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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended DECEMBER 31, 2003.
Commission File Number 000-22996
GILMAN + CIOCIA, INC.
(Exact name of the registrant as specified in its charter)
DELAWARE 11-2587324
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK 12603
(address of principal executive offices)
(845)486-0900
(Issuer's Telephone Number)
Indicate by check mark whether the registrant: (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes |_| No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
As of February 18, 2004, 8,849,323 shares of the issuer's common stock, $0.01
par value, were outstanding.
Page 1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of December 31, 2003
and June 30, 2003 3
Consolidated Statement of Operations for the Three Months
and Six Months Ended December 31, 2003 and December 31, 2002 4
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2003 and December 31, 2002 5-6
Consolidated Statement of Shareholders' Equity (Deficit)
for the Six Months Ended December 31, 2003 7
Notes to Consolidated Financial Statements 8-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-25
Item 3. Quantitative and Qualitative Disclosure About Market Risks 25
Item 4. Controls and Procedures 25-26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES AND CERTIFICATIONS 27
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dec 31, June 30,
2003 2003
------------ ------------
(Unaudited) (Audited)
Assets (Restated)
Cash and cash equivalents $ 1,003,810 $ 955,097
Marketable securities 1,038,652 969,622
Trade accounts receivable, net 4,160,080 4,293,527
Receivables from officers, shareholders
and employees, net 394,329 555,839
Assets of Discontinued Operations
3,568 3,568
Due From Office Sales - Current 149,510 237,302
Prepaid expenses and other current assets 227,473 476,397
Income taxes receivable -- 27,590
------------ ------------
Total current assets 6,977,422 7,518,942
Fixed assets, net 1,992,091 2,396,313
Goodwill 3,900,072 3,900,072
Intangible assets, net 5,917,015 6,133,248
Due from Office Sales - Non Current 522,090 522,090
Other assets 907,345 1,010,449
Total assets $ 20,216,035 $ 21,481,114
============ ============
Liabilities and Shareholders' Deficit
Accounts payable and accrued expenses $ 12,284,417 $ 13,120,150
Current portion of notes payable and
capital leases 10,618,446 12,166,618
Liabilities of Discontinued Operations
-- 1,725,707
Income Tax Payable
91,810 --
------------ ------------
Total current liabilities 22,994,673 27,012,475
Long term portion of notes payable and
capital leases 313,963 650,622
Other liabilities
-- 11,000
------------ ------------
Total liabilities 23,308,636 27,674,097
Shareholders' Equity (Deficit)
Preferred Stock, $0.001 par value, 100,000 shares authorized; no shares -- --
Issued and outstanding at December 31, 2003 and June 30, 2003
Common stock, $0.01 par value 20,000,000 shares authorized; 9,080,945
and 10,039,561 shares issued at December 31, 2003 and June 30, 2003 101,295 100,395
Additional paid in capital 29,653,696 29,850,805
Treasury stock, 1,326,838 and 278,222 shares of common stock at
December 31, 2003 and June 30, 2003, respectively, at cost (1,086,079) (1,075,593)
Note receivable for acquired shares
-- (105,000)
Retained deficit (31,761,513) (34,963,590)
------------ ------------
Total shareholders' deficit (3,092,601) (6,192,983)
------------ ------------
Total liabilities and shareholders' deficit $ 20,216,035 $ 21,481,114
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
For the Three Months Ended For the Six Months
December 31, Ended December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Financial planning services $ 14,669,370 $ 14,427,273 $ 29,534,591 $ 29,166,715
Tax preparation fees 407,639 408,438 885,196 977,097
------------ ------------ ------------ ------------
Total revenues 15,077,009 14,835,711 30,419,787 30,143,812
------------ ------------ ------------ ------------
Operating Expenses:
Salaries and commissions 12,736,706 13,612,124 25,236,863 26,260,435
General and administrative 1,848,792 2,406,371 3,731,278 4,469,224
Advertising 102,196 33,414 121,603 58,871
Brokerage fees and licenses 552,664 521,644 881,142 889,398
Rent 559,611 752,521 1,172,703 1,689,946
Depreciation and amortization 370,698 460,710 729,490 1,023,032
Loss on sale of equipment -- 85,325 -- 85,325
------------ ------------ ------------ ------------
Total operating expenses 16,170,667 17,872,109 31,873,079 34,476,231
------------ ------------ ------------ ------------
Income (loss) from
continuing operations before other ------------ ------------ ------------ ------------
income and expenses (1,093,658) (3,036,398) (1,453,291) (4,332,419)
------------ ------------ ------------ ------------
Other Income (Expenses):
Interest and investment income 9,982 129 28,072 4,594
Interest expense (202,215) (713,845) (450,179) (1,202,293)
Other income (expense), net -- -- -- --
------------ ------------ ------------ ------------
Total other income (expense) (192,233) (713,716) (422,107) (1,197,699)
------------ ------------ ------------ ------------
Loss from continuing operations ------------ ------------ ------------ ------------
before income taxes (1,285,891) (3,750,114) (1,875,399) (5,530,118)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income taxes (benefit) (31) 13,600 1,045 51,500
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss from continuing operations (1,285,860) (3,763,714) (1,876,444) (5,581,618)
------------ ------------ ------------ ------------
Discontinued Operations:
Income (loss) from discontinued operations 24,557 (473,419) 9,903 (1,141,685)
Gain/(Loss) on disposal of
discontinued operations (net of income tax of
$121,359,$1,400,$121,359 and $6,500
respectively) 4,270,460 (2,161,510) 5,068,618 (2,686,690)
------------ ------------ ------------ ------------
Income (loss) from discontinued operations 4,295,017 (2,634,929) 5,078,520 (3,828,375)
------------ ------------ ------------ ------------
Net income (loss) $ 3,009,157 $ (6,398,643) $ 3,202,077 $ (9,409,993)
============ ============ ============ ============
Basic per share data:
Income (Loss) from continuing operations ($ 0.14) ($ 0.40) ($ 0.19) ($ 0.61)
Gain (Loss) from discontinued operations 0.45 (0.28) 0.53 (0.42)
------------ ------------ ------------ ------------
Net Income (loss) per share, basic $ 0.31 $ (0.68) $ 0.34 $ (1.03)
============ ============ ============ ============
Weighted average shares, basic 9,512,839 9,418,381 9,637,089 9,178,467
============ ============ ============ ============
Diluted per share data:
Income (Loss) from continuing operations ($ 0.12) ($ 0.40) ($ 0.19) ($ 0.61)
Gain (Loss) from discontinued operations 0.41 (0.28) 0.50 (0.42)
------------ ------------ ------------ ------------
Net Income (loss) per share, diluted $ 0.29 $ (0.68) $ 0.31 $ (1.03)
============ ============ ============ ============
Weighted average shares, diluted 10,386,813 9,418,381 10,074,076 9,178,467
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
Page 4
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
For the Six Months Ended December 31
Cash Flows From Operating Activities:
2003 2002
----------- -----------
Net Income (Loss): $ 3,202,077 $(9,409,993)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 729,488 1,587,705
Amortization of Debt Discount 112,197 --
(Gain) Loss on sale of discontinued operations (5,189,977) 2,680,190
Issuance of common stock for debt default penalties and interest 24,000 280,000
Loss (Gain) on sale of equipment 85,325
Unrealized losses on securities held for trading 133,676
Bad Debt Expense 50,000 5,000
Changes in assets and liabilities:
Accounts receivable, net 135,947 2,000,928
Prepaid and other current assets 248,923 93,308
Receivables from officers, stockholders and employees 196,802 279,074
Decrease in other assets 103,104 100,178
Accounts payable and accrued expenses (1,380,961) 92,923
Income taxes receivable/payable 119,399 669,787
Increase in other liabilities (11,000) 11,000
Marketable securities (69,030) 130,728
----------- -----------
Net cash (used in) operating activities (1,729,031) (1,260,171)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (17,187) (84,460)
Cash paid for acquisitions (91,846) (106,607)
Proceeds from joint venture distribution -- 90,000
Proceeds from sale of equipment -- 14,000
Proceeds from the sale of discontinued operations 3,562,292 324,114
----------- -----------
Net cash provided by investing activities 3,453,259 237,047
----------- -----------
Cash Flows From Financing Activities:
Acquisition of treasury stock (10,486) (5,209)
Proceeds from bank and other loans 583,249 625,000
Payments of bank and capital lease obligations (2,248,278) (1,311,011)
----------- -----------
Net cash used in financing activities (1,675,515) (691,220)
----------- -----------
----------- -----------
Net change in cash and cash equivalents 48,713 (1,714,344)
----------- -----------
----------- -----------
Cash and cash equivalents at beginning of period 955,097 2,223,806
----------- -----------
----------- -----------
Cash and cash equivalents at end of period $ 1,003,810 $ 509,462
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements
Page 5
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
UNAUDITED
For the Six Months Ended
December 31, December 31,
2003 2002
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $122,937 $115,233
======== ========
Supplemental Disclosure of Non Cash Transactions:
Common Stock and Options issued in connection with -- 6,613
business combinations
Equipment acquired under capital leases -- 4,887
Issuance of common stock for debt default penalties
and interest 90,000 280,000
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Common Stock Additional Paid Accumulated
Shares Amount In Capital Deficit
---------- ------------ ------------ ------------
Balance at July 1, 2003 10,039,561 $ 100,395 $ 29,850,805 ($34,963,590)
---------- ------------ ------------ ------------
Net Income 3,202,077
Record T. Povinelli shares (1,048,616) (220,209)
to Treasury Stock
Release of Note receivable from
Pinnacle sale
Issuance of stock in
connection with default
on note payable 90,000 900 23,100
---------- ------------ ------------ ------------
Balance at December 31, 2003 9,080,945 $ 101,295 $ 29,653,696 ($31,761,513)
========== ============ ============ ============
Total
Shareholder's
Treasury Stock Note Equity
Shares Amount Receivable (Deficit)
--------- ------------ ------------ ------------
Balance at July 1, 2003 278,222 ($ 1,075,593) ($ 105,000) ($ 6,192,983)
--------- ------------ ------------ ------------
Net Income 3,202,077
Record T. Povinelli shares 1,048,616 (10,486) (230,695)
to Treasury Stock
Release of Note receivable from
Pinnacle sale 105,000 105,000
Issuance of stock in
connection with default
on note payable 24,000
--------- ------------ ------------ ------------
Balance at December 31, 2003 1,326,838 ($ 1,086,079) $ 0 ($ 3,092,601)
========= ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Page 7
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
(a) Description of the Company and Overview
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, the
"Company") is a corporation that was organized in 1981 under the laws of the
State of New York and reincorporated under the laws of the State of Delaware in
1993. The Company provides financial planning services, including securities
brokerage, insurance and mortgage agency services, and federal, state and local
tax preparation services to individuals, predominantly in the middle and upper
income tax brackets. In Fiscal 2003*, approximately 89% of the Company's
revenues were derived from commissions on financial planning services and
approximately 11% were derived from fees for tax preparation services. As of
December 31, 2003, the Company had 42 offices operating in 5 states (New York,
New Jersey, Connecticut, Florida and Colorado). The Company's Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K can be
obtained, free of charge, on the Company's web site at www.gilcio.com.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered losses from operations in
each of its last four years and is in default under its three largest financing
agreements raising substantial doubt about its ability to continue as a going
concern. During Fiscal 2003, the Company incurred net losses of $13,996,916 and
at December 31, 2003 had a working capital deficit of $16,017,251. The Company's
ability to continue as a going concern and its future success is dependent on
its ability to reduce costs and generate revenues.
As a result of a number of defaults under its agreements with Wachovia Bank,
National Association, ("Wachovia"), on November 27,
* Fiscal years are denominated by the year in which they end. Accordingly,
Fiscal 2003 refers to the year ended June 30, 2003.
Page 8
2002, the Company entered into a debt forbearance agreement with Wachovia and
subsequently amended the debt forbearance agreement on June 18, 2003. Another of
its lenders, Travelers Insurance Company ("Travelers") has claimed several
defaults under its agreement, but acknowledged that it was subject to the terms
of a subordination agreement which restricts the remedies it can pursue against
the Company. The Company's debt to Rappaport Gamma, Ltd. ("Rappaport") was due
on October 30, 2002, but remains unpaid. This loan is also subordinated to the
Wachovia loan. That lender is entitled to receive shares of the Company's common
stock monthly while the debt remains unpaid. As a result of these defaults, the
Company's debt as to those lenders is classified as current liabilities on its
financial statements.
On August 27, 2002, the Company switched independent auditors from Arthur
Andersen LLP to Grant Thornton LLP. On November 7, 2003, the Company switched
independent auditors from Grant Thornton LLP to Radin Glass & Co. LLP.
(b) Basis of Presentation
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. The consolidated balance sheets as of December 31, 2003, the
consolidated statement of operations for the three months ended December 31,
2003 and 2002, the consolidated statements of cash flows for the three months
and six months ended December 31, 2003 and the consolidated statement of
stockholders equity for the six months ended December 31, 2003 are unaudited.
The consolidated financial statements reflect all adjustments (consisting only
of normal recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of the Company's financial position and
results of operations. The operating results for the three months and six months
ended December 31, 2003 are not necessarily indicative of the results to be
expected for any other interim period or any future year. These consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K/A for the year ended June 30, 2003, as restated. On February 13, 2004, the
Company received a letter from Grant Thornton, its previous auditors, advising
the Company that it did not consent to the inclusion of its 2002 Auditors'
Report issued for the Company's Form 10K for Fiscal 2002 in the Company's Form
10-K/A for Fiscal 2003 filed on February 9, 2004. The letter stated that Grant
Thornton was withdrawing its 2002 Auditors' Report and that its report could no
longer be relied on, and that it was withdrawing its quarterly review reports
for each fiscal quarter during which it served as the Company's auditors. A copy
of Grant Thornton's letter to the Company dated February 13, 2004 is annexed to
this Form 10-Q as Exhibit 99.1.
(c) Accounting Policies
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company 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. The Company's 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 the Company's accounting policies require higher degrees of judgment
than others in their application.
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 at in sales transactions and
current market conditions.
Page 9
Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting services, direct mail services and asset management fees 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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.
Net Income (Loss) Per Share
In accordance with SFAS No. 128, "Earnings per Share", basic net income (loss)
per share is computed using the weighted-average number of common shares
outstanding during each period. Diluted net income (loss) per share gives effect
to all potentially dilutive securities that were outstanding during each period.
For the three and six months ended December 31, 2003 and 2002, outstanding
options and warrants of 2,313,728 and 3,749,391, respectively, to purchase
shares of common stock were included in the December 31, 2003 computation of
diluted net income (loss) per share. The computation for December 30, 2002 did
not include these outstanding options and warrants because to do so would have
an antidilutive effect for the periods presented.
Stock Based Compensation
At December 31, 2003, the Company has one stock-based employee compensation
plan. Prior to 2000, the Company accounted for those plans under the recognition
and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Effective July 1, 2000, the Company
adopted the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-based Compensation, prospectively to all employee awards
granted, modified, or settled after January 1, 2002. Awards under the Company's
plans vest over periods ranging from three to five years. Therefore, the cost
related to stock-based employee compensation included in the determination of
net income for 2002 and 2003 is less than that which would have been recognized
if the fair value based method had been applied to all awards since the original
effective date of Statement 123. The following table illustrates the effect on
net income and earnings per share if the fair value based method had been
applied to all outstanding and unvested awards in each period.
For the Three Months Ended
December 31
2003 2002
------------- -------------
Net Income (Loss), as reported $ 3,009,157 $ (6,398,643)
Add: Stock-based employee
compensation expenses included
in reported net loss, net of related
tax effects
Deduct: Total stock-based
compensation expense determined
under fair value based method for
all awards, net of related taxes 56,003 305,358
------------- -------------
Proforma net income (loss) $ 2,953,154 $ (6,704,001)
Basic and diluted earnings (loss) per share:
As reported - Basic $ 0.31 $ (0.68)
Proforma - Basic 0.31 (0.71)
As reported - Diluted $ 0.29 $ (0.68)
Proforma - Diluted 0.28 (0.71)
Page 10
The effects of applying SFAS 123 in the pro forma net loss disclosures above are
not likely to be representative of the effects on pro forma disclosures of
future years.
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 our June 30, 2003 Consolidated
Financial Statements included in the Company's Form 10-K/A, as restated, which
discusses accounting policies that must be selected by management when there are
acceptable alternatives.
(d) Liquidity and cash flow
The Company's December 31, 2003 consolidated financial statements were prepared
assuming the Company will continue as a going concern. The Company has suffered
losses from operations in each of its last four years, and is in default under
its three largest lending facilities, raising substantial doubt about its
ability to continue as a going concern. During the fiscal year June 30, 2003,
the Company incurred net losses totaling $13,996,916 and at December 31, 2003
was in a working capital deficit position of $16,017,251. At December 31, 2003,
the Company had $1,003,810 of cash and cash equivalents and $4,160,080 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 and generate revenues 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 2004. The following
transactions have had or are expected to have a beneficial effect on the
Company's future cash flow requirements:
1. Sale of forty seven offices (the "Purchased Offices") to Pinnacle Taxx
Advisors, LLC ("Pinnacle") effective as of September 1, 2002. See Note 5 of
Notes to Consolidated Financial Statements for a complete discussion of the sale
of the Purchased Offices to Pinnacle.
2. Sale of thirteen other Company offices in Fiscal 2003, sale of one Company
office during the three months ending September 30, 2003 and the sale of three
Company offices during the three months ended December 31, 2003. See Note 5 of
Notes to Consolidated Financial Statements for a discussion of the sale of three
offices.
3. The payment of the Company's debt. See Note 7 of Notes to Consolidated
Financial Statements for a complete discussion of the Company's debt.
In addition to the above activities, the following business initiatives are
ongoing:
1. Management has engaged in an extensive campaign to reduce corporate overhead,
consisting primarily of closing the White Plains, NY executive offices and
consolidating those functions into the Poughkeepsie, NY 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.
Management believes that these actions will be successful. However, there can be
no assurance that the Company can 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
tactical alternatives and are also continuing to identify and implement internal
actions to improve the Company's liquidity and financial performance.
2. RECLASSIFICATION FOR DISCONTINUED OPERATIONS
During Fiscal 2003 and in the six months ended December 31, 2003, the Company
sold sixty four of its offices, including the sale of forty seven offices to
Pinnacle. In accordance with SFAS 144 assets and liabilities associated with
these offices have been reclassified and are included on the accompanying
balance sheets as assets and liabilities held for sale, and the results of these
operations have been reclassified and are separately presented for all reporting
periods as discontinued operations in the accompanying statements of operations.
Page 11
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised SFAS No. 132, Employers' Disclosures about
Pensions and Other Post Retirement Benefits. This revision requires additional
disclosures to those in the original SFAS No. 132 about assets, obligations,
cash flows and the periodic benefit cost of deferred benefit pension plans and
other deferred benefit post-retirement plans. The required information should be
provided separately for pension plans and for other post-retirement benefit
plans. This statement revision is effective for the fiscal years ended after
December 14, 2003 and interim periods beginning after December 15, 2003. The
adoption of this revision is not expected to have a material impact on our
results of operations, financial position or disclosures.
4. CONTINGENCIES
Litigation
The Company and its Broker Dealer Subsidiaries are defendants and respondents in
lawsuits and NASD arbitrations in the ordinary course of business. On December
31, 2003, there were thirty five pending lawsuits and arbitrations and
management accrued $1,146,058 as a reserve for potential settlements, judgments
and awards. Of these matters, seventeen were related to Prime Capital Services,
Inc. and its registered representatives. Prime Capital Services has Errors &
Omissions coverage for such matters. In addition, under the Prime Capital
Services Registered Representatives contract, each registered representative has
indemnified the Company for these claims. Accordingly, the Company believes that
these lawsuits and arbitrations will not have a material impact on its financial
position.
On February 4, 2004, the Company's registered agent in Delaware was served with
a Summons and a Shareholder's Class Action and Derivative Complaint with the
following caption: "Gary Kosseff, Plaintiff, against James Ciocia, Thomas
Povinelli, Michael P. Ryan, Kathryn Travis, Seth A. Akabas, Louis P. Karol,
Edward H. Cohen, Steven Gilbert and Doreen Biebusch, Defendants and Gilman &
Ciocia, Inc., Nominal Defendant". The action was filed in the Court of Chancery
of the State of Delaware in and for New Castle County under Civil Action No.
188-N. The Company believes that the allegations contained in the lawsuit are
without merit and the Company intends to contest the lawsuit vigorously. The
nature of the action is that the Company, its Board of Directors and its
management, breached their fiduciary duty of loyalty in connection with the sale
of the Purchased Offices to Pinnacle. The action alleges that the sale to
Pinnacle was for inadequate consideration and without a fairness opinion by
independent financial advisors, without independent legal advice and without a
thorough evaluation and vote by an independent committee of the Board of
Directors. The action prays for the following relief: a declaration that the
action is maintainable as a class action and certifying the plaintiff as the
representative of the class; a declaration that the Company, its Board of
Directors and its management breached their fiduciary duty and other duties to
the plaintiff and to the other members of the purported class; a rescission of
the Purchase Agreement; unspecified monetary damages; and an award to the
plaintiff of costs and disbursements, including reasonable legal, expert and
accountants fees.
SEC Investigation
The Company is the subject of a formal investigation by the Securities and
Exchange Commission ("SEC"). 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 Form 10-K for
Fiscal 2002 and 2003, the Company's delay in filing its 10-Q for the quarter
ending September 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. The Company and its executives
have complied fully with the SEC's investigation and will continue to comply
fully 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.
5. SALE OF OFFICES
Sale of the Purchased Offices to Pinnacle
On November 26, 2002, the Company finalized a transaction pursuant to an asset
purchase agreement (the "Purchase Agreement") with 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 effective
date of the closing under the Purchase Agreement was September 1, 2002. The
Company sold to Pinnacle forty seven offices ("Pinnacle Purchased Offices") and
all tangible and intangible net assets (the "Purchased Assets") which were
associated with the operations of the Pinnacle Purchased Offices, together
representing approximately $17,690,000 or approximately 19.0% of the Company's
annual revenue for the fiscal year ended June 30, 2002. Included in the net
Page 12
assets sold to Pinnacle was approximately $1,550,000 in debt plus accrued
interest of approximately $280,000 and other payables of approximately $400,000
which were to be assumed by Pinnacle, subject to creditor approval. As part of
the sale of the Purchased Offices, one hundred thirty seven 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 net purchase price payable by Pinnacle after it assumed all liabilities and
payables was $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 thirty days from the Closing. The
Initial Note was guaranteed by Mr. Povinelli and Mr. Puyear and Mr. Povinelli
pledged his entire holdings of the Company's common stock to secure the Initial
Note. The Initial Note was 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, was to be paid pursuant to a second
promissory note (the "Second Note") which was secured by Pinnacle's assets. The
Initial Note was secured by 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
was 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.
During the quarter ended December 31, 2002, the Company recognized a $1,509,229
loss on the sale of the Pinnacle Purchased Offices. This loss consisted of the
sale of assets net of liabilities assumed totaling $1,685,343, less cash
received of $176,114.
During the quarter ended March 31, 2003, the Company recognized a $1,159,229
gain on the sale of the Pinnacle Purchased Offices. This gain consisted of the
write-off of a note payable ($700,000) and related accrued interest ($144,443)
totaling $844,443 and cash received of $314,786. The note and related accrued
interest were payable to Mr. Povinelli and were written off as a result of
Pinnacle's default under the Initial Note.
During the quarter ended June 30, 2003, the Company recognized a $687,054 gain
on the sale of the Pinnacle Purchased Offices. This gain consisted entirely of
cash received of $687,054. During the quarter ended September 30, 2003, the
Company recognized a $732,639 gain on the sale of the Pinnacle Purchased
Offices. This gain consisted of $710,723 of cash received from Royal and the
remaining $21,916 from Bisys.
As a result of the transaction with Pinnacle, a gain of approximately $4.6
million was calculated by management in December 2002. However, due to the
uncertainties associated with payment on the Initial Note and Second Note, the
Company deferred the gain recognition until proceeds from payment of cash or
collateral by Pinnacle were received on the Initial Note and Second Note. As of
June 30, 2003, the Company had received payments totaling $1,153,362 but had not
received certain payments required under the Initial Note and an equipment
sublease. The Company's position was that Pinnacle was in default under the
Initial Note, the Second Note and the equipment sublease. Accordingly, on May
16, 2003, the Company initiated a lawsuit against Pinnacle seeking payments for
all amounts due. The Company entered into a Stock Purchase Agreement with Mr.
Povinelli whereby he transferred 1,048,616 of his Company shares back to the
Company for a credit of approximately $230,000 against the principal due on the
Initial Note. Due to the uncertainty of the transaction, these shares were
included in the Company's outstanding shares as of June 30, 2003. In December of
2003, the 1,048,616 shares were transferred to the Company's treasury stock.
After the commencement of the lawsuit, Pinnacle agreed to give the Company a
direct assignment of its income and fixed annuity revenue from InsurMark and
Career Brokerage in addition to 75% of Pinnacle's commission overrides being
paid to the Company by Royal.
On December 4, 2003, the Company entered into a settlement with Pinnacle and the
Company collected all amounts due from Pinnacle under the Purchase Agreement. As
part of the settlement, the parties agreed to discontinue all litigation and
legal disputes between the parties. Pinnacle agreed to pay the Company
$2,067,799.93. At closing, Wachovia was wired $636,397.22 pursuant to a
preexisting forbearance agreement, as amended, between the Company and Wachovia,
including $100,000 to obtain its final consent. The balance of $1,431,402.71 was
wired to the Company. The settlement amount constitutes the global settlement
amount in connection with the resolution of all monetary disputes between
Pinnacle and the Company under the Asset Purchase.
In connection with the settlement, Pinnacle negotiated a release of the Company
from its obligations pursuant to the lease for the Company's former White Plains
offices, subject to the consent of the landlord's primary lender. In the event
that a fully executed unconditional release of the Company by the landlord is
not delivered on or before February 23, 2004, the Company will receive $50,000
and Wachovia will receive $50,000. Both payments will be made from funds
currently in escrow. In addition, the Company and Wachovia will each receive an
additional $50,000 from Pinnacle on April 30, 2004, and an additional $45,500
from Pinnacle in 12 monthly payments of $3,791.66 commencing on July 1, 2004..
Including the $2,067,799.93 settlement payment, the Company received total
consideration under the Asset Purchase of approximately $7,270,000, comprised of
the following:
Page 13
Cash payments to the Company $4,410,000
Company debt assumed by Pinnacle $2,630,000
Credit to Pinnacle for the transfer to the Company
By Povinelli of 1,048,616 shares of Company
Common stock $ 230,000
The Company recognized a $10,650 gain in Fiscal 2003 and a gain of $4,121,733 in
the second quarter of Fiscal 2004 from the Pinnacle sale consisting of:
$2,483,562 of cash received and $1,872,532 on the release of obligations assumed
by Pinnacle, and other items totaling $125,695.
Sale of Other Company Offices
In addition to the Pinnacle transaction, during Fiscal 2003, the Company
completed the sale of thirteen other offices to various parties for an aggregate
sales price of approximately $2,332,324 consisting of approximately $490,091 of
cash and approximately $1,842,233 of promissory notes due to the Company.
During the three months ending September 30, 2003, the Company completed the
sale of one Company office for an aggregate sales price of approximately $34,000
in cash and approximately $10,000 of promissory notes due to the Company. During
the three months ending December 31, 2003, the Company completed the sale of
three Company offices for an aggregate sales price of approximately $247,500 in
cash and approximately $27,450 of promissory notes due to the Company.
Sale of North Ridge Securities Corp. and North Shore Capital Management Corp.
By Stock Purchase Agreement dated as of January 1, 2004, the Company agreed to
sell to Daniel R. Levy and Joseph H. Clinard all of the authorized, issued and
outstanding capital stock (the "Shares") of North Ridge Securities Corp. ("North
Ridge") and North Shore Capital Management Corp. ("North Shore"). The total
purchase price for the Shares was $1,100,000 allocated $1,050,000 to the Shares
of North Ridge Securities Corp. and $50,000 to the Shares of North Shore Capital
Management Corp. The sum of $162,500 was to be paid to the Company in cash at
the closing, the sum of $37,500 was to be paid to Wachovia at the closing, the
sum of $37,500 will be paid to the Company on or about sixty (60) days after the
closing when certain contingencies are met and the $862,500 balance will be paid
to the Company by Mr. Levy in monthly payments pursuant to the terms of a
promissory note commencing on May 1, 2004 and ending on April 1, 2016. The
interest rate on the note will be equal to the prime rate at JP Morgan Chase
Bank plus two (2%) percent, but the interest rate cannot exceed eight (8%)
percent until January 1, 2009. The Company will report the income from the sale
of the Shares as it receives the cash payments under the Stock Purchase
Agreement and the promissory note due to having insufficient collateral to
support the collection of such payments and the note having been fully reserved
by the Company. The transaction closed on February 17, 2004 and Wachovia
received the sum of $37,500 on February 17, 2004 and the Company received the
sum of $162,500 on February 18, 2004.
6. DISCONTINUED OPERATIONS
The assets and liabilities attributable to the sale of offices, which have been
classified in the consolidated balance sheets as assets and liabilities held for
sale, consist of the following:
Discontinued Operations (Unaudited)
December 31, June 30,
2003 2003
---------- ----------
Accounts Receivable, Net $ 1,840 $ 1,840
Property and equipment, net 1,728 1,728
---------- ----------
Total assets of discontinued operations $ 3,568 $ 3,568
---------- ----------
Accounts Payable and accrued expenses -- $ 875,707
Other Current Liabilities -- 850,000
---------- ----------
Total liabilities of discontinued operations -- $1,725,707
---------- ----------
Page 14
Approximate direct operating revenues and operating expenses of the Pinnacle
Purchased Offices and Other Purchased Offices included on the accompanying
statements of operations for the three and six months ended December 31, 2003
and December 31, 2002 were as follows:
Unaudited Unaudited
For the three months Ended For the six months Ended
December 31, December 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Financial planning services $ 12,190 $ 1,302,266 $ 16,558 $ 3,611,763
Tax preparation fees 350 207,722 350 881,635
----------- ----------- ----------- -----------
Total revenue 12,540 1,509,988 16,908 4,493,398
----------- ----------- ----------- -----------
Operating Expenses:
Salaries and commissions $ 5,238 $ 1,590,998 $ 21,011 $ 4,248,783
General and Administrative 5,588 94,606 12,467 381,366
Advertising (1,422) 6,667 (1,476) 18,588
Rent (21,421) 236,474 (24,997) 829,040
Depreciation and amortization -- 54,662 -- 157,306
----------- ----------- ----------- -----------
Total operating expenses (12,017) 1,983,407 7,005 5,635,083
----------- ----------- ----------- -----------
Gain/(loss) from discontinued operations $ 24,557 ($ 473,419) $ 9,903 ($1,141,685)
=========== =========== =========== ===========
7. DEBT
The Company is in default on substantially all of its debt.
Wachovia Loan
On December 26, 2001, the Company closed a $7.0 million financing (the "Loan")
with Wachovia. The Loan consisted 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 was being amortized over five years and the Revolving
Credit Loan had a term of two years.
On November 27, 2002, the Company and Wachovia 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
Revolving Credit Loan and under the Term 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 the debt service to
Wachovia and 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 Loan, during the period of forbearance, the
Company was obligated to make interest payments monthly until the Maturity Date.
Principal payments in the amount of $250,000 each were 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. The Company timely made the $250,000 principal
payments due on March 10, 2003 and on April 10, 2003. In an Amendment to
Forbearance Agreement entered into between the Company and Wachovia as of June
18, 2003, Wachovia rescheduled the May 10, 2003 and June 10, 2003 payments and
the Company did not make these payments.
Page 15
With respect to the Term Loan, during the period of forbearance the Company was
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.
In addition, commencing on May 1, 2003, the Company was obligated to make
payments on the 10th day of each month to Wachovia in an amount equal to fifty
percent (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 will 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 forbearance 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 was not material and the
Company was verbally advised by counsel to Wachovia that Wachovia would not
issue a notice of default for any of the items.
At a meeting with Wachovia on May 13, 2003, the Company notified Wachovia that
it was in technical default under the Forbearance Agreement for failing to pay
payroll tax withholdings due which resulted from a bookkeeping error from
switching to a new payroll company. All payroll tax withholdings were
immediately paid by the Company after discovering the error.
By an Amendment to Forbearance Agreement dated as of June 18, 2003, the Company
and Wachovia amended the Forbearance Agreement to change, among other things,
the following provisions of the Forbearance Agreement: the Maturity Date was
extended to July 1, 2004; the Company's reporting requirements to Wachovia were
changed; the May 10, 2003 and June 10, 2003 principal payments of $250,000 were
rescheduled; principal payments in amounts of $250,000 are now due on March 10,
2004, April 10, 2004, May 10, 2004 and June 10, 2004; and the Company was
required to pay to Wachovia fifty percent (50%) of the excess over $1,000,000 of
any lump sum payment received from Pinnacle. The Company has notified Wachovia
that its restatement disclosed in its Form 10K/A for the year ended June 30,
2003, filed on February 9, 2004 constitutes a default under its Loan. The
Company may be in technical default of other provisions of the Loan, the
Forbearance Agreement and the Amendment to Forbearance Agreement. However, the
Company does not believe that Wachovia will issue a note of default for the
restatement or for any of these technical defaults.
Travelers Loan
The Company's credit facility with Travelers closed on November 1, 2000. It was
a $5 million debt financing. 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 were exercisable before May 2, 2003. As
of May 2003, the warrants were not exercised and subsequently expired. 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, 2003, 2002
and 2001 was approximately $282,292, $256,600 and $166,000, respectively. At
June 30, 2003 and June 30, 2002, the Term Loan had an outstanding principal
balance of $4,750,000 and $4,750,000, respectively.
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 Company sent a
letter to the attorneys denying that the Company was in default. Although the
Traveler's notice stated that all unpaid interest and principal under the Debt
Facility were immediately due and payable and that Travelers reserved its rights
and remedies under the debt facility, it also stated that Travelers intended 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. No further notices have been
received from Travelers.
Page 16
Rappaport Loan
On October 30, 2001, the Company borrowed $1,000,000 from Rappaport pursuant to
a written note without collateral and without stated interest (the "Loan"). The
Loan was due and payable on October 30, 2002. 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 were
removed; there was a penalty of 50,000 shares to be issued to Rappaport if the
Loan was 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 was $150,000
when the Rule 144 restrictions were 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. When the Rule 144
holding period was satisfied in October, 2002 with respect to the 100,000 shares
of the Company's common stock issued to Rappaport on the funding of the Loan,
the stock price was $.40 per share. As a result, on October 31, 2002, 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. By December 31, 2003, Rappaport received a total of
1,030,298 shares for all interest and penalties and will receive 15,000 shares
per month as additional penalties until the Loan is paid in full.
8. STOCK - BASED COMPENSATION
The Company has established various stock - based compensation plans for its
officers, directors, key employees and consultants. See Fiscal year ended June
30, 2003 Annual Report on Form 10-K/A for description of the Company's
stock-based compensation plans.
Stock option activity during the three months ended December 31, 2003 was as
follows:
Outstanding June 30, 2003 2,437,928
Grants 20,000
Canceled (21,200)
Expired (123,000)
Exercised --
----------
Outstanding - December 31, 2003 2,313,728
----------
Exercisable - December 31, 2003 1,946,228
----------
9. SEGMENTS OF BUSINESS
The Company's reportable segments are strategic business units that offer
different products and services or are managed separately and have unique and
distinctly different business models. The Company has two reportable segments:
Company Tax Offices and Broker Dealer Operations.
Company Tax Offices provide integrated tax and financial services through
Company managed offices. The Company's Broker Dealer Operations represent the
financial planning and securities business that clears through either Prime
Capital Services or North Ridge. All Company employed Registered Representatives
are licensed with either of these broker dealers.
Page 17
Unaudited Unaudited
For the Three Months Ended For the Six Months Ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Company Tax and Financial Planning Offices:
Tax Preparation Business $ 407,989 $ 408,438 $ 885,196 $ 977,097
Financial Planning Business 4,006,577 4,104,175 7,186,319 8,118,329
------------ ------------ ------------ ------------
Total Company Tax and Financial Planning
Offices 4,414,566 4,512,613 8,071,515 9,095,426
Broker Dealer Operations 13,608,621 14,847,021 27,949,281 30,679,323
Intercompany revenue (2,946,178) (4,523,923) (5,601,009) (9,630,937)
------------ ------------ ------------ ------------
Total Revenue $ 15,077,009 $ 14,835,711 $ 30,419,787 $ 30,143,812
------------ ------------ ------------ ------------
Income (Loss) from Operations:
Company Tax Offices ($ 3,618,404) ($ 2,441,533) ($ 7,289,718) ($ 4,886,448)
Broker Dealer Operations 2,524,746 (594,555) 5,836,427 554,178
e1040.com (310) (149)
------------ ------------ ------------ ------------
Income (Loss) from Operations ($ 1,093,658) ($ 3,036,398) ($ 1,453,291) ($ 4,332,419)
------------ ------------ ------------ ------------
Depreciation and Amortization:
Company Tax Offices $ 189,249 $ 295,051 $ 379,971 $ 581,784
Broker Dealer Operations 181,449 165,659 349,519 441,248
------------ ------------ ------------ ------------
Total Depreciation and Amortization $ 370,698 $ 460,710 $ 729,490 $ 1,023,032
------------ ------------ ------------ ------------
Interest Expense:
Company Tax Offices ($ 183,110) ($ 683,745) ($ 405,826) ($ 1,150,321)
Broker Dealer Operations (19,105) (30,100) (44,353) (51,972)
------------ ------------ ------------ ------------
Total interest Expense: ($ 202,215) ($ 713,845) ($ 450,179) ($ 1,202,293)
------------ ------------ ------------ ------------
Interest and Investment Income:
Company Tax Offices $ 9,958 $ 15 $ 28,025 $ 4,267
Broker Dealer Operations 24 114 47 327
------------ ------------ ------------ ------------
Total interest income $ 9,982 $ 129 $ 28,072 $ 4,594
------------ ------------ ------------ ------------
Income (Loss) before Taxes:
Company Tax Offices ($ 3,791,533) ($ 3,125,258) ($ 7,667,519) ($ 6,032,497)
Broker Dealer Operations 2,505,642 (624,546) 5,792,121 502,528
e1040.com (310) (149)
------------ ------------ ------------ ------------
Total Income (Loss) before Taxes ($ 1,285,891) ($ 3,750,114) ($ 1,875,398) ($ 5,530,118)
------------ ------------ ------------ ------------
Identifiable Assets:
Company Tax Offices $ 21,371,680 $ 33,159,423 $ 21,371,680 $ 33,159,423
Broker Dealer Operations 15,698,836 20,717,009 15,698,836 20,717,009
Intercompany eliminations (16,854,481) (26,846,114) (16,854,481) (26,846,114)
------------ ------------ ------------ ------------
Total identifiable assets $ 20,216,035 $ 27,030,318 $ 20,216,035 $ 27,030,318
------------ ------------ ------------ ------------
Capital Expenditures:
Company Tax Offices $ 3,553 $ 0 $ 3,553 $ 0
Broker Dealer Operations 5,254 45,516 13,634 84,460
------------ ------------ ------------ ------------
Total Capital Expenditures $ 8,807 $ 45,516 $ 17,187 $ 84,460
------------ ------------ ------------ ------------
Page 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Form 10-Q and the exhibits hereto may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are based upon current information, expectations, estimates and
projections regarding the Company, the industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the Company's ability to continue as a going concern, the uncertainty of
laws, legislation, regulations, supervision and licensing by federal, state and
local authorities and their impact on the lines of business in which the Company
and its subsidiaries are involved; unforeseen compliance costs; changes in
economic, political or regulatory environments; changes in competition and the
effects of such changes; the inability to implement the Company's strategies;
changes in management and management strategies; the Company's inability to
successfully design, create, modify and operate its computer systems and
networks; litigation involving the Company and risks described from time to time
in reports and registration statements filed by the Company and its subsidiaries
with the Securities and Exchange Commission. Readers should take these factors
into account in evaluating any such forward-looking statements. The Company
undertakes no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
OVERVIEW
The Company is a preparer of federal, state and local income tax returns for
individuals predominantly in middle and upper income brackets. 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.
For the three months and six months ended December 31, 2003, approximately 2.7%
and 2.9% respectively of the Company's revenues were earned from tax preparation
services, 97.3% and 97.1% were earned from all financial planning and related
services (with 95.8% and 93.9% from mutual funds, annuities and securities
transactions and 4.2% and 6.1% from insurance, mortgage brokerage and other
related 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.
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 fifty percent (50%)
equity interest in GTAX/CB, an insurance broker, which is a joint venture with
Feingold & Scott, Inc. In December 2002, all of the capital stock of Feingold &
Scott, Inc. was purchased by Bisys Insurance Services Holding Company ("Bisys").
Page 19
On March 21, 2003, Bisys sent the Company a written notice terminating the joint
venture effective as of March 21, 2004. The Company is negotiating a Preferred
Sale Agreement with Bisys, whereby Bisys will provide insurance distribution
services to the company and the joint venture will be terminated. The Company
believes that there will be no material adverse effect on its revenue from the
termination of the joint venture. The Company has the capability of processing
insurance business through Prime Financial Services, Inc., its wholly owned
subsidiary, which is a licensed insurance broker.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered losses from operations in
each of its last four years, and is in default under its three largest lending
facilities, raising substantial doubt about its ability to continue as a going
concern. During Fiscal 2003, the Company incurred net losses totaling
$(13,996,916) and at December 31, 2003 was in a working capital deficit position
of $16,017,251. At December 31, 2003, the Company had $1,003,810 of cash and
cash equivalents and $4,160,080 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 and generate
revenues 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 2004. See Note 1(d)
of Notes to Consolidated Financial Statements for a complete discussion of the
Company's liquidity and cash flow, Note 5 of Notes to Consolidated Financial
Statements for a complete discussion of the sale of Company offices and Note 7
of Notes to Consolidated Financial Statements for a complete discussion of the
Company's debt.
If the Company does not comply with the financial covenants and other
obligations in its loan agreement with Wachovia, Travelers or Rappaport, or its
agreements with other 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 February 13, 2004, the Company received a letter from Grant Thornton, its
previous auditors, advising the Company that it did not consent to the inclusion
of its 2002 Auditors' Report issued for the Company's Form 10K for Fiscal 2002
in the Company's Form 10-K/A for Fiscal 2003 filed on February 9, 2004. The
letter stated that Grant Thornton was withdrawing its 2002 Auditors' Report and
that its report could no longer be relied on, and that it was withdrawing its
quarterly review reports for each fiscal quarter during which it served as the
Company's auditors. A copy of Grant Thornton's letter to the Company dated
February 13, 2004 is annexed to this Form 10-Q as Exhibit 99.1.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED TO
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002.
Except as noted, the numbers and explanations presented below represent results
from Continuing Operations only.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 2002
The Company's revenues for the three months ended December 31, 2003 were
$15,077,009 compared to $14,835,711 for the three months ended December 31,
2002, an increase of $241,298 or 1.6%. Of the total increase, $242,097 was
attributable to an increase in the Company's financial planning business, offset
by a $799 reduction in the Company's tax preparation fees.
The Company's total revenues for the three months ended December 31, 2003
consisted of $14,669,370 for financial planning services and $407,639 for tax
preparation fees. Financial planning services represented 97.3% and tax
preparation fees represented 2.7% of the Company's total revenues during the
three months ended December 31, 2003. The Company's total revenues for the three
months ended December 31, 2002 consisted of $14,427,273 for financial planning
services and $408,438 for tax preparation fees. Financial planning services
represented 97.2% and tax preparation fees represented 2.8% of the Company's
total revenues during the three months ended December 31, 2002.
The Company's operating expenses for the three months ended December 31, 2003
were $16,170,667 or 107.3% of revenues, a decrease of $1,701,442 or 9.5%,
compared to $17,872,109 or 120.3% of revenues for the three months ended
December 31, 2002. The decrease in operating expenses was attributable to
decreases in salaries and commissions of $875,418, general and administrative of
$557,579, rent of 192,910, depreciation and amortization of $90,012, loss on
equipment sale of $85,325 offset by increases in advertising expenses of $68,782
and brokerage fees and licenses of $31,020.
Salaries and commissions decreased $875,418 or 6.4% in the three months ended
December 31, 2003 to $12,736,706 from $13,612,124 during the three months ended
December 31, 2002. This decrease is primarily attributable to decreases in
personnel and related costs associated with corporate overhead offset by higher
commission expense related to financial planning products.
General and administrative expenses decreased $557,579 or 23.2% in the three
months ended December 31, 2003 to $1,848,792 from $2,406,371 during the three
months ended December 31, 2002. This decrease is primarily attributable to a
decrease in professional fees and general office expenses.
Page 20
Advertising expenses increased $68,782 or 205.8% in the three months ended
December 31, 2003 to $102,196 from $33,414 during the three months ended
December 31, 2002. This increase is primarily attributable to the increase in
print ad campaigns to build brand equity and awareness.
Brokerage fees and licenses expenses increased $30,020 or 5.9% in the three
months ended December 31, 2003 to $552,664 from $521,644 during the three months
ended December 31, 2002. This increase is primarily attributable to increased
clearing fees as a result of higher financial planning revenues.
Rent expense decreased $192,910 or 25.6% in the three months ended December 31,
2003 to $559,611 from $752,521 during the three months ended December 31, 2002.
This decrease is primarily attributed to the consolidation of corporate overhead
facilitates and the termination of leases associated with closed or merged
offices.
Depreciation and amortization expense decreased $90,012 or 19.5% in the three
months ended December 31, 2003 to $370,698 from $460,710 during the three months
ended December 31, 2002. This decrease is primarily attributable to lower fixed
assets and intangible balances as a result of reduced capital spending and
assets reaching full depreciable lives.
Losses on the sale of equipment decreased $85,325, or 100.0% during the three
months ended December 31, 2003 to $0 from $85,325 during the three months ended
December 31, 2002. The loss included the book value of the equipment at the time
of sale of $99,325 less sale proceeds of $14,000.
The Company's loss from operations for the three months ended December 31, 2003
was $1,093,658 as compared to a loss of $3,036,398 for the three months ended
December 31, 2002, a decrease of $1,942,740 or 64.0%. This decrease in loss was
attributable to the increase in revenues described above as well as the net
reduction in operating expenses described.
The Company's loss before the provision or benefit of income taxes for the three
months ended December 31, 2003 was $1,285,891 compared to $3,750,114 for the
three months ended December 31, 2002. This decrease in loss of $2,464,223 or
65.7% was attributed to the net decease in loss from operations of $1,942,740
highlighted above and by a net increase in other expenses, net, of $521,483. The
net decrease in other expenses, net, includes a decrease in interest expense of
$511,630 due to a lower debt level and an increase in interest and investment
income of $9,853 from interest received on notes as a result of office sales.
The Company's loss after income tax provision from continuing operations for the
three months ended December 31, 2003 was $1,285,860 compared to $3,763,714 for
the three months ended December 31, 2002. This decreased loss of $2,477,854 or
65.8% was attributable to the decrease of income tax expense of $13,631 in
addition to the changes in the revenues and expenses highlighted above. The
decrease in the income tax expense is due to the application of the Company's
large NOL tax position of prior years to offset taxes on current year net
income.
The Company had a gain from Discontinued Operations for the three months ended
December 31, 2003 of $4,295,017 compared to a loss of $2,634,929 for the three
months ended December 31, 2002. The gain for the three months ended December 31,
2003 consisted primarily of the realized gain on the sale of Pinnacle.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE SIX
MONTHS ENDED DECEMBER 31, 2002
The Company's revenues for the six months ended December 31, 2003 were
$30,419,787 compared to $30,143,812 for the six months ended December 31, 2002,
an increase of $275,975 or 0.9%. Of the total increase, $367,876 was
attributable to an increase in the Company's financial planning business,
partially offset by a decrease in the Company's tax preparation fees of $91,901.
The Company's total revenues for the six months ended December 31, 2003
consisted of $29,534,591 for financial planning services and $885,196 for tax
preparation fees. Financial planning services represented 97.1% and tax
preparation fees represented 2.9% of the Company's total revenues during the six
months ended December 31, 2003. The Company's total revenues for the six months
ended December 31, 2002 consisted of $29,166,715 for financial planning
services, and $977,097 for tax preparation fees. Financial planning services
represented 96.7%, and tax preparation fees represented 3.3% of the Company's
total revenues during the six months ended December 31, 2002.
The Company's operating expenses for the six months ended December 31, 2003 were
$31,873,079 or 104.8% of revenues, a decrease of $2,603,152 or 7.6%, compared to
$34,476,231or 114.4% of revenues for the six months ended December 31, 2002. The
decrease in operating expenses was attributable to decreases in salaries and
commissions of $1,023,572, general and administrative of $737, 946, brokerage
fees and licenses of $8,256, rent of $517,243, depreciation and amortization of
$293,542, and loss on equipment sales of $85,325 partially offset by an increase
in advertising of $62,732.
Page 21
Salaries and commissions decreased $1,023,572 or 3.9% in the six months ended
December 31, 2003 to $25,236,863 from $26,260,435 during the six months ended
December 31, 2002. This decrease is primarily attributable to decreases in
personnel and related costs associated with corporate overhead offset by higher
commission expense related to financial planning products .
General and administrative expenses decreased $737,946 or 16.5% in the six
months ended December 31, 2003 to $3,731,278 from $4,469,224 during the six
months ended December 31, 2002. The decrease is primarily attributable to
decreases in professional fees, general office expenses, telephone expenses,
repairs and maintenance, partially offset by increases in E&O insurance
expenses.
Advertising expenses increased $62,732 or 106.6% in the six months ended
December 31, 2003 to $121,603 from $58,871 during the six months ended December
31, 2002. This is primarily a result of increased print advertising to continue
to bolster brand awareness and build brand equity.
Brokerage fees and licenses expenses decreased $8,256 or 0.9% in the six months
ended December 31, 2003 to $881,142 from $889,398 during the six months ended
December 31, 2002. This decrease is primarily attributable to reduced planner
headcount in the broker-dealer segment.
Rent expense decreased $517,243 or 30.6% in the six months ended December 31,
2003 to $1,172,703 from $1,689,946 during the six months ended December 31,
2002. This decrease is primarily attributed to the consolidation of corporate
overhead facilitates and the termination of leases associated with closed or
merged offices.
Depreciation and amortization expense decreased $293,542 or 28.7% in the six
months ended December 31, 2003 to $729,490 from $1,023,032 during the six months
ended December 31, 2002. This decrease is primarily attributable to lower fixed
assets and intangible balances as a result of reduced capital spending, and
assets reaching full depreciable lives.
Losses on the sale of equipment decreased $85,325 during the six months ended
December 31, 2003 from $85,325 during the six months ended December 31, 2002.
The loss is comprised of the book value of the equipment at the time of sale of
$99,325 less sale proceeds of $14,000.
The Company's loss from operations for the six months ended December 31, 2003
was $1,453,291 as compared to a loss of $4,332,419 for the six months ended
December 31, 2002, a decrease in loss of $2,879,128 or 66.5%. This decrease in
loss was attributable to the net reduction in operating expenses described
above, in addition to the increase of revenues.
The Company's loss before the provision or benefit of income taxes for the six
months ended December 31, 2003 was $1,875,398 compared to $5,530,118 for the six
months ended December 31, 2002. This decrease in loss of $3,654,720 or 66.1% was
attributed to the net decrease in loss from operations of $2,879,128 highlighted
above, in addition to the net decrease in other expenses, net, of $775,592. The
net decrease in other expenses, net, includes a decrease in interest expense of
$752,114 due to a lower debt level and an increase in interest and investment
income of $23,478 from interest received on notes as a result of office sales.
The Company's loss after income tax provision from continuing operations for the
six months ended December 31, 2003 was $1,876,443 compared to $5,581,618 for the
six months ended December 31, 2002. This decreased loss of $3,705,175 or 66.4%
was attributable to the decrease of income tax expense of $50,455 offset by the
changes in the revenues and expenses highlighted above. The decrease in the
income tax expense is due to the application of the Company's large NOL tax
position of prior years to offset taxes on current year net income.
The gain from Discontinued Operations for the six months ended December 31, 2003
was $5,078,520 compared to a loss of $3,828,375 for the six months ended
December 31, 2002. The increased gain of $8,906,895 is primarily due to the
realized gain on the sale of Pinnacle.
RESTATEMENTS
The financial statements for the three years ended June 30, 2003 have been
restated to correct a timing error in the recording of receivables and the
related accrual for commission liabilities relating to asset management
services. In January 2004, subsequent to the filing of the Form 10-K for the
year ended June 30, 2003, management discovered and informed the auditors that
revenues and related commission expenses for asset management services, billed
and incurred in the quarter ended September 30, 2003 for services to be rendered
in that quarter, had been recorded as of June 30, 2003. Further, it was
ascertained that this error in revenue and expense recognition had been
occurring since the 1999 acquisition of Asset and Financial Planning Ltd. and
Page 22
had gone undetected for four years. The receivables and commissions originally
prematurely recorded at each quarter end were received and paid by the Company
during the subsequent quarter. On February 13, 2004, the Company received a
letter from Grant Thornton, its previous auditors, advising the Company that it
did not consent to the inclusion of its 2002 Auditors' Report issued for the
Company's Form 10K for Fiscal 2002 in the Company's Form 10-K/A for Fiscal 2003
filed on February 9, 2004. The letter stated that Grant Thornton was withdrawing
its 2002 Auditors' Report and that its report could no longer be relied on, and
that it was withdrawing its quarterly review reports for each fiscal quarter
during which it served as the Company's auditors. A copy of Grant Thornton's
letter to the Company dated February 13, 2004 is annexed to this Form 10-Q as
Exhibit 99.1.
The financial statements for the three years ended June 30, 2003 have been
restated to correct this error. As a result of the restatement, receivables as
of June 30, 2003 have been reduced by $1,114,725 and commission liabilities have
been reduced by $923,658. Shareholder's deficit increased by $191,067.
Revenues for the year ended June 30, 2003 increased by $60,009 and commission
expense for the years ended June 30, 2003 increased by $28,765. Losses for the
year ended June 30, 2003 decreased by $31,334.
As the error applied to both the beginning and ending balances of each quarter,
the effect on any individual quarter filing on Form 10-Q was immaterial.
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 ongoing 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. As of December 31, 2003
the company had $1,003,810 in cash and cash equivalents and $1,038,652 in
marketable securities. Prime Capital Services and North Ridge are subject to the
SEC's Uniform Net Capital Rule 15c 3-1 (Prime) 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 fifteen to one or $100,000 and $25,000, respectively.
For Prime Capital Services, the minimum required regulatory net capital was
$188,520 and it had excess net capital of $261,310.
For North Ridge, the minimum required regulatory net capital was $50,678 and it
had excess net capital of $121,935. See Note 5 of Notes to Consolidated
Financial Statements for a discussion of the sale of North Ridge effective as of
January 1, 2004.
The Company's cash flow used in operating activities totaled $1,729,031 and
$1,260,171 for the six months ended December 31, 2003 and 2002, respectively.
The increase in cash flows used in operating activities is due to increased net
income, increased prepaid and other current assets, offset by an increase in
accounts payable and gain on sale of Pinnacle.
Net cash provided by investing activities totaled $3,453,259 for the six months
ended December 31, 2003 as compared to $237,047 for the six months ended
December 31, 2002. The increase in cash provided by operating activities of
$3,216,212 is primarily due to an increase in proceeds from the sale of
discontinued operations of $3,238,178.
Net cash used in financing activities totaled $1,675,515 for the six months
ended December 31, 2003 as compared to $691,220 for the six months ended
December 31, 2002. The increase in cash used in financing activities of $984,295
is attributed to a decrease in proceeds from bank and other loans of $41,751 as
well as an increase in payouts of bank and capital lease obligations of
$937,267.
Prime Partners, Inc. of New York (previously known as Prime Financial Services,
Inc., New York) has made various loans to the Company at a stated interest rate
of 10%. On December 31, 2003, the Company owed Prime Partners, Inc. $618,200.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
major shareholders of Prime Partners, Inc.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to December 31, 2003 and thereafter. The amounts represent the
maximum future cash contractual obligations.
Page 23
Contractual Obligation and Commercial Commitments
Payment Due by Period
2005 to 2007 to After
Contractual Obligations Total 2004 2006 2008 2008
----------- ----------- ----------- ----------- -----------
Debt $10,497,484 $10,375,293 $ 13,074 $ 60,513 $ 48,604
Operating Leases 9,436,723 3,467,234 3,769,925 1,340,275 859,290
Capital Leases 434,926 243,153 121,533 48,034 22,207
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $20,369,133 $14,085,680 $ 3,904,532 $ 1,448,822 $ 930,101
=========== =========== =========== =========== ===========
In connection with the Pinnacle sale, all operating leases associated with the
Purchased Offices were assigned to Pinnacle, but the Company still remains
liable on the leases. Aggregate operating lease commitment amounts included in
the table above with respect to the leases assigned to Pinnacle in November 2002
are $1,378,965, $1,130,293, 639,927, $404,535, $287,793, and $431,690 for the
fiscal years ending December 31, 2004, 2005, 2006, 2007, 2008 and thereafter,
respectively. See Note 5 of Notes to the Consolidated Financial Statements for a
complete discussion of the sale of the Purchased Offices to Pinnacle.
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 the Company's 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, the Company is now subject to Rule 15c2-11
promulgated by the SEC. If the Company fails 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 the Company's 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. The Company will also
incur additional costs under state blue-sky laws if we sell equity due to our
delisting.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2003, 2002, 2001 and 2000,
inflation has not had a significant effect on the Company's results of
operations since inception.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
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. Management's 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.
Page 24
Certain of the Company's accounting policies require higher degrees of judgment
than others in their application.
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 at in sales transactions and
current market conditions.
The Company recognizes all revenues associated with income tax preparation,
accounting services, direct mail services and asset management fees 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.
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, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
The Company's obligations under its Wachovia and Travelers credit facilities
bear interest at floating rates and therefore, the Company is impacted by
changes in prevailing interest rates.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's senior management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 3a-15 and
15d-15 under the Securities Exchange Act of 1934 (the "Exchange Act") designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officers to allow timely decisions regarding required disclosure.
The Company has received recommendations from both its current and former
auditors regarding its internal controls over financial reporting and is
considering such recommendations. The auditors Radin, Glass & Co. stated that
while none of the items identified by them individually are in and of themselves
a material weakness, the combined effect of the issues and the inability to
produce timely accurate financial statements is a material weakness. The Company
is working to address the issues raised by its current and former auditors and
has implemented financial staffing changes and financial reporting processes to
address their comments. The Company will continue to evaluate the effectiveness
of its internal controls over financial reporting on an ongoing basis and
implement appropriate actions.
Page 25
As of the end of the period covered by this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Accounting Officer,
of the disclosure controls and procedures of the Company as defined in Exchange
Act Rule 13(a)-15(e). In designing and evaluating disclosure controls and
procedures, the Company and its management recognize that any controls and
procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving the desired control objective. The Chief
Executive Officer and the Chief Accounting Officer have determined that, except
for the matters noted by the Company's auditors, and taking into account the
steps taken and to be taken to address these deficiencies and weaknesses, such
controls and procedures will provide a reasonable level of assurance to
adequately and effectively timely alert them to material information required to
be included in the Company's periodic SEC reports.
No change occurred in the Company's internal controls concerning financial
reporting during the quarter ended December 31, 2003 that has materially
affected or is reasonably likely to materially affect the Company's internal
controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Litigation
The Company and its Broker Dealer Subsidiaries are defendants and respondents in
lawsuits and NASD arbitrations in the ordinary course of business. On December
31, 2003, there were thirty five pending lawsuits and arbitrations and
management accrued $1,146,058 as a reserve for potential settlements, judgments
and awards. Of these matters, seventeen were related to Prime Capital Services,
Inc. and its registered representatives. Prime Capital Services has Errors &
Omissions coverage for such matters. In addition, under the Prime Capital
Services Registered Representatives contract, each registered representative has
indemnified the Company for these claims. Accordingly, the Company believes that
these lawsuits and arbitrations will not have a material impact on its financial
position.
On February 4, 2004, the Company was served with a Summons and a Shareholder's
Class Action and Derivative Complaint with the following caption: "Gary Kosseff,
Plaintiff, against James Ciocia, Thomas Povinelli, Michael P. Ryan, Kathryn
Travis, Seth A. Akabas, Louis P. Karol, Edward H. Cohen, Steven Gilbert and
Doreen Biebusch, Defendants and Gilman & Ciocia, Inc., Nominal Defendant". The
action was filed in the Court of Chancery of the State of Delaware in and for
New Castle County under Civil Action No. 188-N. The Company believes that the
allegations contained in the lawsuit are without merit and the Company intends
to contest the lawsuit vigorously. The nature of the action is that the Company,
its Board of Directors and its management, breached their fiduciary duty of
loyalty in connection with the sale of the Purchased Offices to Pinnacle. The
action alleges that the sale to Pinnacle was for inadequate consideration and
without a fairness opinion by independent financial advisors, without
independent legal advice and without a thorough evaluation and vote by an
independent committee of the Board of Directors. The action prays for the
following relief: a declaration that the action is maintainable as a class
action and certifying the plaintiff as the representative of the class; a
declaration that the Company, its Board of Directors and its management breached
their fiduciary duty and other duties to the plaintiff and to the other members
of the purported class; a rescission of the Purchase Agreement; unspecified
monetary damages; and an award to the plaintiff of costs and disbursements,
including reasonable legal, expert and accountants fees.
SEC Investigation
The Company is the subject of a formal investigation by the Securities and
Exchange Commission ("SEC"). 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 Form 10-K for
Fiscal 2002 and 2003, the Company's delay in filing its 10-Q for the quarter
ending September 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. The Company and its executives
have complied fully with the SEC's investigation and will continue to comply
fully 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its last meeting of shareholders on December 14, 2001.
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ITEM 5. OTHER INFORMATION.
On August 27, 2002, the Company switched independent auditors from Arthur
Andersen LLP to Grant Thornton LLP. On November 7, 2003, the Company switched
independent auditors from Grant Thornton LLP to Radin Glass & Co. LLP. On
February 13, 2004, the Company received a letter from Grant Thornton, its
previous auditors, advising the Company that it did not consent to the inclusion
of its 2002 Auditors' Report issued for the Company's Form 10K for Fiscal 2002
in the Company's Form 10-K/A for Fiscal 2003 filed on February 9, 2004. The
letter stated that Grant Thornton was withdrawing its 2002 Auditors' Report and
that its report could no longer be relied on, and that it was withdrawing its
quarterly review reports for each fiscal quarter during which it served as the
Company's auditors. A copy of Grant Thornton's letter to the Company dated
February 13, 2004 is annexed to this Form 10-Q as Exhibit 99.1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Accounting Officer.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley of Act of 2002.
32.2 Certification of Chief Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley of Act of 2002.
99.1 Letter from Grant Thornton to the Company dated February 13, 2004.
(b) Reports on Form 8-K
(1) Current Report on Form 8-K filed with the SEC on November 12, 2003
(2) Current Report on Form 8-K filed with the SEC on December 18, 2003
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.
GILMAN + CIOCIA, INC.
Dated: February 20, 2004 By /s/ Michael P. Ryan
Chief Executive Officer
Dated: February 20, 2004 By /s/ Dennis Conroy
Chief Accounting Officer
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