit in the Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-70640-NY.
10.2 1999 Joint Incentive and Non-Qualified Stock Option Plan of the
Registrant, incorporated by reference to the exhibit in the
Registrant's Proxy Statement on Form 14-A under the Securities
Exchange Act of 1934, as amended, filed on June 22, 1999.
10.3 2000 Employee Stock Purchase Plan of the Registrant, incorporated
by reference to the exhibit in the registrant's Proxy Statement
on Form 14-A under the Securities Exchange Act of 1934, as
amended, filed on May 5, 2000.
10.4 Stock Purchase Agreement dated November 19, 1998 among
Registrant, North Shore Capital Management and North Ridge
Securities Corp., incorporated by reference to Exhibit 1 on the
Registrant's report on Form 8-K, dated November 19, 1998.
10.5 Non-competition Agreement dated November 19, 1998 among
Registrant, Daniel Levy, and Joseph Clinard, incorporated by
reference to Exhibit 2 on the Registrant's report on Form 8-K,
dated November 19, 1998.
10.6 Employment Agreement dated November 19, 1998 between Daniel Levy
and North Shore Capital Management Corp and North Ridge
Securities Corp., incorporated by reference to Exhibit 3 on the
Registrant's report on Form 8-K, dated November 19, 1998.
84
10.7 Stock Option Agreement dated November 19, 1998 between Registrant
and Daniel Levy, incorporated by reference to Exhibit 4 on the
Registrant's report on Form 8-K, dated November 19, 1998.
10.8 Consulting Agreement dated November 19, 1998 between Joseph
Clinard and North Ridge Securities Corp., incorporated by
reference to Exhibit 5 on the Registrant's report on Form 8-K,
dated November 19, 1998.
10.9 Stock and Asset Purchase Agreement dated April 5, 1999 among
Registrant, Prime Financial Services, Inc., Prime Capital
Services, Inc., Asset & Financial Planning, Ltd., Michael P. Ryan
and Ralph Porpora, incorporated by reference to Exhibit 1 on the
Registrant's report on Form 8-K, dated April 5, 1999.
10.11 Non-competition Agreement dated April 5, 1999 among Registrant,
Prime Financial Services, Inc., Michael P. Ryan and Ralph
Porpora, incorporated by reference to Exhibit 2 on the
Registrant's report on Form 8-K, dated April 5, 1999.
10.12 Registration Rights Agreement dated April 5, 1999 among
Registrant, Prime Financial Services, Inc., Michael P. Ryan and
Ralph Porpora, incorporated by reference to Exhibit 3 on the
Registrant's report on Form 8-K, dated April 5, 1999.
10.13 Limited Liability Company Interest Option Agreement dated April
5, 1999 between Registrant and Prime Financial Services, Inc.,
incorporated by reference to Exhibit 4 on the Registrant's report
on Form 8-K, dated April 5, 1999.
10.14 Asset Purchase Agreement dated November 26, 2002 between
Registrant and Pinnacle Taxx Advisors LLC, incorporated by
reference to Exhibit 1 on the Registrant's report on Form 8-K,
dated December 23, 2002.
21 List of Subsidiaries.
23 Consent of Grant Thornton, LLP dated March 3, 2003.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
(1) Current Report on Form 8-K filed with the SEC on July 17, 2002.
(2) Current Report on Form 8-K filed with the SEC on August 9, 2002.
(3) Current Report on Form 8-K filed with the SEC on September 4,
2002.
(4) Current Report on Form 8-K filed with the SEC on December 23,
2002.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: February 28, 2003 GILMAN + CIOCIA, INC.
By /s/ MICHAEL P. RYAN
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MICHAEL P. RYAN
CHIEF EXECUTIVE OFFICER
By /s/ MICHAEL MANNION
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MICHAEL MANNION
CHIEF ACCOUNTING OFFICER
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 28th day of February, 2003.
/s/ JAMES CIOCIA Chairman
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JAMES CIOCIA
/s/ MICHAEL P. RYAN Director
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MICHAEL P. RYAN
/s/ KATHRYN TRAVIS Director
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KATHRYN TRAVIS
Director
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LOUIS P. KAROL
Director
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SETH A. AKABAS
/s/ DOREEN M. BIEBUSCH Director
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DOREEN M. BIEBUSCH
/s/ STEVEN GILBERT Director
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STEVEN GILBERT
/s/ EDWARD H. COHEN Director
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EDWARD H. COHEN
CERTIFICATIONS*
I, Michael P. Ryan, certify that:
1. I have reviewed this annual report on Form 10-K of Gilman + Ciocia, Inc.
(the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: February 27, 2003
/s/ MICHAEL P. RYAN
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CHIEF EXECUTIVE OFFICER
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The
required certification must be in the exact form set forth above.
CERTIFICATIONS*
I, Michael Mannion, certify that:
1. I have reviewed this annual report on Form 10-K of Gilman + Ciocia, Inc.
(the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: February 27, 2003
/s/ MICHAEL MANNION
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CHIEF ACCOUNTING OFFICER
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The
required certification must be in the exact form set forth above.