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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 September 30, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________
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
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) |_| Yes |X| No
As of November 11, 2005, 9,133,223 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 September 30, 2005 and June 30, 2005 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2005 and September 30, 2004 4
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2005 and September 30, 2004 5
Supplemental Disclosures to Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 21
Item 6. Exhibits 21
SIGNATURES 22
Page 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Unaudited Audited
September 30, June 30,
2005 2005
------------- ------------
Assets
Cash & Cash Equivalents $ 390,030 $ 667,054
Marketable Securities 361,397 511,832
Trade Accounts Receivable, Net 3,542,579 3,102,521
Receivables from Officers, Shareholders
and employees, net 306,488 285,556
Due From Office Sales - Current 255,861 280,719
Prepaids and Other Current Assets 590,749 905,277
-----------------------------
Total Current Assets 5,447,104 5,752,959
Property and Equipment (less accumulated depreciation of $5,202,831
at September 30, 2005 and $5,090,906 at June 30, 2005) 955,330 1,040,725
Goodwill 3,837,087 3,837,087
Intangible Assets (less accumulated amortization of $4,845,888 at
September 30, 2005 and $4,908,805 at June 30, 2005) 4,740,890 5,311,002
Due from Office Sales - Non Current 891,492 700,781
Other Assets 506,458 493,158
-----------------------------
Total Assets $ 16,378,361 $ 17,135,712
=============================
Liabilities and Shareholders' Equity (Deficit)
Accounts Payable and Accrued Expenses $ 10,703,259 $ 10,452,087
Current Portion of Notes Payable and Capital Leases 6,848,862 7,253,939
Deferred Income 188,866 310,800
Due to Related Parties 2,030,507 1,568,809
-----------------------------
Total Current Liabilities 19,771,494 19,585,635
Deferred Income Long Term 195,833 --
Long Term Portion of Notes Payable and Capital Leases 290,553 282,424
-----------------------------
Total Liabilities $ 20,257,880 $ 19,868,059
Shareholders' Equity (Deficit)
Preferred Stock, $0.001 par value; 100,000 shares authorized; no
shares issued and outstanding at September 30, 2005 and June 30, 2005 $ -- $ --
Common Stock, $0.01 par value 20,000,000 shares authorized; 10,426,061
at September 30, 2005 and 10,409,876 shares issued at June 30, 2005 104,260 104,098
Additional Paid in Capital 30,215,481 30,207,474
Treasury Stock 1,326,838 at September 30, 2005 and June 30, 2005
shares of common stock, at cost (1,306,288) (1,306,288)
Retained Deficit (32,892,972) (31,737,631)
-----------------------------
Total Shareholders' Equity (Deficit) (3,879,519) (2,732,347)
-----------------------------
Total Liabilities & Shareholders' Equity (Deficit) $ 16,378,361 $ 17,135,712
=============================
See Notes to Consolidated Financial Statements
Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
September 30,
2005 2004
-----------------------------
Revenues
Financial Planning Services $ 12,027,603 $ 12,212,937
Tax Preparation Fees 462,826 517,062
-----------------------------
Total Revenues 12,490,429 12,729,999
-----------------------------
Cost of Sales/Commissions 7,726,643 7,915,643
-----------------------------
Gross Profit 4,763,786 4,814,356
-----------------------------
Operating Expenses
Salaries 2,321,270 2,505,660
General & Administrative 1,903,952 2,020,081
Advertising 302,944 258,662
Brokerage Fees & Licenses 446,945 358,323
Rent 508,917 463,746
Depreciation & Amortization 263,931 310,623
-----------------------------
Total Operating Expenses 5,747,959 5,917,095
-----------------------------
Loss from Continuing Operations
Before Other Income and Expenses (984,173) (1,102,739)
-----------------------------
Other Income/(Expenses)
Interest and Investment Income 20,388 51,183
Interest Expense (206,693) (205,949)
Other Income/(Expense), Net 15,138 33,797
-----------------------------
Total Other Income/(Expense) (171,167) (120,969)
-----------------------------
Loss from Continuing Operations
Before Income Taxes (1,155,340) (1,223,708)
-----------------------------
Income Taxes/(Benefit) -- --
-----------------------------
Net Income/(Loss) (1,155,340) (1,223,708)
=============================
Weighted Average Number of Common
Shares Outstanding
Basic Shares 9,114,421 8,810,275
Diluted Shares 9,114,421 8,810,275
Basic Net Income/(Loss) Per Share:
Loss from Continuing Operations $ (0.13) $ (0.14)
Net Income/(Loss) $ (0.13) $ (0.14)
Diluted Net Income/(Loss) Per Share:
Loss from Continuing Operations $ (0.13) $ (0.14)
Net Income/(Loss) $ (0.13) $ (0.14)
See Notes to Consolidated Financial Statements
Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
September 30,
2005 2004
---------------------------
Cash Flows from Operating Activities:
Net Loss: $(1,155,340) $(1,223,708)
Adjustments to reconcile net loss to net cash provided by/(used in)
operating activities:
Depreciation and amortization 263,931 268,154
Issuance of common stock for debt default penalties and interest 8,169 23,537
Amortization of debt discount 25,815 42,469
(Gain)/loss on sale of discontinued operations (15,114) --
(Gain)/loss on sale of equipment and properties -- (31,182)
Due from office sales 148,414 67,788
Changes in assets and liabilities:
Accounts receivable, net (440,056) 367,137
Prepaid and other current assets 319,175 217,390
Change in marketable securities 150,435 584,509
Receivables from officers, shareholders and employees (20,933) 3,512
Other assets (17,949) 22,631
Accounts payable and accrued expenses 251,176 (263,896)
Other liabilities 73,899 --
---------------------------
Net cash provided by/(used in) operating activities: $ (408,378) $ 78,341
Cash Flows from Investing Activities:
Capital expenditures (53,844) (19,181)
Cash paid for acquisitions, net of cash acquired (14,914) (8,487)
Proceeds from the sale of discontinued operations 161,179 --
Proceeds from the sale of property and equipment -- 293,750
---------------------------
Net cash provided by/(used in) investing activities: $ 92,421 $ 266,082
Cash Flows from Financing Activities:
Proceeds from bank and other loans 472,645 590,000
Payments of bank loans and capital lease obligations (433,712) (757,130)
---------------------------
Net cash provided by/(used in) financing activities: $ 38,933 $ (167,130)
Net change in cash and cash equivalents $ (277,024) $ 177,293
Cash and cash equivalents at beginning of period $ 667,054 $ 498,545
Cash and cash equivalents at end of period $ 390,030 $ 675,838
See Notes to the Consolidated Financial Statements and Supplemental Disclosures
to Consolidated Statements of Cash Flows
Page 5
Supplemental Disclosures to Consolidated Statements of Cash Flows
For the Three Months Ended
September 30,
2005 2004
--------------------------
Cash Flow Information
Cash payments during the year for:
Interest $ 93,548 $205,949
Supplemental Disclosure of Non-Cash Transactions
Common stock issued in connection with
acquisitions/other $ 8,008 $ 5,760
Issuance of common stock for debt default
penalties and interest $ -- $ 23,537
Equipment acquired under capital leases $ 26,038 $ --
Page 6
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
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 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. For the fiscal year ended June 30, 2005, approximately
88.0% of the Company's revenues were derived from commissions on financial
planning services and approximately 12.0% were derived from fees for tax
preparation services. For the three months ended September 30, 2005,
approximately 96.0% of the Company's revenues were derived from financial
planning services. As of September 30, 2005, the Company had 34 offices
operating in four states (New York, New Jersey, Connecticut and Florida). 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 as of June 18, 2003, March 4, 2004 and March 1, 2005.
Another of the Company's lenders, Travelers Insurance Company ("Travelers"), has
claimed several defaults under its distribution financing agreement with the
Company, but acknowledged that it was subject to the terms of a subordination
agreement with Wachovia (the "Subordination Agreement"), which restricts the
remedies it can pursue against the Company. The Company's debt to Rappaport
Gamma Limited Partnership (the "Rappaport Loan") was due on October 30, 2002.
The Rappaport Loan is subordinated to the Wachovia loan. The Rappaport Loan was
sold to a group of Company management and employees (the "Purchasing Group") on
April 29, 2005. The members of the Purchasing Group include Prime Partners,
Inc., a corporation controlled by Michael Ryan, the President and Chief
Executive Officer and a director of the Company, James Ciocia, the Chairman of
the Company, Christopher Kelly, the General Counsel of the Company, Kathryn
Travis, the Secretary and a director of the Company, Dennis Conroy, the Chief
Accounting Officer of the Company, Ted Finkelstein, the Assistant General
Counsel of the Company, and certain other Company employees. The Purchasing
Group has agreed to reduce the principal balance of the Rappaport Loan from $1.0
million to $750,000 and extend the maturity date to April 29, 2009. The
Purchasing Group, as holders of the Rappaport Loan, are entitled to receive, in
the aggregate, 180,000 shares of the Company's common stock annually while the
debt remains unpaid. As a result of these defaults, the Company's debt as to
those lenders has been classified as current liabilities on its financial
statements. Upon the purchase of the Rappaport Loan by the Purchasing Group,
however, the Rappaport Loan was reclassified as a related transaction. See Note
7 to Notes to Consolidated Financial Statements for a discussion of the
Company's debt.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 September 30, 2005, the
Consolidated Statements of Operations for the three months ended September 30,
2005 and 2004 and the Consolidated Statements of Cash Flows for the three months
ended September 30, 2005 and 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 three months ended September 30, 2005 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 for the fiscal year ended
June 30, 2005.
Page 7
Fiscal years are denominated by the year in which they end. Accordingly, Fiscal
2005 refers to the year ended June 30, 2005.
The Consolidated Financial Statements include the accounts of the Company and
all majority owned subsidiaries from their respective dates of acquisition. All
significant inter-company transactions and balances have been eliminated. Where
appropriate, prior years financial statements reflect reclassifications to
conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Furthermore, the Company,
including its wholly owned subsidiary Prime Capital Services, Inc. ("PCS"), has
been named as a defendant in various customer arbitrations. These claims result
from the actions of brokers affiliated with PCS. Under the PCS registered
representatives contract, each registered representative has indemnified the
Company for these claims. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 5 "Accounting for Contingencies," the Company has
established liabilities for potential losses from such arbitrations and other
legal actions, investigations and proceedings. In establishing these
liabilities, the Company's management uses its judgment to determine the
probability that losses have been incurred and a reasonable estimate of the
amount of losses. In making these decisions, we base our judgments on our
knowledge of the situations, consultations with legal counsel and our historical
experience in resolving similar matters. In many such arbitrations and other
legal actions, investigations and proceedings, it is not possible to determine
whether a liability has been incurred or to estimate the amount of that
liability until the matter is close to resolution. However, accruals are
reviewed regularly and are adjusted to reflect our estimates of the impact of
developments, rulings, advice of counsel and any other information pertinent to
a particular matter. Because of the inherent difficulty in predicting the
ultimate outcome of such matters, we cannot predict with certainty the eventual
loss or range of loss related to such matters. If our judgments prove to be
incorrect, our liability for losses and contingencies may not accurately reflect
actual losses that result from these actions, which could materially affect
results in the period other expenses are ultimately determined. As of September
30, 2005, the Company has accrued approximately $0.9 million for these matters.
A majority of these claims are covered by the Company's errors and omissions
insurance policy. While the Company will vigorously defend itself in these
matters, and will assert insurance coverage and indemnification to the maximum
extent possible, there can be no assurance that these matters will not have a
material adverse impact on its financial position.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include
investments in money market funds and are stated at cost, which approximates
market value. Cash at times may exceed FDIC insurable limits.
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 8
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.
Stock-based Compensation
At September 30, 2005, the Company had various stock-based employee compensation
plans. Prior to 2000, the Company accounted for plans under the recognition and
measurement provisions of Accounting Principles Board ("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 SFAS 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
immediately to five years. Therefore, the cost related to stock-based employee
compensation included in the determination of net income for the three months
ended September 30, 2005 and 2004 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 SFAS No. 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
September 30,
2005 2004
-------------------------------
Net Income/(Loss) as reported $ (1,155,340) $ (1,223,708)
Add: Stock-based employee compensation
expenses included in reported net
income/(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 $ 43,177 --
-------------------------------
Proforma Net Income/(Loss) $ (1,198,517) $ (1,223,708)
Basic and diluted earnings/(loss) per share:
As reported - Basic $ (0.13) $ (0.14)
Proforma - Basic $ (0.13) $ (0.14)
As reported - Diluted $ (0.13) $ (0.14)
Proforma - Diluted $ (0.13) $ (0.14)
The effects of applying SFAS No. 123 in the proforma net loss disclosures above
are not likely to be representative of the effects on proforma disclosures of
future years.
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. Differences between basic and diluted shares are
due to the assumed exercise of stock options included in the diluted loss per
share computation.
Page 9
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, notes receivable, and accounts payable,
approximated fair value as of September 30, 2005, because of the relatively
short-term maturity of these instruments and their market interest rates. Since
the long term debt is in default, it is not possible to estimate its value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of trade receivables. The majority of the Company's trade
receivables are commissions earned from providing financial planning services
that include securities/brokerage services and insurance and mortgage agency
services. As a result of the diversity of services, markets and the wide variety
of customers, the Company does not consider itself to have any significant
concentration of credit risk.
Segment Disclosure
Management believes the Company operates as one segment.
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. Refer to Note 2 to Consolidated Financial
Statements included in the Company's Annual Form 10-K for fiscal 2005, which
discusses accounting policies that must be selected by management when there are
acceptable alternatives.
3. RECENT ACCOUNTING PRONOUNCEMENTS
There have been no new accounting pronouncements or significant changes to
accounting pronouncements during the quarter ended September 30, 2005 that the
Company expects will have a material impact on the Company's financial
statements. See Note 2 to Notes to Consolidated Financial Statements included in
the Company's Fiscal 2005 10-K.
4. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has renewed its clearing agreement for a five-year term beginning
September 2005. The economic terms will be amortized over the five-year term of
this agreement ratably.
Litigation
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 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 offices to Pinnacle Taxx
Advisors, LLC ("Pinnacle") in 2002. 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
Page 10
Company and for all defendants filed a motion to dismiss the Amended Complaint.
On March 8, 2005, oral argument was heard on the motion to dismiss, and on July
29, 2005 the case Master delivered his draft report denying the motion. The
parties are briefing exceptions to the report, after review of which the Master
will deliver his final report. While the Company will vigorously defend itself
in this matter, there can be no assurance that this lawsuit will not have a
material adverse impact on its financial position.
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 Form 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 affect on the Company's
Consolidated Financial Statements.
Subsequent to an NASD examination of PCS, the NASD on August 12, 2005 accepted a
Letter of Acceptance, Waiver and Consent ("AWC") submitted by PCS, in which PCS
agreed to be censured and fined $200,000, and to recompense certain customers of
PCS who purchased mutual fund "B" shares. Without admitting or denying the
alleged violations, PCS agreed to the findings by the NASD that certain
supervisory deficiencies existed between June 2002 and July 2003. The acceptance
of the AWC concludes the matter.
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by the Company's registered representatives
during the period January 1, 2002 through August 1, 2005. The Company will
cooperate fully with the SEC in connection with this informal inquiry.
Management believes that a number of other broker-dealers have received similar
informal inquiries. The Company cannot predict whether the SEC will take any
enforcement action against the Company based on the variable annuity sales
practices of the Company.
The Company and PCS are defendants and respondents in lawsuits and NASD
arbitrations in the ordinary course of business. On September 30, 2005, there
were 35 pending lawsuits and arbitrations, of which 17 were against PCS and/or
its registered representatives. In accordance with SFAS No. 5 "Accounting for
Contingencies," the Company has established liabilities for potential losses
from such complaints, legal actions, investigations and proceedings. In
establishing these liabilities, the Company's management uses its judgment to
determine the probability that losses have been incurred and a reasonable
estimate of the amount of the losses. In making these decisions, we base our
judgments on our knowledge of the situations, consultations with legal counsel
and our historical experience in resolving similar matters. In many lawsuits,
arbitrations and regulatory proceedings, it is not possible to determine whether
a liability has been incurred or to estimate the amount of that liability until
the matter is close to resolution. However, accruals are reviewed regularly and
are adjusted to reflect our estimates of the impact of developments, rulings,
advice of counsel and any other information pertinent to a particular matter.
Because of the inherent difficulty in predicting the ultimate outcome of legal
and regulatory actions, we cannot predict with certainty the eventual loss or
range of loss related to such matters. If our judgments prove to be incorrect,
our liability for losses and contingencies may not accurately reflect actual
losses that result from these actions, which could materially affect results in
the period other expenses are ultimately determined. Management accrued $0.9
million 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. While the Company will vigorously defend itself in these matters, and
will assert insurance coverage and indemnification to the maximum extent
possible, there can be no assurance that these lawsuits and arbitrations will
not have a material adverse impact on its financial position.
Page 11
5. LIQUIDITY AND CASH FLOW
During the three months ended September 30, 2005, the Company incurred a net
loss of $1.2 million and at September 30, 2005 had a working capital deficit
position of $14.3 million. At September 30, 2005 the Company had $0.4 million of
cash and cash equivalents and $3.5 million 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 throughout Fiscal 2006 and 2007, though due to the seasonality
of the Company's business the Company may at times employ short term financing.
For the three months ended September 30, 2005, Prime Partners, Inc. ("Prime
Partners"), of which Michael P. Ryan, the Company's President, is a director,
the President and a major shareholder, provided short-term loans to the Company
in the aggregate amount of $0.6 million for working capital purposes. These
loans pay 10% interest per annum. As of September 30, 2005, the Company owed
Prime Partners $1.2 million.
6. BUSINESS COMBINATIONS AND SOLD OFFICES
The Company has financed the sale of five offices and two subsidiaries with the
receipt of notes to be paid over various terms up to 144 months. These notes
have guarantees from the respective office purchaser and certain default
provisions. These notes are non-interest bearing and have been recorded with an
8% discount.
The scheduled payments for the balance of the term of these notes are as
follows:
2006 $ 183,360
2007 261,471
2008 232,449
2009 157,475
2010 139,530
Thereafter 453,007
-----------
Total $ 1,427,292
Less Allowance 279,939
-----------
Total $ 1,147,353
-----------
7. 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. Under the Forbearance Agreement and several
amendments thereto, Wachovia deleted several large pre-maturity principal
payments, increased the "Applicable Margin" to 4%, changed the Company's
reporting requirements under the Loan and extended the due date of the Loan (the
"Maturity Date") several times. Pursuant to Amendment No. 3 to the Forbearance
Agreement ("Amendment No. 3"), dated as of March 1, 2005, the amortization
schedule was extended by approximately 16 months and the Maturity Date was
extended to March 10, 2008. Under Amendment No. 3, the Company will pay Wachovia
principal on the Loan of $66,205.42 monthly, plus interest. 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.
Page 12
The Company's $5.0 million distribution financing agreement 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 distribution
financing agreement with Travelers due to nonpayment of a $0.1 million penalty
for failure to meet sales production requirements as specified in the
distribution financing agreement. 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 distribution financing agreement were
immediately due and payable and that Travelers reserved its rights and remedies
under the distribution financing agreement, it also stated that Travelers
intended to comply with the terms of the Subordination Agreement between
Travelers and Wachovia. The 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 and the
Forbearance Agreement, the Company is not permitted to make payments to
Travelers.
On October 30, 2001, the Company borrowed $1.0 million from Rappaport pursuant
to a written note without collateral and without stated interest. 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 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 agreed to subordinate the Rappaport
Loan to the $7.0 million Wachovia Loan. 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 June 30, 2005, Rappaport had received a total
of 1,345,298 shares for all interest and penalties. The Rappaport Loan, together
with 785,298 shares of Company common stock held by Rappaport, were sold to a
group of Company management and employees on April 29, 2005 for the amount of
$750,000. The Purchasing Group, as holders of the Rappaport Loan, are entitled
to receive, in the aggregate, as interest, 180,000 shares of the Company's
common stock annually while the debt remains unpaid. See also Note 1 to Notes to
Consolidated Financial Statements.
If the Company does not comply with the financial covenants and other
obligations in its agreements relating to the Wachovia, Travelers or Rappaport
loans, 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. The financial advisor was involved in
the Company's discussions with Wachovia that resulted in the Amendment No. 3
described above. 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.
8. STOCK BASED COMPENSATION
The Company has established various stock based compensation plans for its
officers, directors, key employees and consultants.
Stock option activity during the nine months ended September 30, 2005 was as
follows:
Outstanding September 30, 2005 1,709,950
Grants 0
Canceled 113,487
Expired 125,000
Exercised 0
---------
Outstanding - September 30, 2005 1,471,463
Exercisable - September 30, 2005 1,251,463
During the three months ended September 30, 2005, the Company issued no shares
of stock in connection with earnout agreements associated with the acquisition
of client lists.
Page 13
9. RELATED PARTY TRANSACTIONS
For the three months ended September 30, 2005, Prime Partners, of which Michael
Ryan, the Company's President, is a director, the President and a major
shareholder, provided short term loans to the Company in the aggregate amount of
$0.6 million for working capital purposes. These loans pay 10% interest per
annum. As of September 30, 2005, the Company owed Prime Partners $1.2 million.
See Note 1 to Notes to Consolidated Financial Statements for a description of
the purchase of the Rappaport Loan by a group of Company management and
employees.
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, including statements
regarding the implementation and impact of accounting treatments, working
capital needs and sources, the effects of defaults under the Company's loan
arrangements, estimates of timing for and contributions to future profitability,
if any, the effects of the Company's delisting from Nasdaq, resources necessary
to comply with Sarbanes-Oxley Section 404, and effects of the SEC's
investigation of the Company, 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; the
impact on the Company if one or more of the Company's lenders elects to pursue
its available remedies as a result of the Company's default under applicable
loan documents with such lender; 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
and investigations involving the Company; decreased liquidity and share price
and difficulty raising capital, resulting from our delisting from Nasdaq and
other factors; internal control deficiencies and the Company's potential
inability to remedy them; 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. The reader should, however, consult
further disclosures the Company may make in future filings of its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes thereto set forth in Item 1.
"Financial Statements".
OVERVIEW
The Company 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. In Fiscal 2005, 88.0% of the Company's revenues were
derived from commissions on financial planning services and 12.0% were derived
from fees for tax preparation services. For the three months ended September 30,
2005, 96.0% of the Company's revenues were derived from commissions on financial
planning services and 4.0% were earned from fees for tax preparation services.
As of September 30, 2005, the Company had 34 offices operating in four states
(New York, New Jersey, Connecticut and Florida).
Page 14
The Company provides financial planning services through its 34 Company owned
offices and through independently owned and operated financial planning offices.
The Company office financial planning clients generally are introduced to the
Company through the Company's tax return preparation services and educational
workshops. The Company believes that its tax preparation business is
inextricably intertwined with its financial planning activities in the Company
offices. The independent offices use a variety of marketing tools to attract new
clients. Future profitability will likely come from the two channels leveraging
off each other, improving client base retention and growth.
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 Securities and Exchange Commission ("SEC") and a member of the National
Association of Securities Dealers, Inc. ("NASD"). The Company also has a wholly
owned subsidiary, Asset & Financial Planning, Ltd. ("AFP"), which is registered
with the SEC as an investment advisor. 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. ("PFS"), its wholly owned subsidiary, which is a licensed insurance broker,
as well as through other licensed insurance brokers.
A majority of the financial planners located in Company offices are also tax
preparers. The Company's tax preparation business is conducted predominantly in
February, March and April. During the tax season, the Company significantly
increases the number of employees involved in tax preparation. During the 2005
tax season, the Company prepared approximately 26,000 United States tax returns.
During the three months ended September 30, 2005, the Company had a loss from
continuing operations before other income and expenses of $1.0 million compared
to a loss of $1.1 million during the three months ended September 30, 2004.
At September 30, 2005 the Company had a working capital deficit of $14.3
million. At September 30, 2005 the Company had $0.4 million of cash and cash
equivalents and $3.5 million 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 fiscal years ending June 30, 2006 and 2007, though due
to the seasonality of the Company's business the Company may at times employ
short-term financing. See Note 9 of Notes to Consolidated Financial Statements
included in the Fiscal 2005 10-K for a discussion of the Company's debt.
If the Company does not comply with the financial covenants and other
obligations in its agreements relating to the Wachovia, Travelers or Rappaport
loans, 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. The financial advisor was involved in
the Company's discussions with Wachovia that resulted in Amendment No. 3 (see
Note 7 to Notes to Consolidated Financial Statements). 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.
The Company continues to redefine its product mix, placing a smaller emphasis on
the sale of variable annuities, while putting a greater emphasis on the sale of
other financial products that generate recurring income. The Company expects
that this trend will continue in future quarters. The Company is attempting to
increase revenue by, among other things, implementing its recently reestablished
representative recruiting program. If this program is not successful in
generating additional revenue, the anticipated decreases in the sales of
variable annuities, which typically generate higher upfront commissions, may
result in continued downward pressure on total revenues in future quarters until
Page 15
the Company starts to more significantly benefit from the affect of the greater
sale of products that generate recurring income. The Company expects that it
will continue to control levels of salary and general and administrative
expenses, while increasing spending on marketing efforts to build brand
awareness and attract new clients. The Company cannot predict whether its
marketing efforts will have the desired effects.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2004.
Except as noted, the numbers and explanations presented below represent results
from continuing operations only.
The following table presents revenue by product line:
For the Three Months Ended
September 30,
Unaudited
--------------------------
Revenue by Product Line 2005 2004
Brokerage $ 8,502,464 $ 8,650,380
Insurance 767,107 685,300
Advisory 2,199,991 2,168,808
Tax 462,826 517,062
Lending Services 188,765 229,680
Marketing 369,276 478,769
--------------------------
Total $12,490,429 $12,729,999
==========================
The following table presents brokerage revenue by product type:
Brokerage Revenue by Product Type
Mutual Funds $ 1,252,617 $ 1,068,562
Equities, Bonds & UIT 329,129 269,117
Variable Annuities 4,742,359 5,473,857
Limited Partnerships 92,016 13,190
Variable Life 72,812 25,648
Fixed Annuities 254,071 54,440
Trails 1,451,827 1,331,105
Miscellaneous Income 26,844 35,527
Gain/Loss Firm Trading 285,995 317,016
Unrealized Gain/(Loss) on Firm Trading (5,206) 61,918
--------------------------
Total $ 8,502,464 $ 8,650,380
==========================
The Company's total revenues for the three months ended September 30, 2005 were
$12.5 million compared to $12.7 million for the three months ended September 30,
2004, a decrease of $0.2 million or 1.9%. The majority of this decrease was
attributable to a decrease in revenues from the Company's financial planning
business. Of the decline in revenue, nearly 46.0% is attributable to a decline
in marketing (non-commissionable) revenue.
The Company's total revenues for the three months ended September 30, 2005
consisted of $12.0 million for financial planning services and $0.5 million for
tax preparation services. Financial planning services represented 96.0% and tax
preparation services represented 4.0% of the Company's total revenues during the
three months ended September 30, 2005. The Company's total revenues for the
three months ended September 30, 2004 consisted of $12.2 million for financial
planning services and $0.5 million for tax preparation services. Financial
planning services represented 96.0% and tax preparation fees represented 4.0% of
the Company's total revenues during the three months ended September 30, 2004.
Page 16
The Company continues to redefine its product mix, placing a smaller emphasis on
variable annuities, while increasing sales of other financial products that
generate recurring income. This emphasis is evidenced by this quarter's results,
where the revenue from every major brokerage services product type, other than
variable annuities, increased compared with the same quarter last year.
For the three months ended September 30, 2005, revenues from variable annuity
sales were $4.7 million compared with $5.5 million in the same quarter last
year, representing a 13.4% drop in variable annuity revenue.
For the three months ended September 30, 2005, revenues from recurring revenue
sources (managed money and trails) increased to $3.7 million, up $0.2 million
from $3.5 million for the three months ended September 30, 2004, representing a
4.3% increase in recurring revenue.
As indicated in the following table, as of September 30, 2005, assets under AFP
management increased $61.4 million, to $550.1 million, up from $488.7 million
for the same period last year. This increase is attributable to increases in
assets under management, as well as market fluctuations. As of September 30,
2005, total Company assets under custody were $4.2 billion, up $133.0 million
from the fiscal year ended June 30, 2005.
The following table presents the market values of assets under AFP management:
Market Value as of September 30,
2005 2004
--------------------------------
Variable Annuities:
Jackson National $ 60,698,226 $ 45,330,049
Hartford 54,865,559 43,807,757
Manulife 52,512,535 57,448,160
American Skandia 30,402,721 33,546,702
Allmercia 29,186,725 32,825,973
Nationwide Life 24,956,390 23,859,224
ING (Golden America) 11,633,297 7,274,963
Fidelity Selects 11,113,077 11,927,604
Dreyfus 11,111,098 14,150,452
Travelers 7,398,774 7,260,616
Equitable 7,108,236 3,196,400
Polaris 6,230,124 5,949,564
All Other 26,749,079 31,641,088
----------------------------
Subtotal 333,965,841 318,218,552
Brokerage: 216,131,126 170,431,967
----------------------------
Total Assets Under Management $550,096,967 $488,650,519
============================
The Company's commission expense for the three months ended September 30, 2005
was $7.7 million, a decrease of $0.2 million or 2.4% from $7.9 million for the
three months ended September 30, 2004. This decrease is attributable to
decreased financial planning revenue resulting primarily from decreased sales of
variable annuities.
The Company's total operating expenses for the three months ended September 30,
2005 were $5.7 million or 46.0% of revenues, a decrease of 2.9%, compared to
$5.9 million or 46.5% of revenues for the three months ended September 30, 2004.
The decrease in operating expenses was attributable to decreases in salaries,
general and administrative, and depreciation and amortization, partially offset
by increases in rent, advertising and brokerage fees and licenses. Salaries
decreased by $0.2 million, or 7.4% in the three months ended September 30, 2005
Page 17
compared with the same period last year. This decrease is attributable to
outsourcing the telemarketing center, continued efforts to reduce administrative
salary costs and decreased contributions by the Company to health care costs due
to greater health care contributions from the Company's representatives.
General and administrative expenses decreased by 5.7% in the three months ended
September 30, 2005 compared with the same period last year. This decrease is
primarily attributable to the Company's continued efforts to reduce
administrative costs throughout the organization. Partially offsetting decreases
in general and administrative expenses were increases in professional fees
attributable to litigation.
Advertising expenses increased 17.1% to $0.3 million in the three months ended
September 30, 2005. This increase is primarily attributable to the outsourcing
of the Company's telemarketing efforts. The outsourcing, however, has created a
decrease in salaries.
Brokerage fees and licenses were $0.5 million for the three months ended
September 30, 2005, up 24.7% compared with $0.4 million for the three months
ended September 30, 2004. This increase in brokerage fees is largely
attributable to the Company's increased use of outside money managers for its
AFP program.
Rent expense increased 9.7% to $0.5 million for the three months ended September
30, 2005 compared with the same period last year. Rent has been increasing as
the Company relocates some of its offices to, and opens new offices in, larger
more prominent retail locations.
The Company's loss from continuing operations before other income and expenses
for the three months ended September 30, 2005 was $1.0 million compared with
$1.1 million for the three months ended September 30, 2004, a decreased loss of
$0.1 million. This decreased loss was primarily attributable to the Company's
efforts to decrease expenses throughout the organization by decreasing payroll
costs and general and administrative expenses. The affects of decreased expenses
was partially offset by lower revenue.
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 September 30, 2005 the Company had $0.4 million in cash and
cash equivalents and $0.4 million 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, in addition, that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
one. At September 30, 2005 the Company was in compliance with this regulation.
Due to the Company's defaults on its credit facilities (see Note 7 to Notes to
Consolidated Financial Statements), the Company has not had access to banks or
other lenders or the capital markets generally for access to capital. Since
2002, the Company's only source of loan financing has been Prime Partners, of
which Michael Ryan, the Company's President, is the President, a director and a
major shareholder. For the first three months ended September 30, 2005, Prime
Partners loaned the Company an additional $0.6 million. These loans pay 10%
interest per annum. As of September 30, 2005, the Company owed Prime Partners
$1.2 million. There can be no assurance that Prime Partners will extend further
loans to the Company. In the absence of loans from Prime Partners, the Company
may not have access to sufficient funds to meet its working capital needs.
On February 17, 2004, the Company closed the sale of all of the stock of North
Ridge Securities Group and North Shore Capital Management Corp. The Company
received $0.2 million in cash at the closing, $37,500 was paid to Wachovia
against the principal of the Wachovia Loan, and the $0.9 million balance is to
be paid to the Company by the purchaser in monthly payments pursuant to the
terms of a promissory note maturing on April 1, 2016. The interest rate on the
note is equal to the prime rate at JP Morgan Chase Bank plus 2%, but the
interest rate cannot exceed 8% until January 1, 2009.
Page 18
As of August 5, 2005, the Company sold its tax preparation and financial
planning businesses associated with its Colorado Springs, Colorado office. The
tax preparation business was sold to former employees of the Company for total
consideration of $0.4 million, $0.1 million of which was paid in cash to the
Company at closing, and $0.3 million of which is subject to a promissory note
that matures on January 1, 2012. The financial planning business was sold to a
former employee of the Company for total consideration of $47,100, $23,600 of
which was paid in cash to the Company at closing, and $23,600 of which was
subject to a promissory note that matured and was paid on October 1, 2005.
In view of the Company's efforts to increase revenues, the Company does not
currently anticipate selling significant amounts of additional assets.
Accordingly, the Company does not anticipate receiving significant funds in the
near future from asset sales to meet its working capital needs.
The Company's net cash used in operating activities totaled $0.4 million for the
three months ended September 30, 2005, compared with net cash provided by
operating activities of $78,000 for the three months ended September 30, 2004.
The increase of $0.5 million in net cash used in operating activities was
primarily attributable to lower billings in Fiscal 2004 as a result of the
effects of the hurricanes in Florida, the higher levels of accounts receivable
at September 30, 2005 and declines in marketable securities due to a reduced
number of positions held by the Company's bond traders as of September 30, 2005.
Net cash provided by investing activities totaled $92,400 for the three months
ended September 30, 2005 compared to net cash provided by investing activities
of $0.3 million for the three months ended September 30, 2004. The decrease was
attributable to higher proceeds received from the sale of a building located in
Babylon, New York in the three months ended September 30, 2004 compared with
lower proceeds received from the sale of the Company's Colorado office in the
three months ended September 30, 2005.
The Company's cash flows provided by financing activities totaled $38,900 for
the three months ended September 30, 2005, compared with cash flows used in
financing activities of $0.2 million for the three months ended September 30,
2004. The improvement is due primarily to lower principal payments on bank
loans, offset slightly by reduced borrowings from related parties in 2005
compared with 2004.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has renewed its clearing agreement for a five-year term beginning
September 2005. The economic terms will be amortized over the five-year term of
this agreement ratably.
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. Due to the delisting, the
Company would also incur additional costs under state blue-sky laws if the
Company were to sell equity.
Page 19
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 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 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
2005, our independent auditors, Radin Glass & Co., LLP ("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 and accurate financial statements is a material
weakness.
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 the Company's Consolidated
Financial Statements for Fiscal 2004. In Fiscal 2005, Radin Glass, while noting
some improvements have been made in the Company's internal controls, still
identified a number of internal control deficiencies and the Company continues
to work to remedy those deficiencies.
These significant deficiencies in the design and operation of our internal
controls included (i) the need to hire additional staffing and change the
structure of the finance/accounting department in order to provide better
coordination and communication between the legal and finance/accounting
departments; (ii) the need to provide training to existing and new personnel in
SEC reporting requirements; (iii) the lack of integration of the general ledger
system with other recordkeeping systems; (iv) the need for formal control
systems for journal entries and closing procedures; (v) the need to document
internal controls over financial reporting; and (vi) the needs to form an
independent audit committee, an internal audit department and to provide
internal review procedures for schedules, SEC reports and filings prior to
submission to the auditors and/or filing with the SEC.
The Company continues its efforts to remediate these conditions and has and will
continue to implement enhanced procedures to accelerate improvement of its
internal controls. For example, the Company continues to implement specific
changes in its internal controls and has submitted SEC filings within the
prescribed due dates for the last eight quarters.
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
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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 Exchange 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 as of the end of the quarter ended
September 30, 2005 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 are effective at the reasonable assurance
level to ensure that the information required to be disclosed on the reports
filed or submitted by the Company under the Exchange Act is recorded, processed,
summarized and reported within the requisite time periods, including ensuring
that such material information is accumulated and communicated to the Company's
management to allow timely decisions regarding required disclosure.
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.
Except as described above, no change occurred in the Company's internal controls
concerning financial reporting during the quarter ended September 30, 2005 that
has materially affected or is reasonably likely to materially affect the
Company's internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 7 to Notes to Consolidated Financial Statements herein.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Accounting Officer.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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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: November 14, 2005 By: /s/ Michael P. Ryan
------------------------
Chief Executive Officer
Dated: November 14, 2005 By: /s/ Dennis Conroy
------------------------
Chief Accounting Officer
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