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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2004
Commission File Number 000-22996
GILMAN + CIOCIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2587324
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK 12603
(Address of principal executive offices)(Zip code)
(845)486-0900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
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 10, 2005, 9,005,438 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, 2004
and June 30, 2004 3
Consolidated Statement of Operations for the Three Months and
Six Months Ended December 31, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2004 and December 31, 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES AND CERTIFICATIONS 22
Page 2
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Balance Sheet
December 31, 2004 June 30, 2004
(UnAudited) Audited
Assets
Cash & Cash Equivalents 583,803 498,545
Marketable Securities 640,183 1,184,907
Trade Accounts Receivable, Net 3,636,425 3,678,204
Receivables from Officers, Shareholders
and employees, net 40,088 138,564
Assets of Discontinued Operations 3,568 3,568
Due From Office Sales - Current 170,622 287,325
Prepaid Expenses and Other Current Assets 259,727 365,117
-----------------------------
Total Current Assets 5,334,416 6,156,230
Fixed Assets, Net 1,244,097 1,616,661
Goodwill 3,758,355 3,837,087
Intangible Assets, Net 5,522,493 5,631,123
Due from Office Sales - Non Current 1,132,012 1,181,128
Other Assets 501,660 505,351
-----------------------------
Total Assets $ 17,493,033 $ 18,927,579
=============================
Liabilities and Shareholders' Equity (Deficit)
Accounts Payable and Accrued Expenses 10,049,415 10,375,471
Current Portion of Notes Payable & Cap. Leases 8,406,667 9,113,793
Due to related Parties 1,153,149 445,000
-----------------------------
Total Current Liabilities 19,609,231 19,934,269
Long term portion of notes payable and cap leases 323,196 212,253
Total Liabilities $ 19,932,422 $ 20,146,517
-----------------------------
Shareholders' Equity (Deficit)
Preferred Stock, $0.001 par value; 100,000 shares authorized; no
shares issued and outstanding at December 31, 2004, and 2003, respectively
Common Stock, $0.01 par value 20,000,000 shares authorized; 10,332,276
and 10,219,561 shares issued at December 31, 2004, and 2003, respectively 103,322 102,195
Additional Paid in Capital 29,931,124 29,897,210
Treasury Stock 1,326,838 and 278,222 shares of common stock,
at December 31, 2004 and 2003, respectively, at cost (1,306,288) (1,306,288)
Retained Deficit (31,168,552) (29,912,055)
-----------------------------
Total Shareholders' Equity (Deficit) $ (2,439,394) $ (1,218,938)
-----------------------------
Total Liabilities & Shareholders' Equity (Deficit) $ 17,493,033 $ 18,927,579
=============================
The accompanying notes are an integral part of these Consolidated Financial
Statements
Page 3
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Statements of Operations
For the 3 Months Ended For the 6 Months Ended
December 31, December 31,
2004 2003 2004 2003
(UnAudited) (UnAudited) (UnAudited) (UnAudited)
Revenues:
Financial Planning Services $ 12,934,011 $ 12,869,765 $ 25,074,512 $ 25,953,534
Tax Preparation Fees 436,930 403,757 953,991 869,240
---------------------------------------------------------------------
Total Revenues 13,370,940 13,273,522 26,028,504 26,822,774
---------------------------------------------------------------------
Cost of Sales/ Commissions 8,008,340 8,333,152 16,116,758 16,217,564
---------------------------------------------------------------------
Gross Profit: 5,362,600 4,940,370 9,911,746 10,605,210
---------------------------------------------------------------------
Operating Expenses:
Salaries 2,550,185 3,027,717 5,055,965 5,886,475
General & Administrative 1,366,004 1,702,209 3,196,784 3,375,171
Advertising 123,347 101,910 382,010 111,801
Brokerage Fees & Licenses 440,143 527,145 750,997 854,835
Rent 426,156 484,925 889,902 1,022,716
Depreciation & Amortization 301,402 370,740 612,026 726,191
---------------------------------------------------------------------
Total Operating Expenses 5,207,238 6,214,646 10,887,683 11,977,189
---------------------------------------------------------------------
Income (loss) from 155,361 (1,274,276) (975,937) (1,371,979)
continuing operations before other ---------------------------------------------------------------------
income and expenses
Other Income (Expenses):
Interest and investment income 5,972 9,958 57,155 28,026
Interest expense (217,855) (202,214) (423,804) (450,055)
Other Income (Expense), Net 42,287 -- 73,606 --
---------------------------------------------------------------------
Total Other Income (Expense) (169,596) (192,256) (293,043) (422,029)
---------------------------------------------------------------------
Income (Loss) from continuing operations (14,234) (1,466,532) (1,268,980) (1,794,008)
---------------------------------------------------------------------
before income taxes
Income taxes (benefit) 18,152 121,328 (12,887) 122,528
---------------------------------------------------------------------
Loss from continuing operations (32,386) (1,587,860) (1,256,093) (1,916,536)
---------------------------------------------------------------------
Discontinued Operations:
Income (loss) from discontinued operations -- 205,200 -- (71,362)
---------------------------------------------------------------------
Gain (loss) on disposal of -- 4,391,819 -- 5,189,977
discontinued operations ---------------------------------------------------------------------
Income taxes (benefit) -- -- --
Income (loss) from discontinued operations -- 4,597,019 -- 5,118,615
---------------------------------------------------------------------
Net Income (loss) $ (32,386) $ 3,009,159 $ (1,256,093) $ 3,202,079
============ ============ ============ ============
Net Income(Loss) per share of common stock:
Basic Net Income (Loss)
Income (Loss) from continuing operations (0.00) (0.15) (0.14) (0.19)
Income (Loss) from discontinued operations -- 0.44 -- 0.51
Net Income (Loss) $ -- $ 0.29 $ (0.14) $ 0.32
============ ============ ============ ============
Diluted Net Income (Loss)
Income (Loss) from continuing operations (0.00) (0.15) (0.14) (0.19)
Income (Loss) from discontinued operations -- 0.44 -- 0.51
Net Income (Loss) $ -- $ 0.29 $ (0.14) $ 0.32
============ ============ ============ ============
Weighted average number of
shares outstanding:
Basic 8,990,108 10,386,863 8,919,382 10,074,076
---------------------------------------------------------------------
Diluted 8,990,108 10,386,863 8,919,382 10,074,076
---------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 4
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months For the Six Months
Ended December 31 Ended December 31
2004 2003
---- ----
(UnAudited) (UnAudited)
Cash Flows From Operating Activities:
Net Loss / Income $(1,256,093) $ 3,202,077
Adjustments to reconcile net loss to net cash used in --
operating activities:
Depreciation and amortization 612,024 729,488
Issuance of common stock for debt default penalties and interest 35,837 24,000
Amortization of debt discount 80,885 112,197
(Gain) Loss on sale of discontinued operations (5,189,977)
(Gain) Loss on sale of equipment and properties (31,182) --
Due From Office Sales 165,819
Bad Debt Expense 50,000
Changes in assets and liabilities: --
Accounts receivable, Net 41,779 135,947
Prepaid and other current assets 227,560 248,923
Change in marketable securities 544,725 (69,030)
Receivables from officers, shareholders and employees 98,475 196,802
Other Assets 3,693 103,104
Accounts Payable and accrued expenses (387,153) (1,380,961)
Income taxes receivable (payable) -- 119,399
Decrease in Other liabilities -- (11,000)
-----------------------------------
Net cash provided by (used in) operating activities 136,369 (1,729,031)
Cash Flows from investing activities:
Capital Expenditures (189,457) (17,187)
Cash paid for acquisitions, net of cash acquired (125,212) (91,846)
Proceeds from the sale of discountinued operations 3,562,292
Proceeds from the sale of property and equipment 293,750 --
-----------------------------------
Net cash Provide by (used in) investing activities (20,919) 3,453,259
Cash Flows from Financing Activities:
Adquisition of treasury stock (10,486)
Proceeds from bank and other loans 1,233,011 583,249
Payments of bank loans and capital lease obligations (1,263,203) (2,248,278)
-----------------------------------
Net cash Provided by (used in) Financing Activities: (30,192) (1,675,515)
Net change in cash and cash equivalents 85,258 48,713
Cash and cash equivalents at beginning of period 498,543 955,097
-----------------------------------
Cash and cash equivalents at end of period $ 583,803 $ 1,003,810
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the period for:
Interest $ 172,219 $ 122,937
=========== ===========
Income Taxes
Supplemental Disclosure of Non-Cash Transactions:
Common stock and options issued in connection with
business combination 5,760 --
Issuance of common stock for debt default penalties and interest 30,077 24,000
Equipment acquired under capital leases 155,357 --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 5
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 2004*, 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. For the
six months ended December 31, 2004, 97% of the Company's revenues were earned
from all financial planning and related services. As of December 31, 2004, the
Company had 36 offices operating in six states (New York, New Jersey,
Connecticut, Florida, Maryland 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.
As a result of a number of defaults under its agreements with Wachovia Bank,
National Association ("Wachovia"), on November 27, 2002 the Company entered into
a debt forbearance agreement with Wachovia and subsequently amended the debt
forbearance agreement on June 18, 2003 and on March 4, 2004. 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.
(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, 2004, the
consolidated statement of operations for the six months ended December 31, 2004
and 2003, and the consolidated statements of cash flows for the six months ended
December 31, 2004 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 six
months ended December 31, 2004 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, 2004 (the "2004 10-K/A").
* Fiscal years are denominated by the year in which they end. Accordingly,
Fiscal 2004 refers to the year ended June 30, 2004.
Page 6
(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.
Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting 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.
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.
The computation for December 31, 2004 did not include outstanding options and
warrants because to do so would have an antidilutive effect for the periods
presented.
Stock Based Compensation
At December 31, 2004, the Company had various stock-based employee compensation
plans. Prior to 2000, the Company accounted for 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
plan 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 2003, 2004 and 2005 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.
Page 7
For the Six Months Ended
December December
31, 2004 31, 2003
Net Income (Loss), as reported $ (1,256,093) $ 3,202,077
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 $ -- $ --
---------------------------------
Proforma net income (loss) $ (1,256,093) $ 3,202,077
Basic and diluted earnings (loss) per share:
As reported - Basic (0.14) 0.32
Proforma - Basic (0.14) 0.32
As reported - Diluted (0.14) 0.32
Proforma - Diluted (0.14) 0.32
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 Consolidated Financial
Statements included in the 2004 10-K/A, which discusses accounting policies that
must be selected by management when there are acceptable alternatives.
(d) Liquidity and cash flow
During the six months ended December 31, 2004, the Company incurred a net loss
of $(1,256,093) and at December 31, 2004 had a working capital deficit position
of $(14,275,119). At December 31, 2004 the Company had $583,803 of cash and cash
equivalents and $3,636,425 of trade accounts receivables to fund short-term
working capital requirements.
The Company believes that it has completed the necessary steps to meet its cash
flow requirements throughout Fiscal 2005 and 2006, though due to the seasonality
of the Company's business the Company may at times employ short term financing.
In December 2004, Prime Partners, Inc. of New York("Prime Partners"), of which
Michael P. Ryan, the Company's President, is a major shareholder, provided
short-term loans to the Company in the aggregate amount of $593,000 for working
capital purposes. These loans pay 10% interest per annum.
2. RECLASSIFICATION FOR DISCONTINUED OPERATIONS
During Fiscal 2003 and Fiscal 2004 the Company sold 64 of its offices, including
the sale of 47 offices to Pinnacle Taxx Advisors LLC ("Pinnacle") and two
subsidiaries. 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 of discontinued operations, and the results of these
Page 8
operations have been reclassified and are separately presented for all reporting
periods as discontinued operations in the accompanying statements of operations.
3. RECENT ACCOUNTING PRONOUNCEMENTS
FASB 151 - Inventory Costs
In November 2004, the FASB issued FASB Statement No. 151, which revised ARB
No.43,relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.
FASB 152 - Accounting for Real Estate Time-Sharing Transactions
In December 2004, the FASB issued FASB Statement No. 152, which amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to
real-estate time-sharing transactions. The accounting for those operations and
costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Management
believes this Statement will have no impact on the financial statements of the
Company once adopted.
FASB 153 - Exchanges of Nonmonetary Assets
In December 2004, the FASB issued FASB Statement No. 153. This Statement
addresses the measurement of exchanges of nonmonetary asstes. The guidance in
APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similiar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
this Statement will have no impact on the financial statements of the Company
once adopted.
FASB 123 (revised 2004) - Share-Based Payments
In December 2004, the FASB issued a revision to FASB Statement No. 123,
Accounting for Stock Based Compensation. This Statement supercedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
Statement 123 as originally issued and EITF Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." This Statement does not address
the accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership
Plans.
A nonpublic entity will measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of those instruments, except in certain circumstances.
A public entity will initially measure the cost of employee services received in
exchange for an award of liability instruments based on its current fair value;
the fair value of that award will be re-measured subsequently at each reporting
date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period. A
nonpublic entity may elect to measure its liability awards at their intrinsic
value through the date of settlement.
The grant-date fair value of employee share options and similar instruments will
be estimated using the option-pricing models adjusted for the unique
characteristics of those instruments (unless observable market prices for the
same or similar instruments are available).
Excess tax benefits, as defined by this Statement, will be recognized as an
addition to paid-in-capital. Cash retained as a result of those excess tax
benefits will be presented in the statement of cash flows as financing cash
inflows. The write-off of deferred tax assets relating to unrealized tax
benefits associated with recognized compensation cost will be recognized as
income tax expense unless there are excess tax benefits from previous awards
remaining in paid-in capital to which it can be offset.
The notes to the financial statements of both public and nonpublic entities will
disclose information to assist users of financial information to understand the
nature of share-based payment transactions and the effects of those transactions
on the financial statements.
The effective date for public entities that do not file as small business
issuers will be as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005. For public entities that file as small
business issuers and nonpublic entities the effective date will be as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. Management intends to comply with this Statement at the
scheduled effective date for the relevant financial statements of the Company.
4. CONTINGENCIES
Litigation
See Item 1 Legal Proceedings of Part II herein.
Page 9
5. DISCONTINUED OPERATIONS
Approximate direct operating revenues and operating expenses of the offices sold
to Pinnacle and other parties included as discontinued operations on the
accompanying statements of operations for the three and six months ended
December 31, 2003 were as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2003 2003
-------------------------------
Revenues:
Financial planning services $ 1,811,796 $ 3,597,615
Tax preparation fees $ 4,232 $ 16,306
-------------------------------
Total revenues $ 1,816,028 $ 3,613,921
-------------------------------
Commission Expenses:
Commissions 1,224,538 2,803,690
-------------------------------
Cost of Sales: 1,224,538 2,803,690
-------------------------------
Gross Profit 591,490 810,231
Operating Expenses:
Salaries and benefits $ 156,537 $ 350,147
General and administrative $ 152,171 $ 368,573
Advertising $ (1,137) $ 8,325
Brokerage fees and licenses $ 25,519 $ 26,307
Rent $ 53,266 $ 124,991
Depreciation and amortization $ (42) $ 3,298
-------------------------------
Total operating expenses $ 386,314 $ 881,641
-------------------------------
Income (loss) from
continuing operations before other -------------------------------
income and expenses $ 205,175 $ (71,410)
-------------------------------
Other Income (Expenses):
Interest and investment income $ 24 $ 47
-------------------------------
Total other income (expense) 24 47
-------------------------------
Gain from continuing operations -------------------------------
before income taxes $ 205,199 $ (71,363)
-------------------------------
Page 10
6. DEBT
The Company is in default on substantially all of its debt.
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"). 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. Wachovia extended the due date of the Loan
to November 1, 2003 (the "Maturity Date"), and as a result of several
amendments, the Maturity Date of the Loan was extended to July 1, 2005; certain
$250,000 principal payments due on March 10, 2004, April 10, 2004, May 10, 2004
and June 10, 2004 were deleted; commencing on March 10, 2004, and continuing on
the 10th day of each month thereafter until the new Maturity Date of the Loan,
the Company will make a principal payment to Wachovia in the amount of $31,250
in addition to the regular monthly payments due Wachovia; the Applicable Margin
to the interest rate of the Loan was increased to 4%; and the Company's
reporting requirements to Wachovia were changed. The Company is in technical
default of several other provisions of the Loan, the Forbearance Agreement and
the Amendments to Forbearance Agreement. However, the Company does not believe
that Wachovia will issue a note of default for any of these technical defaults.
The Company's $5 million credit facility with Travelers closed on November 1,
2000. On September 24, 2002, the Company received a notice from 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 responded with a
letter 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 that Travelers could
pursue against the Company. No further notices have been received from
Travelers. No payments have been made to Travelers since April, 2003 pursuant to
the terms of the subordination agreement.
On October 30, 2001, the Company borrowed $1,000,000 from Rappaport pursuant to
a written note without collateral and without stated interest (the "Rappaport
Loan"). The Rappaport Loan was due and payable on October 30, 2002.
Additionally, the Rappaport Loan provided that: Rappaport receive 100,000 shares
of Rule 144 restricted shares of common stock of the Company upon the funding of
the Rappaport 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 Rappaport Loan was not
paid when due and an additional penalty of 10,000 shares per month thereafter
until the Rappaport Loan was paid in full. On December 26, 2001, Rappaport
subordinated the Rappaport Loan to the $7,000,000 being loaned to the Company by
Wachovia. In consideration of the subordination, the Rappaport 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 Rappaport 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.
By December 31, 2004, Rappaport had received a total of 1,285,298 shares for all
interest and penalties and will receive 15,000 shares per month as additional
penalties until the Rappaport Loan is paid in full.
If the Company does not comply with the financial covenants and other
obligations in its loan agreements 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. The
Company has retained a financial advisor to assist the Company in further
discussions with its lenders. There can be no guarantee, however, that the
lenders will agree to terms in the future that are more favorable to the Company
than the current arrangements with the lenders.
Page 11
7. STOCK - BASED COMPENSATION
The Company has established various stock - based compensation plans for its
officers, directors, key employees and consultants. See the 2004 10-K/A for a
description of the Company's stock-based compensation plans.
Stock option activity during the six months ended December 31, 2004 was as
follows:
Outstanding June 30, 2004 2,177,566
Grants 0
Canceled 2,549
Expired 31,885
Exercised 0
---------
Outstanding - December 31, 2004 2,143,132
Exercisable - December 31, 2004 1,788,132
During the six months ended December 31, 2004 the Company issued 227 shares of
stock in connection with earn out agreements associated with the acquisition of
client lists.
8. SEGMENTS OF BUSINESS
As a result of the Company's recent restructuring, management believes the
Company operates as one segment.
9. RELATED PARTY TRANSACTIONS
In December 2004, Prime Partners, of which Michael Ryan, the Company's President
is a major shareholder, provided short term loans to the Company in the
aggregate amount of $593,000 for working capital purposes. These loans pay 10%
interest per annum.
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 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). 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 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 SEC.
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, together with its wholly owned subsidiaries, provides federal,
state and local tax preparation services to individuals, predominantly in the
middle and upper income tax brackets and financial planning services, including
securities brokerage, insurance and mortgage agency services.
Page 12
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. Future profitability
will come from the two channels leveraging off each other, improving client base
growth and retention.
All of the Company's financial planners are employees or independent contractors
of the Company and registered representatives of Prime Capital Services,
Inc.("PCS"), a wholly owned subsidiary of the Company. PCS conducts a securities
brokerage business providing regulatory oversight and products and sales support
to its registered representatives, who provide investment products and services
to their clients. PCS earns a share of commissions from the services that the
financial planners provide to their clients in transactions for securities,
insurance and related products. PCS is a registered securities broker-dealer
with the SEC and a member of the National Association of Securities Dealers,
Inc.
A majority of the Company's financial planners are also tax preparers. The
Company's tax preparation business is conducted predominantly in the months of
February, March and April. During the tax season, the Company significantly
increases the number of employees involved in tax preparation. During the 2004
tax season, the Company prepared approximately 29,000 United States tax returns.
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. The Company has the capability of processing insurance
business through Prime Financial Services, Inc., its wholly owned subsidiary,
which is a licensed insurance broker, and through other licensed insurance
brokers.
In Fiscal 2004, 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. For the six months ended December 31,
2004, 97% of the Company's revenues were earned from all financial planning and
related services and 3% were earned from tax preparation services.
During the three months ended December 31, 2004, the Company had income from
continuing operations before other income and expenses of $155,361, an
improvement over a loss from continuing operations before other income and
expenses of $(1,274,276) during the three months ended December 31, 2003. Income
(loss) from continuing operations before other income and expenses also improved
from a loss of $(1,371,979) during the six months ended December 31, 2003 to a
loss of $(975,937) during the six months ended December 31, 2004.
During the three months ended December 31, 2004, the Company had net loss of
($32,386), and during the six months ended December 31, 2004 the Company
incurred a net loss of $($1,256,093). At December 31, 2004 the Company had a
working capital deficit of $(14,275,119). At December 31, 2004 the Company had
$583,803 of cash and cash equivalents and $3,636,425 of trade accounts
receivables, net, to fund short-term working capital requirements.
The Company believes that it has completed the necessary steps to meet its cash
flow requirements for the years ending June 30, 2005 and 2006, though due to the
seasonality of the Company's business the Company may at times employ short term
financing. See Note 1(d) of Notes to Consolidated Financial Statements included
in the 2004 10-K/A for a complete discussion of the Company's liquidity and cash
flow and Note 7 of Notes to Consolidated Financial Statements included in the
2004 10-K/A 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 agreements with Wachovia, Travelers or Rappaport, 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. The Company has retained a financial
advisor to assist the Company in further discussions with its lenders. There can
be no guarantee, however, that the lenders will agree to terms in the future
that are more favorable to the Company than the current arrangements with the
lenders.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003.
Except as noted, the numbers and explanations presented below represent results
from continuing operations only.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 2003
The Company's revenues for the three months ended December 31, 2004 were $13.37
million compared to $13.27 million for the three months ended December 31, 2003,
an increase of $.1 million or .7%. Of the total increase, $.07 million was
attributable to an increase in the Company's financial planning business,
coupled with an increase in the Company's tax preparation fees of $.03 million.
The Company's total revenues for the three months ended December 31, 2004
consisted of $ 12,934,011 for financial planning services and $ 436,930 for tax
Page 13
preparation fees. Financial planning services represented 97% and tax
preparation fees represented 3% of the Company's total revenues during the three
months ended December 31, 2004. The Company's total revenues for the three
months ended December 31, 2003 consisted of $ 12,869,765 for financial planning
services and $403,757 for tax preparation fees. Financial planning services
represented 97% and tax preparation fees represented 3% of the Company's total
revenues during the three months ended December 31, 2003.
The Company's commission expense for the three months ended December 31, 2004
was $8.0 million, a decrease of $ .3 million or 3.9% from $8.3 million for the
quarter ended December 31, 2003. This decrease is attributable to a higher
percentage of the Company's revenue being derived from its employee sales force.
The Company's operating expenses for the three months ended December 31, 2004
were $ 5.2 million or 38.9% of revenues, a decrease of $1.0 million or 16.2%,
compared to $6.2 million or 46.8% of revenues for the three months ended
December 31, 2003. The dollar decrease in operating expenses was attributable to
decreases in general and administrative expenses of $.3 million, in salaries of
$.4 million, in rent of $.05 million, in brokerage fees and licenses of $.08
million, in depreciation and amortization of $.07 million, offset by an increase
in advertising of $.02 million.
General and administrative expenses decreased $.3 million or 19.6% in the three
months ended December 31, 2004 to $ 1.4 million from $1.7 million during the
three months ended December 31, 2003. This decrease is primarily attributable to
a decrease in professional fees and insurance expense offset by an increase in
computer and telephone expenses.
Advertising expenses increased $ .02 million in the three months ended December
31, 2004 to $.12 million from $ .1 million during the three months ended
December 31, 2003. This increase is primarily attributable to the increase in
print ad campaigns to build brand equity and awareness.
Brokerage fees and licenses expenses decreased $ .8 million or 16.5% in the
three months ended December 31, 2004 to $ .44 million from $ .52 million during
the three months ended December 31, 2003. This decrease is primarily
attributable to decreased revenues from the Company's clearing firm.
Rent expense decreased $.6 million or 12.1% in the three months ended December
31, 2004 to $ .43 million from $.48 million during the three months ended
December 31, 2003. This decrease is primarily attributable to the termination of
leases associated with closed or merged offices.
Depreciation and amortization expense decreased $ .7 million or 18.7% in the
three months ended December 31, 2004 to $ .30 million from $ .37 million during
the three months ended December 31, 2003. 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.
The Company's income or loss from continuing operations before other income and
expenses for the three months ended December 31, 2004 was $.1 million profit as
compared to a loss of $(1.3 million) for the three months ended December 31,
2003, an increase of $ 1.4 million. This increase was attributable to increased
revenues from financial planning services and lower commission and operating
expenses as described above.
The Company's net income or loss from continuing operations before income taxes
for the three months ended December 31, 2004 was $.01 million compared to a loss
of $(1.47 million) for the three months ended December 31, 2003. This increase
was primarily attributable to the increased revenue and improved operating
results described above.
The Company had income from discontinued operations for the three months ended
December 31, 2004 of $ 0 compared to $4.6 million for the three months ended
December 31, 2003.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THE SIX
MONTHS ENDED DECEMBER 31, 2003
The Company's revenues for the six months ended December 31, 2004 were $26.0
million compared to $26.8 million for the six months ended December 31, 2003, a
decrease of $.8 million or 3%. Of the total decrease, $ .9 million was
attributable to a decrease in the Company's financial planning business
partially offset by an increase in the Company's tax preparation fees of $ .1
million.
The Company's total revenues for the six months ended December 31, 2004
consisted of $25.1 million for financial planning services and $1 million for
tax
Page 14
preparation fees. Financial planning services represented 96% and tax
preparation fees represented 3% of the Company's total revenues during the six
months ended December 31, 2004. The Company's total revenues for the six months
ended December 31, 2003 consisted of $ 26.0 million for financial planning
services and $ .8 million for tax preparation fees. Financial planning services
represented 97% and tax preparation fees represented 3% of the Company's total
revenues during the six months ended December 31, 2003.
The Company's commission expense for the six months ended December 31, 2004 was
$16.1 million, a decrease of $.1 million from $16.2 million for the quarter
ended December 31, 2003. This decrease is attributable to a higher percentage of
the Company's revenue being derived from its employee sales force.
The Company's operating expenses for the six months ended December 31, 2004 were
$10.9 million or 41.8% of revenues, a decrease of $1.1 million or 9.1%, compared
to $12.0 million or 44.7% of revenues for the six months ended December 31,
2003. The dollar decreases in operating expenses was attributable to a decreases
of $ .2 million in general and administrative expenses, $.8 million in salaries,
$.1 million in rent, $.1 million in brokerage fees and licenses and $.1 million
in depreciation and amortization, offset by an increase in advertising of $ .3
million.
General and administrative expenses decreased $ .2 million or 5.2% in the six
months ended December 31, 2004 to $3.2 million from $3.4 million during the six
months ended December 31, 2003. This decrease is primarily attributable to a
decrease in professional fees and insurance expense offset by reduced computer
and telephone expenses.
Advertising expenses increased $.3 million in the six months ended December 31,
2004 to $.4 million from $.1 million during the six months ended December 31,
2003. This increase is primarily attributable to the increase in print ad
campaigns to build brand equity and awareness.
Brokerage fees and licenses expenses decreased $.1 million or 12.7% in the six
months ended December 31, 2004 to $.7 million from $.8 million during the six
months ended December 31, 2003. This decrease is primarily attributable to
decreased revenues from the Company's clearing firm.
Rent expense decreased $.1 million or 15.7% in the six months ended December 31,
2004 to $.6 million from $.7 million during the six months ended December 31,
2003. This decrease is primarily attributable to the termination of leases
associated with closed or merged offices.
Depreciation and amortization expense decreased $.1 million or 15.7 % in the six
months ended December 31, 2004 to $.6 million from $.7 million during the six
months ended December 31, 2003. 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.
The Company's loss from continuing operations before other income and expense
for the six months ended December 31, 2004 was $(.9 million) as compared to
$(1.4 million) for the six months ended December 31, 2003, a reduced loss of $.5
million. This reduced loss was attributable to increased revenues produced by
the Company's employee sales force coupled with overall reduced expenses
described above.
The Company's net loss from continuing operations before income taxes for the
six months ended December 31, 2004 was $(1.3 million ) compared to a loss of
$(1.8 million) for the six months ended December 31, 2003. This reduced loss was
attributable to the reduced losses from operations of $ .6 million highlighted
above, and by a decrease of $.3 million in interest expense and increases of $.3
million and $.7 million, respectively, in interest and investment income and
other income, net.
The Company had income from discontinued operations for the six months ended
December 31, 2004 of $0 compared to a loss of ($5.1 million) for the six months
ended December 31, 2003.
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 15
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.
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 deficit increased by $191,067. Revenues
for the year ended June 30, 2003 increased by $60,009 and commission expense for
the year 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 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 and borrowings to support operations and finance working capital
requirements. As of December 31, 2004 the Company had $ 583,803 in cash and cash
equivalents and $640,183 in marketable securities. PCS is subject to the SEC's
Uniform Net Capital Rule 15c 3-1, which requires that PCS maintain minimum
regulatory net capital of $100,000 and that the ratio of aggregate indebtedness
to net capital, both as defined, shall not exceed the greater of 15 to one. At
December 31, 2004, the Company was in compliance with this regulation.
During the six months ended December 31, 2004, the Company incurred a net loss
of $(1,256,093) and at December 31, 2004 had a working capital deficit position
of $(14,275,119). At December 31, 2004 the Company had $583,803 of cash and cash
equivalents and $ 3,636,425 of trade accounts receivables to fund short-term
working capital requirements.
The Company believes that it has been able to complete the necessary steps in
order to meet its cash flow requirements throughout Fiscal 2005 and 2006, though
due to the seasonality of the Company's business the Company may at times employ
short term financing.
The Company's cash flow provided by or used in operating activities totaled $ .1
million and $(1.7 million) for the six months ended December, 2004 and 2003,
respectively. The decrease in cash flows used in operating activities is due to
increased net income, decreased marketable securities and other current assets,
and offset by a decrease in accounts payable. For the six months ended December
31, 2003, the Company recognized gain on the sale of offices to Pinnacle and
others.
Net cash provided by investing activities totaled ($.02 million) for the six
months ended December 31, 2004, as compared to $ 3.4 million for the six months
ended December 31, 2003. December 31, 2004 net cash included the proceeds from a
real property sale of $.3 million. The December 31, 2003 net cash of $3.4
million is primarily due to the sale of discontinued operations.
Net cash used in financing activities totaled ($.03 million) for the six months
ended December 31, 2004, as compared to ($1.7 million)for the six months ended
December 31, 2003. The decrease in cash used in financing activities of $1.6
million is attributable to an increase in proceeds from bank and other loans,
and the decrease in payouts of bank and capital lease obligations of $ 1
million.
Prime Partners has made various loans to the Company at an interest rate of 10%.
On December 31, 2004 the Company owed Prime Partners $878,149. Michael Ryan, the
Company's President, is one of the major shareholders of Prime Partners.
The Company believes that it has completed the necessary steps to meet its cash
flow requirements for the years ending June 30, 2005 and 2006, though due to the
seasonality of the Company's business the Company may at times employ short term
financing. See Note 1(d) of Notes to Consolidated Financial Statements included
in the 2004 10-K/A for a complete discussion of the Company's liquidity and cash
flow and Note 7 of Notes to Consolidated Financial Statements included in the
2004 10-K/A 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 agreements with Wachovia, Travelers or Rappaport, 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. The Company has retained a financial
advisor to assist the Company in further discussions with its lenders. There can
be no guarantee, however, that the lenders will agree to terms in the future
that are more favorable to the Company than the current arrangements with the
lenders.
Page 16
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to December 31, 2004 and thereafter. The amounts represent the
maximum future cash contractual obligations.
Contractual Obligation and Commercial Commitments
Payment Due by Period
2006 to 2008 to After
Contractual
Obligations Total 2005 2007 2009 2010
--------------------------------------------------------------------------
Debt 9,559,537 9,438,404 47,216 47,139 26,777
Operating Leases 5,550,620 2,486,776 2,029,991 724,257 309,595
Capital Leases 317,487 145,086 147,076 25,325 --
--------------------------------------------------------------------------
Total contractual
cash obligations 15,427,644 12,070,266 2,224,284 796,721 336,372
==========================================================================
In connection with the sale of offices to Pinnacle, all operating leases
associated with the sold offices were assigned to Pinnacle, but the Company
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 $801,790, $259, 599, and $119,636 for the fiscal years ending
June 30, 2005, 2006, and 2007, respectively. See Note 5 of Notes to the
Consolidated Financial Statements in the 2004 10-K/A for a complete discussion
of the sale 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 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 material 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 the share price. It would
also make it more difficult for the Company 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
Inflation has not had a significant effect on the Company's results of
operations in recent periods.
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. 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.
Page 17
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 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.
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 and investment. 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 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.
In performing its audit of our Consolidated Financial Statements for Fiscal
2004, our independent auditors, Radin Glass, notified our Board of Directors of
several reportable conditions in internal controls under standards established
by the American Institute of Certified Public Accountants. Reportable conditions
involve matters coming to the attention of our auditors relating to significant
deficiencies in the design or operation of internal controls that, in their
judgment, could adversely affect our ability to record, process, summarize, and
report financial data consistent with the assertions of management in the
consolidated financial statements. Radin Glass stated that while none of the
items identified by them individually are individually a material weakness, the
combined effect of these issues and the inability to produce timely accurate
financial statements is a material weakness.
Page 18
Although Radin Glass noted significant improvements in the structure of the
accounting department, and designed its audit procedures to address the matters
described below in order to obtain reasonable assurance that the financial
statements are free of material misstatement and to issue an unqualified audit
report, certain of the internal control deficiencies noted by Radin Glass had
been noted in their internal control letter regarding fiscal 2003. The Company
has assigned a high priority to the remediation of the reportable conditions,
has hired a new general counsel, is seeking additional independent directors,
intends to hire additional staff in the finance department and will implement
enhanced procedures to accelerate improvement of the internal controls.
These significant deficiencies in the design and operation of our internal
controls include the needs to hire additional staffing and change the structure
of the finance/accounting department, to provide better coordination and
communication between the legal and finance/accounting departments and to
provide training to existing and new personnel in SEC reporting requirements;
the lack of integration of the general ledger system with other recordkeeping
systems, and the need for formal control systems for journal entries and closing
procedures; the need to document internal controls over financial reporting; the
needs to form an independent audit committee, to form an internal audit
department and to implement budget and reporting procedures; and the need to
provide internal review procedures for schedules, SEC reports and filings prior
to submission to the auditors and/or filing with the SEC.
A material weakness is defined as a reportable condition in which the design or
operation of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements caused by error or fraud in
amounts that would be material in relation to the financial statements being
audited may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. While the Company did
implement specific changes in our internal controls during the fourth quarter of
Fiscal 2004, such as improvement in recording commissions earned and tax return
billings, and regulatory filings are now being filed within the prescribed due
dates, such improvements were partially offset by declines in other areas.
The Company's senior management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 13a-15 and
15d-15 under 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 SEC'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 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 disclosure 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 the Company will further enhance its disclosure controls and
procedures and that except for the matters noted by Radin Glass, and taking into
account the steps taken and to be taken to address the matters described above,
such disclosure 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.
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"),
and newly enacted SEC regulations have created additional compliance
requirements for companies such as ours. We are committed to maintaining high
standards of internal controls over financial reporting, corporate governance
and public disclosure. As a result, we intend to invest appropriate resources to
comply with evolving standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities. In
particular, a great deal of management time and attention will be required to
comply on a timely basis with the internal control requirements of Section 404
of Sarbanes-Oxley, and without significant additional staff or resources it will
be difficult to achieve timely compliance.
Page 19
Except as described above, no change occurred in the Company's internal controls
concerning financial reporting during the quarter ended December 31, 2004 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 PCS are defendants and respondents in lawsuits and NASD
arbitrations in the ordinary course of business. On December 31, 2004, there
were 30 pending lawsuits and arbitrations, of which 16 were against PCS and/or
its registered representatives. Management accrued $798,116 as a reserve for
potential settlements, judgments and awards. PCS has errors & omissions coverage
that will cover a portion of such matters. In addition, under the PCS registered
representatives contract, each registered representative is responsible for
covering costs in connection with these claims. The Company does not believe
that these lawsuits and arbitrations will have a material effect on its
consolidated 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 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 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 Asset Purchase Agreement; unspecified
monetary damages; and an award to the plaintiff of costs and disbursements,
including reasonable legal, expert and accountants fees. On March 15, 2004,
counsel for the Company and for all defendants filed a motion to dismiss the
lawsuit. On June 18, 2004, counsel for the plaintiff filed an Amended Complaint.
On July 12, 2004, counsel for the Company and for all defendants filed a motion
to dismiss the Amended Complaint. On October 27, 2004, counsel for the plaintiff
filed a memorandum of law in opposition to defendant's motion to dismiss the
Amended Complaint.
SEC Investigation
The Company is the subject of a formal investigation by the 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 its Form 10-K for Fiscal 2002 and 2003,
the Company's delay in filing its 10-Q for the quarter ended 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. The Company does
not believe that the investigation will have a material effect on its
consolidated financial position.
Page 20
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 19, 2004 and on December 23, 2004, the Company issued 45,000 shares
of common stock to Rappaport Gamma LP ("Rappaport") pursuant to Section 4(2) of
the Securities Act. The shares were issued as part of a penalty for nonpayment
on a loan by Rappaport to the Company, and the Company received no proceeds in
connection therewith.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 9 of Notes to Consolidated Financial Statements in the 2004 10-K/A.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its last meeting of shareholders on December 14, 2001.
ITEM 5. OTHER INFORMATION
On or about October 21, 2004, the Company's broker-dealer subsidiary, PCS,
received a letter from the Boston District Office of the NASD (the "Office")
with respect to the Office's 2002 and 2003 examinations of PCS. The letter
stated that with respect to the periods examined the Office had found that PCS
had failed to fully comply with certain NASD Conduct Rules. PCS has conducted a
review of the letter and its findings, and submitted a response to the Office.
The Office has subsequently advised PCS that it proposes a settlement in the
matter in the amount of a $235,000 monetary penalty, plus reimbursement to
certain PCS customers in an amount that cannot at this time be ascertained by
PCS, but which amount PCS believes will not be material. PCS anticipates that a
portion of any amounts it pays out in connection with the matter will be
recovered from certain of its registered representatives. PCS does not concur
with certain findings of the Office and will continue to discuss the matter with
the Office to reach a final solution.
Item 6. EXHIBITS
(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.
(b) Reports on Form 8-K
None
Page 21
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 14, 2005 By /s/ Michael P. Ryan
Chief Executive Officer
Dated: February 14, 2005 By /s/ Dennis Conroy
Chief Accounting Officer
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