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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
FOR THE FISCAL YEAR ENDED JUNE 30, 2003 COMMISSION FILE NUMBER 000-22996
GILMAN + CIOCIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2587324
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK, 12603
(address of principal executive offices)
(845) 485-3300
(Registrant's Telephone Number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |_| No |X|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the registrant's voting and non-voting common
equity held by non-affiliates as of June 30, 2003 was $992,569 based on a sale
price of $0.15.
As of January 20, 2004, 10,171,161 shares of the registrant's common equity were
outstanding.
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act 12b-2) Yes |_| No |X|
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
1
GILMAN + CIOCIA, INC.
REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I
Item 1. Description of Business................................................................................... 3
Item 2. Properties................................................................................................ 15
Item 3. Legal Proceedings......................................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................... 16
Item 6. Selected Consolidated Financial Data...................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................ 35
Item 8. Consolidated Financial Statements and Supplementary Data.................................................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 76
Item 9A. Controls and Procedures .................................................................................. 77
PART III
Item 10. Directors and Executive Officers of the Registrant........................................................ 77
Item 11. Executive Compensation.................................................................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............ 85
Item 13. Certain Relationships and Related Transactions............................................................ 87
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................... 88
SIGNATURES............................................................................................................ 91
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, the
"Company") is a corporation that was organized in 1981 under the laws of the
State of New York and reincorporated under the laws of the State of Delaware in
1993. The Company provides financial planning services, including securities
brokerage, insurance and mortgage agency services, and federal, state and local
tax preparation services to individuals, predominantly in the middle and upper
income tax brackets. In Fiscal 2003*, approximately 89% of the Company's
revenues were derived from commissions on financial planning services and
approximately 11% were derived from fees for tax preparation services. As of
June 30, 2003, the Company had 43 offices operating in 5 states (New York, New
Jersey, Connecticut, Florida and Colorado). The Company's Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K can be
obtained, free of charge, on the Company's web site at www.gilcio.com.
In Fiscal 2003, the Company had total revenues of $62.9 million representing a
decrease of $4.6 million from revenues from continuing operations in Fiscal
2002. See Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered losses from operations in
each of its last four years and is in default under its three largest financing
agreements raising substantial doubt about its ability to continue as a going
concern. During Fiscal 2003, the Company incurred net losses of $14,028,251 and
at June 30, 2003 had a working capital deficit of $19,302,466. The Company's
ability to continue as a going concern and its future success is dependent on
its ability to reduce costs and generate revenues. See Note 1 to Consolidated
Financial Statements.
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. Another of its lenders, Travelers
Insurance Company ("Travelers") 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.
See "Recent Developments" and Note 9 to Consolidated Financial Statements.
RECENT DEVELOPMENTS
Change in Management and Auditors. During Fiscal 2003, the Company underwent a
transition in senior management and in the composition of its Board of
Directors. On August 8, 2002, Michael Ryan was appointed President and Chief
Executive Officer of the Company, Thomas Povinelli resigned as the Company's
President and Chief Executive Officer and as a director of the Company, and
David Puyear resigned as the Company's Chief Financial Officer. In addition, on
August 8, 2002, Edward H. Cohen, Steve Gilbert and Michael Ryan were added to
the Board. On May 15, 2003, Louis Karol and Doreen Biebusch resigned from the
Board, and on July 24, 2003, Seth Akabas resigned from the Board.
* Fiscal years are denominated by the year in which they end. Accordingly,
Fiscal 2003 refers to the year ended June 30, 2003.
3
On August 27, 2002, the Company switched independent auditors from Arthur
Andersen LLP to Grant Thornton LLP. On November 7, 2003, the Company switched
independent auditors from Grant Thornton LLP to Radin Glass & Co. LLP. See Item
9 "Changes in and Disagreement with Accountants and Accounting and Financial
Disclosure."
SEC Investigations. The Company is the subject of a formal investigation by the
Securities and Exchange Commission ("SEC"). The investigation concerns, among
other things, the restatement of the Company's financial results for Fiscal 2001
and the fiscal quarters ended March 31, 2001 and December 31, 2001 (which have
been previously disclosed in the Company's amended annual and quarterly reports
for such periods), the Company's delay in filing Form 10-K for Fiscal 2002 and
2003 and the Company's past accounting and recordkeeping practices. The Company
had previously received informal, non-public inquiries from the SEC regarding
certain of these matters. On March 13, 2003, three of the Company's executives
received subpoenas from the SEC requesting that they produce documents and
provide testimony in connection with such investigation and on March 19, 2003,
the Company received a subpoena requesting that it produce documents. The
Company and its executives have complied and intend to continue to comply fully
with the requests contained in the subpoenas and with the SEC's investigation.
In addition, the Company has been advised that the SEC wanted to interview
certain former officers, directors and employees of the Company. The Company
does not believe that the investigation will have a material effect on the
Company's Consolidated Financial Statements. On January 13, 2004 the Company
received subpoenas for two executives to be re-interviewed. One of the
executives is no longer with the Company. Both of these interviews are currently
scheduled.
Pinnacle Transaction and Sale of Other Offices. On November 26, 2002, effective
as of September 1, 2002, the Company finalized a transaction with Pinnacle Tax
Advisors LLC ("Pinnacle"), whereby Pinnacle, an entity controlled by Thomas
Povinelli and David Puyear, former executive officers of the Company, purchased
47 of the Company's offices (the "Pinnacle Purchased Offices"). The Pinnacle
Purchased Offices together represented approximately $17,690,000 in revenues, or
approximately 19.0% of the Company's total revenues, for Fiscal 2002. As part of
the sale, Pinnacle assumed approximately $1,830,000 in debt and other payables
of approximately $400,000, subject to creditor approval. Also as part of the
sale, 137 employees of the Company were terminated and were hired by Pinnacle.
In addition, all registered representatives in the Pinnacle Purchased Offices
transferred their broker-dealer registrations to Royal Alliance Associated
("Royal").
The net purchase price payable by Pinnacle was $4,745,463, subject to final
adjustments. Of that amount, $3,422,108 was to be paid pursuant to a promissory
note (the "Initial Note") and the balance of $1,323,355, subject to final
adjustments and less certain debts of the Company that Pinnacle assumed, was to
be paid pursuant to a second promissory note (the "Second Note"). The Initial
Note was guaranteed by Mr. Povinelli and Mr. Puyear and Mr. Povinelli pledged
the Company's common stock owned by him to secure the Initial Note. The Second
Note was secured by Pinnacle's assets. The Initial Note was also are secured by
a collateral assignment of 75% of Pinnacle's commission overrides to be paid to
Pinnacle from Royal. The Initial Note was due and payable on the earlier of
February 26, 2003 or the date that Pinnacle closed a debt or equity financing.
The Second Note was payable in three equal consecutive annual installments. Due
to the uncertainties associated with the payment on the Initial Note and Second
Note and Pinnacle's payment under equipment subleases and rent leases assumed by
it, the Company deferred any gain recognition until the proceeds from the
Initial Note and Second Note were received. Mr. Povinelli transferred 1,048,616
of his Company shares to the Company for a credit of approximately $230,000
against the principal due on the Initial Note. Due to the uncertainly of the
transaction, these shares are included in the Company's outstanding shares as of
June 30, 2003. As of June 30, 2003, the Company had recognized a gain of
$488,772 from the sale to Pinnacle. In January, 2003, the Company asserted that
Pinnacle was in default under the Initial Note, the Second Note and the
equipment subleases. On May 16, 2003, the Company initiated a lawsuit against
Pinnacle seeking payment for all amounts due. On December 4, 2003, the Company
settled its lawsuit with Pinnacle and all amounts due and owing by Pinnacle to
the Company were collected. However, subsequent to the settlement, the Company
still remains liable to lessors of equipment and landlords for certain leases
assigned to Pinnacle and will have to pay such lessors and landlords if Pinnacle
does not pay. The aggregate of these lease amounts is $5,265,164. See Note 20 to
Consolidated Financial Statements.
4
During Fiscal 2003, the Company sold in separate transactions 13 of its offices
to the respective managers of those offices. The aggregate sales price for the
13 offices was $2,332,324, consisting of $490,091 in cash and $1,842,233 in
promissory notes, plus an undetermined contingent amount based on 2003 revenues.
Due to uncertainties associated with the payment of these promissory notes, the
Company has reserved $330,000 of the balance due. The Company recognized a loss
of $72,292 on the sale of these offices in Fiscal 2003.
Debt Defaults .During Fiscal 2003, the Company was in default of its $7.0
million term loan/revolving letter of credit financing with Wachovia (the
"Wachovia Loan"). The Company had changed its control without Wachovia's consent
and failed to meet requirements under the loan to pay scheduled debt service and
to maintain certain financial ratios, including senior funded debt to EBITDA.
The Company and Wachovia entered into a Forbearance Agreement dated as of
November 27, 2002 (the "Forbearance Agreement"), whereby the Company paid the
scheduled debt service to Wachovia and Wachovia agreed to forbear from enforcing
its default remedies and extended the time of payment for the loans and the
interest rate charged on the loans was increased.
On March 5, 2003, the Company received a notice of default from the attorneys
for Wachovia, alleging that the Company was in default for selling eleven
offices without the written consent of Wachovia; failing to remit to Wachovia
the proceeds of the sales of the offices; and failing to provide to Wachovia the
monthly reports required under the Forbearance Agreement. By letter dated March
10, 2003, counsel for Wachovia advised the Company that Wachovia rescinded the
notice of default and Wachovia consented to the sale of certain Company offices.
Upon a subsequent review of the Forbearance Agreement, on March 21, 2003 the
Company notified the attorneys for Wachovia that it was not in compliance with
the following provisions of the Forbearance Agreement: late filing of several
local personal property tax returns and the late payment of the taxes owed; late
payment of several local license fees and late payment of several vendors of
materials and supplies; and failure to make rent payments on a few vacant
offices for which the Company was negotiating workout payments with the
landlords. The total amount due for these payables was not material and Wachovia
did not issue a notice of default for any of the items.
At a meeting with Wachovia on May 13, 2003, the Company notified Wachovia that
it was in technical default under the Forbearance Agreement for failing to pay
payroll tax withholdings due which resulted from a bookkeeping error from
switching to a new payroll company. All payroll tax withholdings were
immediately paid by the Company after discovering the error and Wachovia did not
issue a note of default for the error.
In an Amendment to Forbearance Agreement entered into between the Company and
Wachovia as of June 18, 2003, the maturity date of the Wachovia Loan was
extended to July 1, 2004. In addition, Wachovia rescheduled certain principal
payments.
During Fiscal 2003, the Company may also have been in default of its $5 million
financing with Travelers. On September 24, 2002, the Company received a notice
from the attorneys for Travelers alleging that the Company was in default due to
nonpayment of a $100,000 penalty for failure to meet certain sales production
requirements. The Company sent a letter to the attorneys denying that the
Company was in default. Although the Traveler's notice stated that all unpaid
interest and principal under the Travelers facility were immediately due and
payable and that Travelers reserved its rights and remedies under the facility,
it also stated that Travelers intended to comply with the terms of a
subordination agreement between Travelers and Wachovia. Such subordination
agreement restricts the remedies which Travelers could pursue against the
Company. No further notices have been received from Travelers.
The Company is also in default under the $1 million loan from Rappaport, which
was due October 30, 2002. Rappaport is entitled to receive 15,000 shares of the
Company's common stock per month as additional penalties until the loan is paid
in full.
See Note 9 to Consolidated Financial Statement for a complete discussion of the
Company's debt.
Joint Venture Termination
In July 1999, the Company formed a joint venture corporation, GTAX/Career
Brokerage, Inc. ("GTAX/CB"), with Feingold & Scott, Inc., a company engaged in
the wholesaling of insurance and annuity products. GTAX/CB was formed to become
a licensed insurance agent in all states in which the Company markets insurance
and annuity products and to act as a licensed entity for the sale by the Company
of life insurance, long term health care insurance and fixed annuity products.
In December 2002, all of the capital stock of Feingold & Scott was purchased by
Bisys Insurance Services Holding Corp. ("Bisys"). On March 23, 2003, Bisys sent
the Company a written notice terminating the joint venture relationship
effective as of March 21, 2004. The Company is negotiating a Preferred Sale
Agreement with Bisys, whereby Bisys will provide insurance distribution services
to the company and the joint venture will be terminated.
5
TAX RETURN PREPARATION
The Company prepares federal, state and local income tax returns for
individuals, predominantly in the middle and upper income tax brackets. The
United States Internal Revenue Service (the "IRS") reported that more than
130,000,000 individual 2002 federal income tax returns were filed in the United
States through June 30, 2003. According to the IRS, a paid preparer completes
approximately 50% of the tax returns filed in the United States each year. Among
paid preparers, H&R Block, Inc. ("H&R Block") dominates the low-cost tax
preparation business with approximately 10,000 offices located throughout the
United States. According to information released by H&R Block, H&R Block
prepared an aggregate of approximately 18 million United States tax returns
during the 2003 tax season. During the 2003 tax season, the Company prepared
approximately 32,000 United States tax returns through its 44 offices. The tax
preparation industry is highly fragmented and includes regional tax preparation
services, accountants, attorneys, small independently owned companies, and
financial service institutions that prepare tax returns as ancillary parts of
their business. The ability to compete in this market depends in large part on
the geographical area, specific location of the tax preparation office, local
economic conditions, quality of on-site office management and the ability to
file tax returns electronically with the IRS.
Tax Preparation Services. The preparation of a tax return by the Company
generally begins with a personal meeting at a Company office between a client
and a specially trained employee of the Company. At the meeting, the Company's
employee solicits from the client the information concerning income, deductions,
family status and personal financial information necessary to prepare the
client's tax return. After the meeting, the employee prepares drafts of the
client's tax returns. After review and final correction by the employee, the
returns are delivered to the client for filing.
The Company believes that it offers clients a cost effective tax preparation
service compared to services provided by accountants and tax attorneys and many
independent tax preparers. The Company's volume allows it to provide uniform
service at competitive prices. In addition, as compared to certain of its
competitors that are open only during tax season, all of the Company's offices
are open year round due to the demand for financial planning services. As a
result, the Company has avoided opening offices specifically for tax season and
closing them after the peak period.
Since 1990, the IRS has made electronic filing available throughout the United
States. The Company has qualified to participate in the electronic filing
program with the IRS and state tax departments and offers clients the option of
filing their federal and state income tax returns electronically. Under this
system, the final federal income tax return is transmitted to the IRS through a
publicly available software package. Electronic filing reduces the amount of
time required for a taxpayer to receive a Federal tax refund and provides
assurance to the client that the return, as filed with the IRS, is
mathematically accurate. If the client desires, he or she may have his or her
refund deposited by the Treasury Department directly into his or her account at
a financial institution designated by the client.
As part of its electronic filing program, Refund Anticipation Loans ("RAL's")
are also available to the clients of the Company through arrangements with
approved banking institutions. Using this service, a client is able to receive a
check in the amount of his or her federal refund (less fees charged by the
Company and banking institutions) drawn on an approved bank, at the office where
he or she had his or her return prepared. RAL's are recourse loans secured by
the taxpayer's refund. The Company acts only as a facilitator between the client
and the bank in preparing and submitting the loan documentation and receives a
fee for these services payable upon consummation of the loan. None of the
Company's funds are used to finance these loans, and the Company has no
liability for repayment of these loans.
Tax Preparers. The Company's tax preparation business is conducted predominantly
in the months of February, March and April, when most individuals prepare their
federal, state and local income tax returns. During the tax season, the Company
increases the number of employees involved in the tax return segment of its
business to 145. Almost all of the Company's professional tax preparers have tax
preparation experience and the Company has specifically tested and trained each
one to meet the required level of expertise to properly prepare tax returns. A
large percentage of the Company's seasonal employees return in the next year.
6
The Company's tax preparers are generally not certified public accountants.
Therefore, they are limited in the representation that they can provide to
clients of the Company in the event of an audit by the IRS. Only an attorney, a
certified public accountant or a person specifically enrolled to practice before
the IRS can represent a taxpayer in an audit.
Potential Liabilities. The Company's tax preparation business subjects it to
potential civil liabilities under the Internal Revenue Code for knowingly
preparing a false return or not complying with all applicable laws and
regulations relating to preparing tax returns. Although the Company believes
that it complies with all applicable laws and regulations, no assurance can be
given that the Company will not incur any material fines or penalties. In
addition, the Company does not maintain professional liability or malpractice
insurance policies. No assurance can be given that the Company will not be
subject to professional liability or malpractice suits. The Company has never
incurred any material fines or penalties from the IRS and has never been the
subject of a malpractice lawsuit for tax preparation.
FINANCIAL PLANNING
The Company provides financial planning services, including securities
brokerage, insurance and annuity brokerage and mortgage agency services, to
individuals, predominantly in the middle and upper income tax brackets. While
preparing tax returns, clients often consider other aspects of their financial
needs, such as insurance, investments, retirement and estate planning. To
capitalize on this situation, the Company offers every client the opportunity to
complete a questionnaire that discloses information on his or her financial
situation. Financial planners subsequently review these questionnaires and
evaluate whether the client may benefit from financial planning services. Upon
request, the client is then introduced to a financial planner. The IRS prohibits
tax preparers from using information on a taxpayer's tax return for certain
purposes involved in the solicitation of other business from such taxpayer
without the consent of such taxpayer. The Company believes that it complies with
all applicable IRS regulations.
Most middle and upper income individuals require a variety of financial planning
services. If the client seeks insurance or annuity products in connection with
the creation of a financial plan, he or she is referred to a financial planner
employed by the Company who is also an authorized agent of an insurance
underwriter. If the client seeks mutual fund products or other securities for
investment, he or she is referred to a financial planner employed by the Company
who is also a registered representative of one of the broker-dealer subsidiaries
of the Company.
Approximately 40 of the Company's offices provide both tax preparation and
financial planning services. The remaining Company offices provide tax
preparation services, but have no regular financial planner associated with
them, although financial planners from other offices work with clients from
these offices. A majority of the Company's financial planners are also tax
preparers. Approximately 5,500 securities broker-dealers are registered in the
United States, some of which provide financial planning services similar to
those offered by the Company. A large number of these professionals are
affiliated with larger financial industry firms. The remaining portion of the
financial planning industry is highly fragmented with services provided by
certified financial planners, stockbrokers and accountants.
Relationship with Securities Broker-Dealer. All of the Company's financial
planners are registered representatives of either Prime Capital Services, Inc.
("Prime") or North Ridge Securities ("North Ridge"), wholly owned subsidiaries
of the Company (together, the "Broker/Dealer Subsidiaries"). Each Broker/Dealer
Subsidiary 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. Each Broker/Dealer
Subsidiary is a registered securities broker-dealer with the SEC and a member of
the National Association of Securities Dealers ("NASD").
7
To become a registered representative, a person must pass one or more of a
series of qualifying exams administered by the NASD that test the person's
knowledge of securities and related regulations. Thereafter, the Broker-Dealer
Subsidiaries supervise the registered representatives with regard to all
regulatory matters. In addition to certain mandatory background checks required
by the NASD, the Company also requires that each registered representative
respond in writing to a background questionnaire. The Broker/Dealer Subsidiaries
have been able to recruit and retain experienced and productive registered
representatives who seek to establish and maintain personal relationships with
high net worth individuals. The Broker/Dealer Subsidiaries generally do not hire
inexperienced brokers or trainees to work as registered representatives. The
Company believes that continuing to add experienced, highly productive
registered representatives is an integral part of its growth strategy.
If clients of the Company inquire about the acquisition or sale of investment
securities, they are directed to a registered representative. The registered
representatives are able to effect transactions in such securities at the
request of clients and retain a certain percentage of the commissions earned on
such transactions. All security transactions are introduced and cleared on a
fully disclosed basis through a clearinghouse broker that is a member of the New
York Stock Exchange; in the case of Prime, National Financial Services Corp.,
which is a wholly owned subsidiary of Fidelity Investments, and in the case of
North Ridge, Pershing & Co., the clearing division of Donaldson, Lufkin and
Jenrette. About 90% of the securities transactions handled by registered
representatives of the Broker-Dealer Subsidiaries involve mutual funds, variable
annuities, managed money products and variable life insurance. The balance of
their business comprises stocks, bonds and other securities.
The Company also has a wholly owned subsidiary, Asset & Financial Planning,
Ltd., which is registered with the SEC as an investment advisor.
Relationship with Authorized Agents of Insurance Underwriters. Certain of the
Company's financial planners are also authorized agents of insurance
underwriters. If clients of the Company inquire about insurance products, they
are directed to one of these authorized agents. These agents are able, through
several insurance underwriters, to sell insurance products to clients and are
paid a certain percentage of the commissions earned on such sales. The Company's
wholly owned subsidiary, Prime Financial Services, Inc., is an authorized
insurance agent in approximately thirty states.
Regulation. The Broker/Dealer Subsidiaries' business, and the securities
industry in general, are subject to extensive regulation in the United States at
both the federal and state levels, as well as by self-regulatory organizations
("SRO's").
The SEC is the federal agency primarily responsible for the regulation of
broker-dealers and investment advisers doing business in the United States. Each
of the Broker/Dealer Subsidiaries is registered as a broker-dealer with the SEC.
Certain aspects of broker-dealer regulation have been delegated to securities
industry SRO's, principally the National Association of Securities Dealers
("NASD") and the New York Stock Exchange ("NYSE"). These SRO's adopt rules
(subject to SEC approval) that govern the industry, and, along with the SEC,
conduct periodic examinations of the Broker/Dealer Subsidiaries' operations.
Each of the Broker/Dealer Subsidiaries is a member of the NASD. The Board of
Governors of the Federal Reserve System promulgates regulations applicable to
securities credit transactions involving broker-dealers Securities firms are
also subject to regulation by state securities administrators in those states in
which they conduct business.
Broker-dealers are subject to regulations covering all aspects of the securities
industry, including sales practices, trade practices among broker-dealers,
capital requirements, the use and safekeeping of clients' funds and securities,
recordkeeping and reporting requirements, supervisory and organizational
procedures intended to insure compliance with securities laws and to prevent
unlawful trading on material nonpublic information, employee related matters,
including qualification and licensing of supervisory and sales personnel,
limitations on extensions of credit in securities transactions, clearance and
settlement procedures, requirements for the registration, underwriting, sale and
distribution of securities and rules of the SRO's designed to promote high
standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations concerns the relationship between
broker-dealers and their clients. As a result, many aspects of the relationship
between broker-dealers and clients are subject to regulation, including, in some
instances, requirements that brokers make "suitability" determinations as to
certain customer transactions, limitations on the amounts that may be charged to
clients, timing of proprietary trading in relation to client's trades, and
disclosures to clients.
8
Additional legislation, changes in rules promulgated by the SEC, state
regulatory authorities or SRO's, or changes in the interpretation or enforcement
of existing laws and rules may directly affect the mode of operation and
profitability of broker-dealers. The SEC, SRO's and state securities commission
may conduct administrative proceedings which can result in censure, fines, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulating
and disciplining broker-dealers is for the protection of customers and the
securities markets, not the protection of creditors or shareholders of
broker-dealers.
As registered broker-dealers, the Broker-Dealer Subsidiaries are required to
establish and maintain a system to supervise the activities of their retail
brokers, including their independent contractor offices and other securities
professionals. The supervisory system must be reasonably designed to achieve
compliance with applicable securities laws and regulations, as well as SRO
rules. The SRO's have established minimum requirements for such supervisory
systems; however, each broker-dealer must establish procedures that are
appropriate for the nature of its business operations. Failure to establish and
maintain an adequate supervisory system may result in sanctions imposed by the
SEC or a SRO that could limit the Broker/Dealer Subsidiaries' abilities to
conduct their securities business. Moreover, under federal law and certain state
securities laws, the Broker/Dealer Subsidiaries may be held liable for damages
resulting from the unauthorized conduct of their account executives to the
extent that the Broker/Dealer Subsidiaries have failed to establish and maintain
an appropriate supervisory system.
MARKETING
The Company markets its services principally through direct mail, promotions and
seminars. The majority of clients in each office return to the Company for tax
preparation services during the following year.
Direct Mail. Each year, prior to and during the tax season when individuals file
federal, state and local income tax returns, the Company sends direct mail
advertisements to each residence in the area surrounding the Company's offices.
The direct mail advertising solicits business principally for the Company's tax
preparation services. A large majority of the Company's new clients each year
are first introduced to the Company through its direct mail advertising.
Seminars. The Company supports its Registered Representatives by advertising
their local financial planning seminars. At these seminars, prospective new
clients can learn about a wide variety of investment products and tax planning
opportunities.
Telemarketing. The Company promotes its Registered Representatives' financial
planning seminars through the Company's telemarketing center.
Online. The Company currently has a web site on the Internet at
http://www.gilcio.com for income tax and financial planning advice and Company
information, including financial information and the latest news releases.
Other Marketing. The Company also prints and distributes brochures, flyers and
newsletters about its services, and advertises in newspapers, on the radio and
on billboards on highways and in train stations.
The Company believes that its most promising market for in-office tax
preparation expansion may lie in areas of above average population growth.
Individuals usually retain a local tax preparer in connection with their
individual tax returns. When people move, they usually seek to find a new income
tax preparer. At or shortly after the time that they move, therefore,
individuals are most susceptible to the direct mail advertising of the Company's
tax preparation services.
ACQUISTIONS
The Company's current strategy is not to actively pursue acquisitions.
COMPETITION
Competitors include companies specializing in income tax preparation as well as
companies that provide general financial services. Many of these competitors, in
the tax preparation field, including H&R Block, and many well-known brokerage
9
firms in the financial service field have significantly greater financial and
other resources than the Company. The Company's online tax preparation
competitors are primarily Intuit and HR Block.com. An increasing number of
taxpayers are using software programs to prepare their own income tax returns.
The Company believes that the primary elements of competition are convenience,
location, local economic conditions, quality of on-site management, quality of
service, price, and with respect to online operations, effective affiliation
campaigns and ease of using the service. There is no assurance that the Company
will be able to compete successfully with larger and more established companies.
In addition, the Company may suffer from competition from departing employees
and financial planners. Although the Company attempts to restrict such
competition contractually, as a practical matter enforcement of contractual
provisions prohibiting small scale competition by individuals is difficult. The
Company's success in managing the expansion of its business depends in large
part upon its ability to hire, train, and supervise seasonal personnel. If this
labor pool is reduced or if the Company is required to provide its employees
higher wages or more extensive and costly benefits due to competitive reasons,
the expenses associated with the Company's operations could be substantially
increased without the Company receiving offsetting increases in revenues.
TRADEMARKS
The Company has registered its "Gilman + Ciocia" trademark and its "e1040.com"
trademark with the U.S. Patent and Trademark Office. There is no assurance that
the Company would be able to successfully defend its trademarks if forced to
litigate their enforceability. The Company believes that its trademark "Gilman +
Ciocia" constitutes a valuable marketing factor. If the Company were to lose the
use of such trademark, its sales could be adversely affected.
EMPLOYEES
As of June 30, 2003, the Company employed 390 persons on a full-time, full-year
basis, including 3 officers. During tax season, the Company employs
approximately 145 seasonal employees who do only tax preparation or provide
support functions. Approximately 70% of the Company's seasonal employees return
the following year and the Company uses advertisements in online job sites to
meet the balance of its recruiting needs. The minimum requirements for a tax
preparer at the Company are generally some tax preparation experience and a
passing grade on an examination given by the Company. More than half of the
Company's full-year tax preparers are also registered representatives with one
of the Broker/Dealer Subsidiaries.
Each of the registered representatives licensed with the Broker-Dealer
Subsidiaries (except the officers of the Company) has entered into a commission
sharing agreement with the Company. Each such agreement generally provides that
a specified percentage of the commissions earned by the Company are paid to the
registered representative. In the commission sharing agreements, the employee
registered representatives also agree to maintain certain Company information as
confidential and not to compete with the Company. Approximately 209 independent
registered representatives are also affiliated with one of the Broker/Dealer
Subsidiaries and have entered into commission sharing agreements with such
Broker/Dealer Subsidiary.
Each of the insurance agents has entered into a commission sharing agreement
with the Company. Each agreement generally provides that a specified percentage
of the commissions earned by the Company are paid to the agent. In the
commission sharing agreements, the employee agents also agree to maintain
certain Company information as confidential and not to compete with the Company.
On November 26, 2002, the Company finalized the transaction with Pinnacle and
sold to Pinnacle 47 offices and all assets which were associated with the
operations of the Purchased Offices (see Note 20 to Consolidated Statements for
a complete discussion of the Pinnacle sale). As part of the sale of the 47
offices, 137 employees of the offices sold were terminated by the Company as of
November 15, 2002 and were hired by Pinnacle.
RISK FACTORS
This Form 10-K contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Form 10-K, the words
"anticipate", "believe", "estimate", "should", "expect" and other similar
10
expressions, as they relate to the Company or its management, are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below.
Substantial Doubt About Ability to Continue as a Going Concern. Investors should
not rely on past revenues as a prediction of future revenues. Additionally, the
Company's June 30, 2003 Consolidated Financial Statements have been prepared
assuming the Company will continue as a going concern. However, the Company has
suffered losses from operations in each of its last four years and is in default
of its three largest financing agreements raising substantial doubt about its
ability to continue as a going concern. As a result of these defaults, the
Company's debt s to those lenders are classified as current liabilities on its
financial statements. See Note 9 to Consolidated Financial Statements.,
If the Company does not comply with the financial covenants and other
obligations in its loan agreement with Wachovia, Travelers or Rappaport, or its
agreements with other lenders, and such lenders elected to pursue their
available remedies, the Company's operations and liquidity would be materially
adversely affected and the Company could be forced to cease operations.
SEC Investigations. The Company is the subject of a formal investigation by the
Securities and Exchange Commission ("SEC"). The investigation concerns, among
other things, the restatement of the Company's financial results for Fiscal 2001
and the fiscal quarters ended March 31, 2001 and December 31, 2001 (which have
been previously disclosed in the Company's amended annual and quarterly reports
for such periods), the Company's delay in filing Form 10-K for Fiscal 2002 and
2003 and the Company's past accounting and recordkeeping practices. The Company
had previously received informal, non-public inquiries from the SEC regarding
certain of these matters. On March 13, 2003, three of the Company's executives
received subpoenas from the SEC requesting that they produce documents and
provide testimony in connection with such investigation and on March 19, 2003,
the Company received a subpoena requesting that it produce documents. The
Company and its executives have complied and intend to continue to comply fully
with the requests contained in the subpoenas and with the SEC's investigation.
In addition, the Company has been advised that the SEC wanted to interview
certain former officers, directors and employees of the Company. In addition, on
January 13, 2004 the Company received subpoenas for two executives to be re-
interviewed. One of the executives in no longer with Company. The Company does
not believe that the investigation will have a material effect on the Company's
Consolidated Financial Statements.
Delisting of Company Shares. The shares of the Company's Common Stock were
delisted from the NASDAQ national market in August 2002 and are now traded in
the over-the-counter market on what is commonly referred to as the "pink
sheets". As a result, an investor may find it more difficult to dispose of or
obtain accurate quotations as to the market value of the securities. In
addition, the Company is now subject to Rule 15c2-11 promulgated by the SEC. If
the Company fails to meet criteria set forth in such Rule (for example, by
failing to file periodic reports as required by the Exchange Act), various
practice requirements are imposed on broker-dealers who sell securities governed
by the Rule to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
Rule may have a materially adverse effect on the ability of broker-dealers to
sell the Company's securities, which may materially affect the ability of
shareholders to sell the securities in the secondary market.
The delisting could make trading the Company's shares more difficult for
investors, potentially leading to further declines in share price. It would also
make it more difficult for the company to raise additional capital. The Company
will also incur additional costs under state blue-sky laws if it sells equity
due to its delisting.
General Business Risks. If the financial planners that the Company presently
employs or recruits do not perform successfully, the Company's operations may be
adversely affected. The Company plans to continue to expand into the area of
financial planning, by expanding the business of presently employed financial
planners and by recruiting additional financial planners. The Company's revenue
growth will in large part depend upon the expansion of existing business and the
successful integration and profitability of the recruited financial planners.
The Company's growth will also depend on the successful operation of independent
financial planners who are recruited to join the Company. The financial planning
segment of the Company's business has generated an increasing portion of the
Company's revenues during the past few years, and if such segment does not
continue to be successful, the Company's rate of growth may decrease.
11
The Consolidated Financial Statements do not include any adjustments that might
result due to these events or from the uncertainties of a shift in the Company's
business.
If the tax preparation practices that the Company owns and acquires do not
perform successfully, the Company's operations may be adversely affected. As
part of its strategy, the Company has historically pursued the acquisition of
tax preparation practices. However, the Company's current strategy is not to
actively pursue acquisitions until such time that sufficient working capital is
available. The future success of the Company will in part depend upon the
successful operation of existing practices and the integration of newly acquired
businesses into the Company. A rapid acquisition of offices that are not
profitable would reduce the Company's net income and could depress future
operating results. If the acquired companies do not perform as expected, or if
the Company cannot effectively integrate the operations of the acquired
companies, the Company's operating results could be materially adversely
affected.
The Company may choose to open new offices. When the Company opens a new office,
the Company incurs significant expenses to purchase furniture, equipment and
supplies. The Company has found that a new office usually suffers a loss in its
first year of operation, shows no material profit or loss in its second year of
operation and does not attain profitability, if ever, until its third year of
operation. Therefore, the Company's operating results could be materially
adversely affected in any year that the Company opens a significant number of
new offices. However, the Company's current strategy does not contemplate
opening many new offices. .
If the financial markets deteriorate, the Company's financial planning segment
will suffer decreased revenues as was the case in Fiscal 2002. The Company's
revenue and profitability may be adversely affected by declines in the volume of
securities transactions and in market liquidity, which generally result in lower
revenues from trading activities and commissions. Lower securities price levels
may also result in a reduced volume of transactions as well as losses from
declines in the market value of securities held in trading, investment and
underwriting positions. In periods of low volume, the fixed nature of certain
expenses, including salaries and benefits, computer hardware and software costs,
communications expenses and office leases, will adversely affect profitability.
Sudden sharp declines in market values of securities and the failure of issuers
and counterparts to perform their obligations can result in illiquid markets in
which the Company may incur losses in its principal trading and market making
activities.
Competition from Other Companies. If competitors in the industry began to
encroach upon the Company's market share, the Company's operations may be
adversely affected. The income tax preparation and financial planning services
industries are highly competitive. The Company's competitors include companies
specializing in income tax preparation as well as companies that provide general
financial services. The Company's principal competitor is H+R Block, Inc. in the
tax preparation field and many well-known national brokerage and insurance firms
in the financial services field. Many of these competitors have larger market
shares and significantly greater financial and other resources than the Company.
The Company may not be able to compete successfully with such competitors.
Competition could cause the Company to lose existing clients, slow the growth
rate of new clients and increase advertising expenditures, all of which could
have a material adverse effect on the Company's business or operating results.
Competition from Departing Employees. If a large number of the Company's
departing employees and financial planners were to enter into competition with
the Company, the Company's operations may be adversely affected. Departing
employees and financial planners may compete with the Company. Although the
Company attempts to restrict such competition contractually, as a practical
matter, enforcement of contractual provisions prohibiting small scale
competition by individuals is difficult. In the past, departing employees and
financial planners have competed with the Company. They have the advantage of
knowing the Company's methods and, in some cases, having access to the Company's
clients. No assurance can be given that the Company will be able to retain its
most important employees and financial planners or that the Company will be able
to prevent competition from them or successfully compete against them. If a
substantial amount of such competition occurs, the corresponding reduction of
revenue may materially adversely affect the Company's operating results.
12
Departure of Key Personnel. If any of the Company's key personnel were to leave
its employ, the Company's operations may be adversely affected. The Company
believes that its ability to successfully implement its business strategy and
operate profitably depends on the continued employment of James Ciocia, its
Chairman of the Board, Michael P. Ryan, its President and Chief Executive
Officer and President of its Prime subsidiary, Ted Finkelstein, its Vice
President and General Counsel, Kathryn Travis, its Secretary, Carole Enisman,
the Chief Operating Officer of its Prime subsidiary, Daniel Levy, the President
of its North Ridge subsidiary, and Dennis Conroy, its Chief Accounting Officer.
Michael P. Ryan and Carole Enisman are married. If any of these individuals
become unable or unwilling to continue in his or her present position, the
Company's business and financial results could be materially adversely affected.
Tax Return Preparation Malpractice. The Company's business of preparing tax
returns subjects it to potential civil liabilities for violations of the
Internal Revenue Code or other regulations of the IRS, although the Company has
never been assessed with material civil penalties or fines. If a Company
violation resulted in a material fine or penalty, the Company's operating
results could be materially adversely affected. In addition, the Company does
not maintain any professional liability or malpractice insurance policies for
tax preparation. The Company has never been the subject of a tax preparation
malpractice lawsuit, however, the significant uninsured liability and the legal
and other costs relating to such claims could materially adversely affect the
Company's business and operating results.
In addition, making fraudulent statements on a tax return, willfully delivering
fraudulent documents to the IRS and unauthorized disclosure of taxpayer
information can constitute criminal offenses. If the Company were to be charged
with a criminal offense and found guilty, or if any of its employees or
executives were convicted of a criminal offense, in addition to the costs of
defense and possible fines, the Company would likely experience an adverse
effect to its reputation, which could directly lead to a decrease in revenues
from the loss of clients.
The Company does not hire a large number of CPA's, which could affect the
Company's ability to provide adequate IRS representation services to the
marketplace. The Company utilizes a significant number of seasonal employees who
are not certified public accountants or tax attorneys, to provide tax
preparation services. Under state law, the Company is not allowed to provide
legal tax advice and the Company does not employ nor does it retain any tax
attorneys on a full time basis. Because most of the Company's employees who
prepare tax returns are not certified public accountants, tax attorneys or
otherwise enrolled to practice before the IRS, such employees of the Company are
strictly limited as to the roles they may take in assisting a client in an audit
with the IRS. These limitations on services that the Company may provide could
hinder the Company's ability to market its services.
Furthermore, the small percentage of certified public accountants or tax
attorneys available to provide assistance and guidance to the Company's tax
preparers may increase the risk of the improper preparation of tax returns by
the Company. The improper preparation of tax returns could result in significant
defense expenses and civil liability.
Loss of Trademarks. If the Company were to lose its trademarks or other
proprietary rights, the Company could suffer decreased revenues. The Company
believes that its trademarks and other proprietary rights are important to its
success and its competitive position. The Company has registered its "Gilman +
Ciocia" trademark and its "e1040.com" trademark with the U.S. Patent and
Trademark Office and devotes substantial resources to the establishment and
protection of its trademarks and proprietary rights. However, the actions taken
by the Company to establish and protect its trademarks and other proprietary
rights may be inadequate to prevent imitation of its services and products by
others or to prevent others from claiming violations of their trademarks and
proprietary rights by the Company. In addition, others may assert rights in the
Company's trademarks and other proprietary rights. If the Company were to lose
the exclusive right to its trademarks, its operations would be materially
adversely affected.
Payment of Dividends. The Company's decision not to pay dividends could
negatively impact the marketability of the Company's stock. Since its initial
public offering of securities in 1994, the Company has not paid dividends and it
does not plan to pay dividends in the foreseeable future. The Company currently
intends to retain any earnings to finance the growth of the Company. It is very
likely that dividends will not be distributed in the near future, which may
reduce the marketability of the Company's Common Stock.
13
Third Party Control. If a third party wanted to acquire control of the Company,
it could be prevented by the Company's classified board and its ability to issue
preferred stock without shareholder approval and the marketability of the
Company's stock could be affected. Certain provisions of the Certificate of
Incorporation could make it more difficult for a third party to acquire control
of the Company, even if such change in control would be beneficial to
stockholders. The Certificate of Incorporation allows the Company to issue
preferred stock without stockholder approval. Such issuance could make it more
difficult for a third party to acquire the Company. The Certificate of
Incorporation also provides for a classified board of directors, which would
prevent a third party from acquiring a majority of the Common Stock from
immediately electing a new board of directors.
Low Trading Volume. Low trading volume of the Company's stock increases
volatility, which could result in the impairment of the Company's ability to
obtain equity financing. As a result, historical market prices may not be
indicative of market prices in the future. In addition, the stock market has
recently experienced extreme stock price and volume fluctuation. The Company's
market price may be impacted by changes in earnings estimates by analysts,
economic and other external factors and the seasonality of the Company's
business. Fluctuations or decreases in the trading price of the Common Stock may
adversely affect the stockholders' ability to buy and sell the Common Stock and
the Company's ability to raise money in a future offering of Common Stock. The
shares of the Company's Common Stock were delisted from the NASDAQ national
market in August 2002, and the market price of the Company's shares has
dramatically declined since the delisting .
Restricted Common Stock. If restrictions that are in place on the future sale of
the Common Stock of the Company were released, the market price of the stock may
decline. Various restrictions on the possible future sale of Common Stock may
have an adverse affect on the market price of the Common Stock. Approximately
4.5 million shares of the Common Stock outstanding are "restricted securities"
under Rule 144 of the Securities Act of 1933, as amended (the "Act").
In general, under Rule 144, a person who has satisfied a one year holding period
may, under certain circumstances, sell, within any three month period, a number
of shares of "restricted securities" that do not exceed the greater of one
percent of the then outstanding shares of Common Stock or the average weekly
trading volume of such shares during the four calendar weeks prior to such sale.
Rule 144 also permits, under certain circumstances, the sale of shares of Common
Stock by a person who is not an "affiliate" of the Company (as defined in Rule
144) and who has satisfied a two year holding period, without any volume or
other limitation.
The sale of restricted Common Stock in the future, or even the possibility that
it may be sold, may have an adverse effect on the market price for the Common
Stock and reduce the marketability of the Common Stock.
Securities Industry Rules. If a material risk inherent to the securities
industry was to be realized, the value of the Company's stock may decline. The
securities industry, by its very nature, is subject to numerous and substantial
risks, including the risk of declines in price level and volume of transactions,
losses resulting from the ownership, trading or underwriting of securities,
risks associated with principal activities, the failure of counterparties to
meet commitments, customer, employee or issuer fraud risk, litigation, customer
claims alleging improper sales practices, errors and misconduct by brokers,
traders and other employees and agents (including unauthorized transactions by
brokers), and errors and failure in connection with the processing of securities
transactions. Many of these risks may increase in periods of market volatility
or reduced liquidity. In addition, the amount and profitability of activities in
the securities industry are affected by many national and international factors,
including economic and political conditions, broad trends in industry and
finance, level and volatility of interest rates, legislative and regulatory
changes, currency values, inflation, and the availability of short-term and
long-term funding and capital, all of which are beyond the control of the
Company.
Several current trends are also affecting the securities industry, including
increasing consolidation, increasing use of technology, increasing use of
discount and online brokerage services, greater self-reliance of individual
investors and greater investment in mutual funds. These trends could result in
the Company facing increased competition from larger broker-dealers, a need for
increased investment in technology, or potential loss of clients or reduction in
commission income. These trends or future changes could have a material adverse
effect on the Company's business, financial condition, and results of operations
or cash flows.
14
If new regulations are imposed on the securities industry, the operating results
of the Company may be adversely affected. The SEC, the NASD, the NYSE and
various other regulatory agencies have stringent rules with respect to the
protection of customers and maintenance of specified levels of net capital by
broker-dealers. The regulatory environment in which the Company operates is
subject to change. The Company may be adversely affected as a result of new or
revised legislation or regulations imposed by the SEC, the NASD, other U.S.
governmental regulators or self regulatory organizations. The Company also may
be adversely affected by changes in the interpretation or enforcement of
existing laws and rules by the SEC, other federal and state governmental
authorities and self regulatory organizations.
The B/D Subsidiaries are subject to periodic examination by the SEC, the NASD,
SROs and various state authorities. The B/D Subsidiaries' sales practice
operations, recordkeeping, supervisory procedures and financial position may be
reviewed during such examinations to determine if they comply with the rules and
regulations designed to protect customers and protect the solvency of
broker-dealers. Examinations may result in the issuance of letters to the B/D
Subsidiaries, noting perceived deficiencies and requesting the B/D Subsidiaries
to take corrective action. Deficiencies could lead to further investigation and
the possible institution of administrative proceedings, which may result in the
issuance of an order imposing sanctions upon the B/D Subsidiaries and/or their
personnel.
The Company's business may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume and profitability of the Company's
or its clients' trading activities in a specific period could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities.
Financial Planning Litigation and Arbitration. If the Company were to be found
liable to clients for misconduct alleged in civil proceedings, the Company's
operations may be adversely affected. Many aspects of the Company's business
involve substantial risks of liability. There has been an increase in litigation
and arbitration within the securities industry in recent years, including class
action suits seeking substantial damages. Broker-dealers such as the B/D
Subsidiaries are subject to claims by dissatisfied clients, including claims
alleging they were damaged by improper sales practices such as unauthorized
trading, churning, sale of unsuitable securities, use of false or misleading
statements in the sale of securities, mismanagement and breach of fiduciary
duty. The B/D Subsidiaries may be liable for the unauthorized acts of their
retail brokers and independent contractors if they fail to adequately supervise
their conduct. The B/D Subsidiaries are currently defendants/respondents in
several such proceedings. If all of such proceedings were to be resolved
unfavorably to the Company, the Company's financial condition could be adversely
affected. It should be noted, however, that the B/D Subsidiaries maintain
securities broker-dealer's professional liability insurance to insure against
this risk, but the insurance policies contain a deductible (presently $50,000)
which must be paid by the B/D Subsidiaries and a cumulative cap on coverage
(presently $5,000,000). From time to time, in connection with hiring retail
brokers, the Company is subject to litigation by a broker's former employer. The
adverse resolution of any legal proceedings involving the Company could have a
material adverse effect on its business, financial condition, and results of
operations or cash flows.
ITEM 2. PROPERTIES
As of June 30, 2003, the Company provided services to its clients at 43 local
offices in 5 states: 17 in New York, 14 in Florida, 6 in New Jersey, 1 in
Connecticut, 4 in Maryland and 1in Colorado. A majority of the offices are
located in commercial office buildings and are leased pursuant to standard form
office leases. The remaining terms of the leases varies from one to seven years.
The Company's rental expense during Fiscal 2003 was approximately $3 million.
The Company believes that any of its rental spaces could be replaced with
comparable office space, however, location and convenience is an important
factor in marketing the Company's services to its clients. Since the Company
advertises in the geographic area surrounding the office location, the loss of
such an office that is not replaced with a nearby office could adversely affect
the Company's business at that office. The Company generally needs approximately
1,000 - 3,000 square feet of usable floor space to operate an office and its
needs can be flexibly met in a variety of real estate environments. Therefore,
the Company believes that its facilities are adequate for its current needs.
15
In August 2002, the Company consolidated the Executive Headquarters in White
Plains, NY into the Operations Center in Poughkeepsie, NY. The Operations Center
facility in Poughkeepsie, NY is owned by an entity controlled by Michael Ryan,
the Company's Chief Executive Officer and President.
On November 26, 2002, the Company finalized the sale to Pinnacle whereby it sold
47 of its offices to Pinnacle (See Note 20of the "Notes to Consolidated
Financial Statements"). In connection with the sale, all operating leases
associated with the purchased offices were assigned to and assumed by Pinnacle,
including the former Executive Headquarters office in White Plains, NY. However,
the Company will remain liable on these leases after the assignment. (See Note
20 to Consolidated Statements for a complete discussion of the Pinnacle Sale.)
The Company owns a building in Babylon, New York which is presently vacant and
is listed for sale.
ITEM 3. LEGAL PROCEEDINGS
The Company is the subject of a formal investigation by the Securities and
Exchange Commission ("SEC"). The Company believes that the investigation
concerns, among other things, the restatement of the Company's financial results
for the fiscal year ended June 30, 2001 and the fiscal quarters ended March 31,
2001 and December 31, 2001 (which have been previously disclosed in the
Company's amended quarterly and annual reports for such periods), the Company's
delay in filing Form 10-K for Fiscal 2002 and 2003 and the Company's past
accounting and recordkeeping practices. On March 13, 2003 three of the Company's
executives received subpoenas from the SEC requesting that they produce
documents and provide testimony in connection with the formal investigation. In
addition, on March 19, 2003 the Company received a subpoena requesting documents
in connection with such investigation. The Company and its executives have
complied fully with the SEC's investigation and will continue to comply fully
with the SEC's investigation. In addition, on January 13, 2004 the Company
received subpoenas for two executives to be re- interviewed. One of the
executives in no longer with Company. The Company does not believe that the
investigation will have a material effect on the Company's Consolidated
Financial Statements.
The Company and its B/D Subsidiaries are defendants and respondents in lawsuits
and NASD arbitrations in the ordinary course of business. On June 30, 2003,
there were 39 pending lawsuits and arbitrations and management accrued
$1,741,011 as a reserve for potential settlements, judgments and awards. 21 of
these matters were related to Prime Capital Services, Inc. and its registered
representatives. Prime Capital Services has Errors & Omissions coverage for such
matters. In addition, under the Prime Capital Services Registered
Representatives contract, each registered representative has indemnified the
Company for these claims. Accordingly, the Company believes that these lawsuits
and arbitrations will not have a material impact on its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its last meeting of shareholders on December 14, 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The shares of the Company's Common Stock were delisted from the NASDAQ national
market in August 2002 and now trade in the over-the-counter market on what is
commonly called the pink sheets under the symbol "GTAX.PK". As a result, an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the market value of the securities. The Company is now subject to Rule
15c2-11 promulgated by the Securities and Exchange Commission. If the Company
fails to meet criteria set forth in such Rule, including making all required
filings under the Exchange Act, various practice requirements are imposed on
broker-dealers who sell securities governed by the Rule to persons other than
established customers and accredited investors. For these types of transactions,
the broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transactions
prior to sale. Consequently, the Rule may have a materially adverse effect on
the ability of broker-dealers to sell the Company's securities, which may
materially affect the ability of shareholders to sell the securities in the
secondary market.
16
The following table sets forth the high and low sales prices for the Common
Stock during the periods indicated as reported by the NASDAQ stock market.
SALES PRICES
QUARTER ENDED HIGH LOW
------------- ---- ---
September 30, 2001 $ 3.50 $ 1.90
December 31, 2001 $ 3.45 $ 1.95
March 31, 2002 $ 3.12 $ 1.15
June 30, 2002 $ 1.75 $ 1.01
September 30, 2002 $ 0.55 $ 0.55
December 31, 2002 $ 0.10 $ 0.10
March 31, 2003 $ 0.25 $ 0.25
June 30, 2003 $ 0.15 $ 0.15
DIVIDENDS
Since its initial public offering of securities in 1994, the Company has not
paid dividends, and it does not plan to pay dividends in the foreseeable future.
The Company currently intends to retain any earnings to finance the growth of
the Company.
HOLDERS OF COMMON STOCK
On June 30, 2003, there were approximately 285 registered holders of Common
Stock. This does not reflect persons or entities that hold Common Stock in
nominee or "street" name through various brokerage firms. On the closing of
trading on June 30, 2003, the price of the Common Stock was $0.15 per share.
During the fiscal year ended June 30, 2003, the Company issued the following
common stock in privately negotiated transactions that were not registered under
the Securities Act of 1933:
Through June 30, 2003, 1,015,298 shares were issued to Rappaport. and an
additional 15,000 shares per month will be issued until its $1,000,000
loan to the company is paid in full.
By agreement dated March 31, 2003, the Company entered into a Stock Purchase
Agreement with Thomas Povinelli whereby he transferred 1,048,616 of the
Company's shares back to the Company for a credit of approximately $230,000
against the amount due to the Company from Pinnacle Taxx Advisors, LLC. Due to
the uncertainly of the transaction, these shares are included in the Company's
outstanding shares as of June 30, 2003.
16,534 shares were issued to one seller of a tax practice under the terms of the
asset purchase agreement.
No underwriters or brokers participated in any of these transactions. All such
sales were privately negotiated with the individuals with whom the Company had a
prior relationship and were exempt from registration under the Act pursuant to
Section 4 (2) as a sale by an issuer not involving a public offering.
17
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities to be Weighted-average Number of securities remaining
issued upon exercise of exercise price of available for future issuance under
Plan category outstanding options, warrants outstanding options, equity compensation plans (excluding
and rights warrants and rights securities reflected in column (a)
Equity
compensation
plans approved 136,928 $6.43 1,361,769
by security
Holders (1)
Equity
compensation
plans not 2,301,000 $6.64 0
approved by
security holders (2)
------------- ------------
Total 2,437,928 1,361,769
(1) The issued options are based on taking all outstanding production awards
as of June 30, 2003.
(2) The issued options are based on adding up all non-production awards as of
June 30, 2003.
The Company maintains records of option grants by year, exercise price, vesting
schedule and grantee. In certain cases, the Company has estimated, based on all
available information, the number of such options that were issued pursuant to
each plan. Accordingly, the Company has not in the past consistently recorded
the plan pursuant to which the option was granted. The Company is implementing
new recordkeeping procedures regarding options that will ensure this information
is accurately recorded and processed. The material terms of each option grant
vary according to the discretion of the Board of Directors.
In addition, from time to time, the Company has issued, and in the future may
issue additional non-qualified options pursuant to individual option agreements,
the terms of which vary from case to case.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data with respect to the Company's
consolidated balance sheets as of June 30, 2003 and 2002 and the related
consolidated statements of operations for the years ended June 30, 2003, 2002,
and 2001 have been derived from the Company's Consolidated Financial Statements
which are included herein and have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the Consolidated
Financial Statements, the Company has suffered losses from operations in each of
its last four years, and is in default under its three largest lending
facilities, raising substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
1 of the "Notes to Consolidated Financial Statements". The Consolidated
Financial Statements do not include any adjustments that might result from the
outcome of this uncertainty. The following selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto and the information contained in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
18
SUMMARY OF CONSOLIDATED BALANCE SHEETS AND STATEMENT OF INCOME
AS OF JUNE 30
(unaudited) 2001 RESTATED
2003 2002 SEE NOTE 2(a) 2000 1999
------------ ------------ ------------- ------------ ------------
Working Capital
(Deficit) $(19,302,466) $(10,903,094) $ 614,325 $ (1,611,436) $ 5,249,516
Total Assets 22,595,840 37,172,513 52,679,895 43,950,178 32,998,980
Long Term Debt 661,622 851,501 5,425,928 826,476 2,738,124
Total Shareholders' Equity(Deficit) (6,001,916) 7,711,069 27,924,433 24,712,841 24,959,941
Cash Dividends -- -- -- -- --
Revenues $ 62,857,202 $ 67,497,772 $ 82,741,730 $ 88,919,337 $ 50,443,406
Operating Expenses 73,770,493 90,627,234 85,825,369 96,366,821 46,646,555
Net Income/(Loss) from
Continuing Operations (12,721,046) (22,752,421) (3,257,334) (6,160,092) 3,701,143
Net Income/(Loss) from
Discountinued Operations (1,307,205) 448,122 3,044,595 -- --
Net Income/(Loss) (14,028,251) (22,304,299) (212,739) (4,013,092) 2,181,143
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and related notes thereto set forth in Item 8 of this
Annual Report. Except for the historical information contained herein, this and
other sections of this Annual Report contain certain forward-looking statements
that involve substantial risks and uncertainties. When used in this Annual
Report, the words "anticipate", "believe", "estimate", "should", "expect" and
other similar expressions as they relate to the Company or its management are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from the results
expressed or implied by these forward-looking statements. Factors that could
contribute to such differences are discussed in this Annual Report under the
headings "Description of Business - Risk Factors".
OVERVIEW
Company Model. The Company is a preparer of federal, state and local income tax
returns for individuals predominantly in middle and upper income brackets. While
preparing tax returns, clients often consider other aspects of their financial
needs such as investments, insurance, pension and estate planning. The Company
capitalizes on this situation by making financial planning services available to
clients. The financial planners who provide such services are employees or
independent contractors of the Company and are Registered Representatives of the
Company's broker-dealer subsidiaries. The Company and/or its B/D Subsidiaries
earn a share of commissions (depending on what service is provided) from the
services that the financial planners provide to the clients in transactions for
securities, insurance and related products.
Revenue Analysis. For the fiscal year ended June 30, 2003, approximately 10.8%
of the Company's revenues were earned from tax preparation services, 89.2% were
earned from all financial planning and related services (with 70.8 % from mutual
funds, annuities and securities transactions and 29.2 % from insurance, mortgage
brokerage and other related services).
The Company's financial planning clients generally are introduced to the Company
through the Company's tax preparation services. The Company believes that its
tax return preparation business is inextricably intertwined with, and is a
necessary adjunct to, its financial planning activities. Neither segment would
operate as profitably by itself and the two segments leverage off each other,
improving profitability and client retention.
Insurance and Mortgage Services. Almost all of the financial planners are also
authorized agents of insurance underwriters. The Company is also a licensed
mortgage broker. As a result, the Company also earns revenues from commissions
for acting as an insurance agent and a mortgage broker. In addition, the Company
owns a fifty percent (50%) equity interest in GTAX/CB, an insurance broker,
which is a joint venture with Feingold & Scott, Inc. In December, 2002, all of
the capital stock of Feingold & Scott, Inc. was purchased by Bisys Insurance
Services Holding Company ("Bisys"). On March 21, 2003, Bisys sent the Company a
written notice terminating the joint venture effective as of March 21, 2004. The
Company is negotiating a Preferred Sale Agreement with Bisys, whereby Bisys will
provide insurance distribution services to the company and the joint venture
will be terminated.
Substantial Doubt About Ability to Continue as a Going Concern. The Company's
June 30, 2003 Consolidated Financial Statements have been prepared assuming the
Company will continue as a going concern. The Company has suffered losses from
operations in each of its last four years, and is in default under its three
largest lending facilities, raising substantial doubt about its ability to
continue as a going concern. During the fiscal year June 30, 2003, the Company
incurred net losses totaling $(14,028,251) and at June 30, 2003 was in a working
capital deficit position of $19,302,466. At June 30, 2003, the Company had
$955,097 of cash and cash equivalents and $5,408,252 of trade receivables to
fund short-term working capital requirements. The Company's ability to continue
as a going concern and its future success is dependent upon its ability to
reduce costs and generate revenues to: (1) satisfy its current obligations and
commitments, and (2) continue its growth.
19
Transactions Which will Affect Cash Flow Requirements. The Company believes that
it will be able to complete the necessary steps in order to meet its cash flow
requirements throughout fiscal 2004. The following transactions will affect the
Company's cash flow requirements:
Pinnacle Transaction. On November 26, 2002, the Company finalized a
transaction pursuant to an asset purchase agreement (the "Purchase Agreement")
with Pinnacle, whereby Pinnacle an entity controlled by Thomas Povinelli and
David Puyear, former executive officers of the Company, purchased certain assets
of the Company. The effective date of the closing under the Purchase Agreement
was September 1, 2002. The Company sold to Pinnacle 47 offices ("Pinnacle
Purchased Offices") and all tangible and intangible net assets (the "Purchased
Assets") which were associated with the operations of the Pinnacle Purchased
Offices, together representing approximately $17,690,000 or approximately 19.0%
of the Company's annual revenue for the fiscal year ended June 30, 2002.
Included in the net assets sold to Pinnacle was approximately $1,550,000 in debt
plus accrued interest of approximately $280,000 and other payables of
approximately $400,000 which were to be assumed by Pinnacle, subject to creditor
approval. As part of the sale of the Purchased Offices, 137 employees of the
Purchased Offices were terminated by the Company as of November 15, 2002 and
were hired by Pinnacle. In addition, all registered representatives of the
Purchased Offices licensed with Prime Capital Services, Inc. (a wholly owned
broker-dealer subsidiary of the Company) transferred their registrations to
Royal Alliance Associates ("Royal").
The net purchase price payable by Pinnacle after it assumed all liabilities and
payables was $4,745,463, subject to final adjustments. The sum of $3,422,108,
(the "Closing Payment") was paid pursuant to a promissory note (the "Initial
Note") which was given by Pinnacle to the Company at the date of closing (the
"Closing") with interest at 10% commencing 30 days from the Closing. The Initial
Note was guaranteed by Mr. Povinelli and Mr. Puyear and Mr. Povinelli pledged
his entire holdings of the Company's common stock to secure the Initial Note.
The Initial Note was due and payable on the earlier of February 26, 2003 or on
the date that Pinnacle closed a debt or equity financing. The balance of the
purchase price of $1,323,355, subject to adjustment and less certain debts of
the Company that Pinnacle assumed, was to be paid pursuant to a second
promissory note (the "Second Note") which was secured by Pinnacle's assets. The
Initial Note was secured by collateral assignment of 75% of Pinnacle's
commission overrides to be paid to Pinnacle from Royal each month up to
$250,000, pursuant to an agreement between Pinnacle and Royal. The Second Note
was payable in three equal consecutive annual installments, with interest
calculated at the prime rate of Pinnacle's primary lender in effect as of the
Closing, on the first, second and third anniversaries of the Closing.
Including the $2,067,799.93 settlement payment, the Company received total
consideration under the Asset Purchase of approximately $7,270,000, comprised of
the following:
Unaudited
---------
Cash payments to the Company $4,410,000
Company debt assumed by Pinnacle $2,630,000
Credit to Pinnacle for the transfer to the Company $ 230,000
By Povinelli of 1,048,616 shares of Company
Common stock
As part of the settlement, the Company received the following indemnifications
in addition to the indemnification contained in the Asset Purchase. All of the
indemnifications include any monies paid by judgment, settlement or otherwise,
costs and reasonable attorney's fees.
1. Pinnacle, Povinelli and Puyear agreed to indemnify and hold harmless
the Company for: all claims arising from Pinnacle's assumption of
the Company debt of the Company owed to any employee of the Company
who became an employee of Pinnacle with the exception of William
Hellmers; and all vendor debt assumed by Pinnacle.
20
2. Pinnacle, Povinelli, Puyear and Gerlad Hoenings each personally
guaranteed and indemnified the payment of all real estate lease
obligations which the Company is still liable for under leases
assumed by Pinnacle. In addition, Richard Boehm and Serafino
Maiorano guaranteed certain of these real estate lease obligations.
3. Pinnacle, Povinelli and Puyear agreed to indemnify and hold the
Company harmless from all claims under personal property leases
which Pinnacle assumed and which the Company remains liable for.
4. Pinnacle, Povinelli and Puyear agreed to indemnify and hold the
Company harmless for any damages resulting from Pinnacle renewing
any real estate leases which Pinnacle assumed and for which the
Company remains liable for.
Other Office Sales. In addition to the Pinnacle transaction, during Fiscal
2003, the Company completed the sale of 13 other offices to various parties for
an aggregate sales price of approximately $2,332,324 consisting of approximately
$ 490,091 of cash and approximately $ 1,842,233 of promissory notes due to the
Company (see Note 1 of the "Notes to Consolidated Financial Statements").
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").
The interest rate on the Term Loan and the Revolving Credit Loan is LIBOR plus
2.75%. The Term Loan was being amortized over five years and the Revolving
Credit Loan had a term of two years.
On November 27, 2002, the Company and Wachovia entered into a forbearance
agreement (the "Forbearance Agreement") whereby Wachovia agreed to forbear from
acting on certain defaults of financial covenants by the Company under the
Revolving Credit Loan and under the Term Loan. The Company had changed its
control without Wachovia's consent and failed to meet requirements under the
Loan to pay scheduled debt service and to maintain certain financial ratios
including senior funded debt to EBITDA. The Company paid the debt service to
Wachovia and Wachovia agreed to forbear from enforcing its default remedies and
extended the time of payment for the Loan to November 1, 2003 ("Maturity Date").
Pursuant to the Forbearance Agreement, the interest rate charged on the Loans
was increased by 1% to LIBOR plus 3.75%.
With respect to the Revolving Credit Loan, during the period of forbearance, the
Company is obligated to make interest payments monthly until the Maturity Date.
Principal payments in the amount of $250,000 each were due on March 10, 2003,
April 10, 2003, May 10, 2003 and June 10, 2003 with the remaining principal
balance due on the Maturity Date. The Company timely made the $250,000 principal
payments due on March 10, 2003 and on April 10, 2003. In an Amendment to
Forbearance Agreement entered into between the Company and Wachovia as of June
18, 2003, Wachovia rescheduled the May 10, 2003 and June 10, 2003 payments and
the Company did not make these payments.
With respect to the Term Loan, during the period of forbearance the Company is
obligated to make its regular payments of principal in the amount of $83,333
plus interest until the Maturity Date when remaining principal balance is due.
In addition, commencing on May 1, 2003, the Company is obligated to make
payments on the 10th day of each month to Wachovia in an amount equal to fifty
percent (50%) of the amount of cash and marketable securities possessed by the
Company that exceeds $1,500,000 on the last day of the preceding month. However,
amounts contained in the broker-dealer reserve to the extent of regulatory
requirements and historical levels will not be included in the calculation of
cash and marketable securities for purposes of this payment.
On March 5, 2003, the Company received a notice of default from the attorneys
for Wachovia. Wachovia alleged that the Company was in default for the following
reasons: selling eleven offices without the written consent of Wachovia; failing
to remit to Wachovia the proceeds of the sales of the offices; and failing to
21
provide to Wachovia the monthly reports required under the Forbearance
Agreement. By letter dated March 10, 2003, counsel for Wachovia advised the
Company that Wachovia rescinded the notice of default. Wachovia also consented
to the sale of certain Company offices. Wachovia's forbearance and consent were
made in reliance on the Company's agreement that it would obtain Wachovia's
prior consent for all future sales of offices and that the cash payments
received or to be received from the approved sales would be remitted to Wachovia
in reduction of the Company's scheduled principal payments.
Upon a subsequent review of the Forbearance Agreement, on March 21, 2003 the
Company notified the attorneys for Wachovia that it was not in compliance with
the following provisions of the Forbearance Agreement: late filing of several
local personal property tax returns and late payment of the taxes owed; late
payment of several local license fees and late payment of several vendors of
materials and supplies; and failure to make rent payments on a few vacant
offices for which the Company was negotiating workout payments with the
landlords. The total amount due for these payables was not material and the
Company was verbally advised by counsel to Wachovia that Wachovia would not
issue a notice of default for any of the items.
At a meeting with Wachovia on May 13, 2003, the Company notified Wachovia that
it was in technical default under the Forbearance Agreement for failing to pay
payroll tax withholdings due which resulted from a bookkeeping error from
switching to a new payroll company. All payroll tax withholdings were
immediately paid by the Company after discovering the error.
By an Amendment to Forbearance Agreement dated as of June 18, 2003, the Company
and Wachovia amended the Forbearance Agreement to change, among other things,
the following provisions of the Forbearance Agreement: the Maturity Date was
extended to July 1, 2004; the Company's reporting requirements to Wachovia were
changed; the May 10, 2003 and June 10, 2003 principal payments of $250,000 were
rescheduled; principal payments in amounts of $250,000 are now due on March 10,
2004, April 10, 2004, May 10, 2004 and June 10, 2004; and the Company was
required to pay to Wachovia fifty percent (50%) of the excess over $1,000,000 of
any lump sum payment received from Pinnacle. The Company may be in technical
default of other provisions of the Loan, the Forbearance Agreement and the
Amendment to Forbearance Agreement. However, the Company does not believe that
Wachovia will issue a note of default for any of these technical defaults.
The Company's credit facility with Travelers closed on November 1, 2000. It was
a $5 million debt financing. As part of the debt facility financing with
Travelers, the Company issued warrants to purchase 725,000 shares of the
Company's common stock. Of this amount, 425,000 warrants were issued to purchase
at $4.23 per share, representing the average closing price for 20 days before
the effective date. The 425,000 warrants were exercisable before May 2, 2003. As
of May 2003, the warrants were not exercised and expired. The remaining warrants
to purchase 300,000 shares of the Company's common stock were awarded on
February 28, 2002 with a strike price of $2.43 and will expire on October 31,
2005. The value, as determined by an external appraisal of these warrants issued
on February 28, 2002, was set at $300,000. The warrant valuations were treated
as a debt discount and are being amortized over the five year term of the Debt
Facility under the effective interest rate method. The amortization of the debt
discount for the fiscal years ended June 30, 2003, 2002 and 2001 were
approximately $282,292, $256,600 and $166,000, respectively. At June 30, 2003
and June 30, 2002, the Term Loan had an outstanding principal balance of
$4,750,000 million and $4,750,000 million, respectively.
On September 24, 2002, the Company received a notice from the attorneys for
Travelers alleging that the Company was in default under its debt facility with
Travelers due to nonpayment of a $100,000 penalty for failure to meet sales
production requirements as specified in the debt facility. The Company sent a
letter to the attorneys denying that the Company was in default. Although the
Traveler's notice stated that all unpaid interest and principal under the Debt
Facility were immediately due and payable and that Travelers reserved its rights
and remedies under the debt facility, it also stated that Travelers intended to
comply with the terms of a subordination agreement between Travelers and
Wachovia. Such subordination agreement greatly restricts the remedies which
Travelers could pursue against the Company. No further notices have been
received from Travelers.
On October 30, 2001, the Company borrowed $1,000,000 from Rappaport pursuant to
a written note without collateral and without stated interest (the "Loan"). The
Loan was due and payable on October 30, 2002. Additionally, the Loan provided
that: Rappaport receive 100,000 shares of Rule 144 restricted shares of common
stock of the Company upon the funding of the Loan, subject to adjustment so that
the value of the 100,000 shares was $300,000 when the Rule 144 restrictions were
removed; there was a penalty of 50,000 shares to be issued to Rappaport if the
Loan was not paid when due and an additional penalty of 10,000 shares per month
thereafter until the Loan was paid in full. The 100,000 shares were issued on
22
October 31, 2001 at a value of $3 per share. On December 26, 2001, Rappaport
subordinated the Loan to the $7,000,000 being loaned to the Company by Wachovia.
In consideration of the subordination, the Loan was modified by increasing the
10,000 shares penalty to 15,000 shares per month and by agreeing to issue 50,000
additional shares to Rappaport if the Loan was not paid in full by March 31,
2002, subject to adjustment so that the value of the shares issued was $150,000
when the Rule 144 restrictions were removed. The Loan was not paid by March 31,
2002. Accordingly, Rappaport was issued 95,298 common shares with a value of
$150,000 on May 7, 2002 for the March 31, 2002 penalty. When the Rule 144
holding period was satisfied in October, 2002 with respect to the 100,000 shares
of the Company's common stock issued to Rappaport on the funding of the Loan,
the stock price was $.40 per share. As a result, on October 31, 2002, Rappaport
was issued an additional 650,000 common shares to be added to the 100,000 shares
issued upon the funding of the Loan so that the total value of the original
shares issued was $300,000. By June 30, 2003, Rappaport received a total of
1,015,298 shares for all interest and penalties and will receive 15,000 shares
per month as additional penalties until the Loan is paid in full.
If the Company does not comply with the financial covenants and other
obligations in its loan agreement with Wachovia, Travelers or Rappaport, or its
agreements with other lenders, and such lenders elected to pursue their
available remedies, the Company's operations and liquidity would be materially
adversely affected and the Company could be forced to cease operations.
Ongoing Business Initiatives. In addition to the above activities, the following
business initiatives are ongoing:
1. Management has engaged in an extensive campaign to reduce corporate
overhead, consisting primarily of closing the White Plains, NY executive
offices and consolidating those functions into the Poughkeepsie, NY home
office. This has resulted in savings of approximately $170,000 per month.
2. The Company's current strategy is not to actively pursue acquisitions.
3. The Company has negotiated with certain strategic vendors and has settled,
and will continue to settle, current liabilities.
Management believes that these actions will be successful. However, there can be
no assurance that the Company can reduce costs to provide positive cash flows
from operations to permit the Company to realize its plans. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Management and the Board of Directors are currently exploring a number of
strategic alternatives and are also continuing to identify and implement
internal actions to improve the Company's liquidity or financial performance.
Acquisitions. The Company's current strategy is not to actively pursue
acquisitions.
SEC Investigation. The Company is the subject of a formal investigation by the
Securities and Exchange Commission ("SEC"). The investigation concerns, among
other things, the restatement of the Company's financial results for the fiscal
year ended June 30, 2001 and the fiscal quarters ended March 31, 2001 and
December 31, 2001 (which have been previously disclosed in the Company's amended
quarterly and annual reports for such periods), the Company's delay in filing
Form 10-K for Fiscal 2002 and 2003 and the Company's past accounting and
recordkeeping practices. The Company had previously received informal,
non-public inquiries from the SEC regarding certain of these matters. On March
13, 2003, three of the Company's executives received subpoenas from the SEC
requesting that they produce documents and provide testimony in connection with
the formal investigation. In addition, on March 19, 2003, the Company received a
subpoena requesting documents in connection with such investigation. The Company
and its executives have complied fully with the requests contained in the
subpoenas and with the SEC's investigation and will continue to cooperate with
the SEC. In addition, on January 13, 2004 the Company received subpoenas for two
executives to be re- interviewed. One of the executives in no longer with
Company. The Company does not believe that the SEC investigation will have a
material effect on the Company's Consolidated Financial Statements.
23
RESTATEMENTS
The Consolidated Financial Statements and the related notes thereto, as of June
30, 2001 and for the year then ended, have been restated to correct an
overstatement error of $600,000 in the previously reported revenue amount as
indicated below. During the quarter ended December 31, 2001 of Fiscal 2002,
management identified the overstatement error from Fiscal 2001 during a review
of its' intercompany accounts. Cash amounts of $600,000 advanced by a subsidiary
during the quarter ended March 30, 2001 of Fiscal 2001 were not eliminated
properly and erroneously reported as revenue.
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
AS PREVIOUSLY
REPORTED AS RESTATED
-------- -----------
BALANCE SHEET:
Accounts payable and accrued expenses $ 9,831,363 $ 10,431,363
Deferred tax assets, net of current 1,460,160 1,709,160
Retained earnings 1,911,027 1,560,027
STATEMENT OF OPERATIONS:
Revenue (a) $ 106,513,173 $ 104,900,310
Provision for income taxes 946,764 697,764
Net loss 138,261 (212,739)
NET INCOME (LOSS) PER SHARE:
Basic and diluted $ 0.02 $ (0.03)
(a) $1,012,863 representing net trading gains previously included in financial
planning revenue have been reclassified to other income (expense) in the
statements of operations for the year ended June 30, 2001.
(b) These financial statements do not reflect the effects of discontinued
operations.
Retained earnings as of July 1, 2001 have been decreased by $351,000 for the
effect of the restatements on prior years.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from the
Company's statements of income expressed as a percentage of revenue for fiscal
years 2003, 2002 and 2001. The trends illustrated in the following table are not
necessarily indicative of future results. All numbers for Fiscal 2001 are as
restated.
24
AS A PERCENTAGE OF REVENUE
YEARS ENDED JUNE 30,
AMOUNTS
2001
----
2003 2002 RESTATED
----- ----- --------
(SEE NOTE 2(A))
---------------
Financial planning commissions 89.2% 80.8% 81.6%
Tax preparation fees 10.8% 18.6% 16.7%
e1040.com 0% 0.1% 0.8%
Direct mail services 0% 0.5% 0.9%
----- ----- -----
Total revenue 100% 100% 100%
===== ===== =====
Salaries and commissions 82.9% 83.9% 76.7%
General and administrative expense 16.3 16.6% 10.0%
Advertising 1.3 2.4% 3.7%
Brokerage fees & licenses 2.6 1.9% 1.7%
Rent 4.8 6.4% 4.9%
Depreciation and amortization 3.1 3.9% 3.0%
Loss on Sold Assets .1 .0 .0
Goodwill and other intangibles impairment loss 6.2 8.1% 0.0%
----- ----- -----
Total operating expenses 117.2% 123.2% 100.0%
----- -----
Loss from continuing operations (17.2)% (23.2)% 0.0%
----- ----- -----
Other income (expense) (2.8) (0.6)% 0.5%
----- ----- -----
Income (loss) before income taxes (19.5) (23.8)% 0.5%
Provision (benefit) for income taxes .1% 0.2% 0.7%
----- ----- -----
Net loss from continuing operations (19.6) (24.0)% (0.2)%
===== ===== -----
FISCAL 2003 COMPARED TO FISCAL 2002
Except as noted, the numbers and explanations presented below represent results
from Continuing Operations only.
Revenue. The Company's revenues for the fiscal year ended June 30, 2003 were
$62.9 million compared to $67.5 million for the fiscal year ended June 30, 2002,
a decrease of $4.6 million. This decrease was primarily attributable to a
decrease in financial planning services and lower tax preparation revenues. The
decline in revenues from tax preparation is attributable to the sales of offices
and non-returning clients, offset by the development of new client through
marketing. The reduction in financial planning revenue for Fiscal 2002 was
primarily a product of office sales and weak financial markets. The weak
financial markets resulted in declines in the volume of securities transactions
and in market liquidity, which resulted in lower revenues from trading
activities and commissions.
For the fiscal years ended June 30, 2003 and 2002, respectively, the Company's
total revenues for the two primary business segments (see Note 16 of "Notes to
Consolidated Financial Statements") consisted of $20.1 million and $32.2 million
for the Company's tax and financial planning offices, $59.6 million and $68.8
million for the Company's broker-dealer subsidiaries (which includes $16.8
million and $34.1 million of intercompany revenue related to Company employee
financial planning revenue which clears through the B/D Subsidiaries).
The Company's tax and financial planning office segment consists of $6.8 million
and $7.4 million for tax preparation services, $56.1 million and $59.5 million
for financial planning business done at an office level and for the fiscal years
ended June 30, 2003 and 2002, respectively.
The Company's broker-dealer segment consists of financial planning business done
by Prime and North Ridge, before elimination of intercompany financial planning
revenue. Prime represented 90.8% and 91.5% and North Ridge represented 9.2% and
8.5% of the broker-dealer segment total revenues for the fiscal years ended June
30, 2003 and 2002, respectively.
The $.6 million or 8.7% year-to-year reduction in the tax preparation is
primarily attributed to the sale of offices and non-returning clients, offset by
new clients from marketing and an increase in the average fee charged this year.
The $3.4 million or 5.7% decrease in financial planning revenue and the
corresponding decrease in the broker-dealers segment is primarily attributed to
the sales of offices and weak financial markets. The weak financial markets
resulted in declines in the volume of securities transactions and in market
liquidity, which resulted in lower revenues from trading activities and
commissions.
25
Operating Expenses. The Company's operating expenses for the fiscal year ended
June 30, 2003 were $73.8 million or 117.4% of revenues compared to operating
expenses of $90.6 million or 134.3% of revenues for the fiscal year ended June
30, 2002. Operating expenses for the fiscal year ended June 30, 2003 had a
decrease of $10.3 million in salaries and commissions, $3.0 million in general
and administrative expenses, $.7 million in advertising expense, $.1 million in
brokerage fees and licenses, $.5 million in rent, $1.1 million in depreciation
and amortization, $1.1 million in goodwill and intangible assets impairment
losses and an increase of $.1 million on loss of sale of equipment.
Salaries and Commissions Expense. Salaries and commissions expense
consists primarily of salaries and commissions paid to financial planners for
financial planning services as well as related payroll taxes and employee
benefit costs. For the fiscal year ended June 30, 2003, salaries and commissions
decreased $10.3 million or 16.5%, to $52.0 million from $62.3 million for the
fiscal year ended June 30, 2002. The decrease in salaries and commission expense
is primarily attributed to a decrease in commissions paid to financial planners
as a result of the decreased sales of financial planning services as well as
sales of offices and the consolidation of the Company's operating headquarters
from White Plains, NY to Poughkeepsie, NY.
General and Administrative Expense. General and administrative expense
consist primarily of expenses for general corporate functions including outside
legal and professional fees, insurance, telephone, bad debt expenses and general
corporate overhead costs. General and administrative expenses for the fiscal
year ended June 30, 2003 decreased by $3.0 million or 22.1% to $10.4 million
from $13.4 million for the fiscal year ended June 30, 2002. The decrease in
general and administrative expense is primarily attributed to lower legal fees
and consulting fees, lower bad debt expenses and the continued implementation of
cost containment initiatives.
Advertising Expense. Advertising expense for the fiscal year ended June
30, 2003 was $.8 million compared to $1.6 million for the fiscal year ended June
30, 2002. The decrease of $.7 million or 46.9% in advertising cost was
attributed to a reduction of marketing efforts relating to print and media
advertisements and the continued implementation of cost containment initiatives.
Brokerage Fees and Licenses Expense. Brokerage fees and licenses expense
for the fiscal year ended June 30, 2003 was $1.6 million compared to $1.7
million for the fiscal year ended June 30, 2002. The decrease of $.1 million or
8.1% in brokerage fees and licenses was attributed to lower clearing fees as a
result of the decrease in financial planning revenues.
Rent Expense. For the fiscal year ended June 30, 2003, rent expense
decreased by $0.5 million or 15.7% to $3.0 million compared to $3.5 million for
the fiscal year ended June 30, 2002. The decrease in rent expense is primarily
attributed to the closure and consolidation of offices during Fiscal 2003,
including the consolidation of the Company's headquarters from White Plains, NY
to Poughkeepsie, NY.
Depreciation and Amortization. For the fiscal year ended June 30, 2003,
depreciation and amortization expense decreased by $1.1 million or 35.8% to $2.0
million compared to $3.1 million for the fiscal year ended June 30, 2002. The
decrease in depreciation and amortization is primarily attributed to the
decrease of amortization for intangibles due to the impairment and subsequent
write down of intangibles at year end Fiscal 2002. The remaining decrease is
attributable to lower depreciation expense as a result of assets reaching their
full depreciable lives during the course of Fiscal 2003 as well as reduced
capital spending. From a segment standpoint, the Company's depreciation and
amortization expense for Fiscal 2003 comprises 53.2% from the Company's tax and
financial planning office segment, 46.8% from the Company's broker-dealer
segment. For Fiscal 2002, the Company's depreciation and amortization expense
comprises 47.9.0% from the Company's tax and financial planning office segment,
30.9% from the Company's broker-dealer segment and 21.2% from e1040.com.
Goodwill and Other Intangible Assets Impairment Loss. As a result of the
Company adopting SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill
and other intangible assets were determined to be impaired by $3.9 million for
the fiscal year ended June 30, 2003. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed for
impairment. The goodwill and impairment loss for the fiscal year ended June 30,
2002 was $5 million.
26
Other Income and (Expenses). Other income (expenses) for the fiscal year ended
June 30, 2003 was $(1.7) million compared to $(0.6) million for the fiscal year
ended June 30, 2002. The decrease in other income (expenses) of $1.21 million or
211.6% is comprised of a decrease of $2.1 million or 94.3% in interest and
investment income recognized, offset by an increase of interest expense of $0.1
million or 3.4% due to higher debt level in Fiscal 2002. Other income (expense)
decreased $.8 million or 90.6% from $.1 million in 2003 to expense of $0.9
million in 2002. Other expense of $(0.9) million in 2002 is primarily attributed
to unrealized losses on trading. During Fiscal 2003, the Company has set up a
separate bond trading desk and now records all realized and unrealized gains and
losses resulting from trading in revenue.
Income (Loss) from Continuing Operations Before Taxes. The Company's loss from
continuing operations before taxes for the fiscal year ended June 30, 2003 was
$(12.6) million compared to a loss of $(23.7) million for the fiscal year ended
June 30, 2002, a decrease of $11.1 million. From a segment standpoint, the
Company's income (loss) from continuing operations before taxes for the fiscal
year ended June 30, 2003 is composed of a loss of $(10.0) million from the
Company's tax and financial planning office segment and net loss of $(2.7)
million from the Company's broker-dealer segment. The fiscal year ended June 30,
2002 is composed of a loss of $(19.9) million from the Company's tax and
financial planning office segment, loss of $(1.8) million from the Company's
broker-dealer segment and a loss of $(2.0) million from e1040.com. The loss at
the Company's tax and financial planning is primarily attributed to lower
financial planning revenues without a corresponding decrease in fixed costs,
impairments of goodwill and other intangibles.
Income Tax Provision. The Company's income tax provision for the fiscal year
ended June 30, 2003 was $0.1 million compared to an income tax benefit of $(1.0)
million for the fiscal year ended June 30, 2002 for a decrease of $0.6 million
or 109.3%. The increase in the income tax provision is the result of the lower
losses in Fiscal 2003 compared to Fiscal 2002. The Company's effective income
tax rate for fiscal year 2003 was (0.4%) as compared to (0.6%) for Fiscal 2002.
Loss from Continuing Operations. The Company's loss from continuing operations
after income taxes for the fiscal year ended June 30, 2003 was $(12.7) million
compared to a loss of $(22.7) million for the fiscal year ended June 2002, a
decrease of $10.0 million or 44.1%. The decreased loss is primarily attributed
to a decrease in operating expenses, a decrease of impairment of goodwill and
other intangible assets, offset by a decrease in revenues.
Income (Loss) from Discontinued Operations. The Company's loss from discontinued
operations for the fiscal year ended June 30, 2003 was $1.3 million compared to
income of $.4 million for the fiscal year ended June 2002, an increase loss of
$1.8 million or 391.7%. Components of the loss represent $1.2 million of losses
in Fiscal 2003 related to the sales of offices, including those 47 offices sold
to Pinnacle, compared to income of $1.5 million from those same offices in
Fiscal 2002, a decrease of $2.7 million. The other component is the realized
gain/loss on the disposal of these offices. For Fiscal 2003, the Company
realized a loss of $.1 million compared to a loss of $.02 million in Fiscal
2002, an increase of $.55 million.
Net Income (Loss). The Company's net loss for the fiscal year ended 2003 was
$14.0 million compared to a loss of $22.3 million in fiscal year ended 2002, a
decrease of $8.9 million or 37.1%.
The Company's business is seasonal, with a significant component of its revenue
earned during the tax season of January through April. The effect of inflation
has not been significant to the Company's business in recent years.
FISCAL 2002 COMPARED TO FISCAL 2001 (AS RESTATED)
Revenue. The Company's revenues for the fiscal year ended June 30, 2002 were
$67.5 million compared to $82.7 million for the fiscal year ended June 30, 2001,
a decrease of $15.2 million. This decrease was primarily attributable to a
decrease in financial planning services and lower tax preparation revenues. The
decline in revenues from tax preparation is attributable to a reduction in
on-line returns prepared and the impact of some tax preparer attrition and
reduced tax preparation marketing, offset by acquisitions. The reduction in
financial planning revenue for Fiscal 2002 was a product of the declining
financial markets. The declining financial markets resulted in declines in the
volume of securities transactions and in market liquidity, which resulted in
lower revenues from trading activities and commissions.
27
The Company's tax and financial planning office segment consists of $7.4 million
and $8.4 million for tax preparation services, $59.5 million and $72.6 million
for financial planning business done at an office level and $0.5 million and
$1.0 million for third party direct mail business for the fiscal years ended
June 30, 2002 and 2001, respectively.
The Company's broker-dealer segment consists of financial planning business done
by Prime and North Ridge, before elimination of intercompany financial planning
revenue. Prime represented 91.5% and 92% and North Ridge represented 8.5% and 8%
of the broker-dealer segment total revenues for the fiscal years ended June 30,
2002 and 2001, respectively.
The $1.0 million or 11.6% year-to-year reduction in the tax preparation revenue
is attributed to an increase in price competition, offset in part by the
acquisition of new tax practices during Fiscal 2002 and the full-year effect of
the new tax practices acquired in Fiscal 2001. The $13.1 million or 18.0%
decrease in financial planning revenue and the corresponding decrease in the
broker-dealers segment is attributed to the decline in the financial markets.
The decline in the financial markets resulted in declines in the volume of
securities transactions and in market liquidity, which resulted in lower
revenues from trading activities and commissions. In Fiscal 2002, e1040.com
contributed approximately $69,000 of revenues compared to approximately $792,000
in Fiscal 2001. This significant 91.3% reduction was attributed to a reduced
advertising and media campaign budget, as well as increased price competition
for online tax services.
Operating Expenses. The Company's operating expenses for the fiscal year ended
June 30, 2002 were $90.6 million or 134.3% of revenues compared to operating
expenses of $85.8 million or 103.7% of revenues for the fiscal year ended June
30, 2001. Operating expenses for the fiscal year ended June 30, 2002 had a
decrease of $4.2 million in salaries and commissions and $1.1 million in
advertising expense, offset in part by an increase of $4.5 million in general
and administrative expenses; $0.3 million in rent; $0.3 million in depreciation
and amortization; and $5.0 million in goodwill and intangible assets impairment
losses.
Salaries and Commissions Expense. Salaries and commissions expense consists
primarily of salaries and commissions paid to financial planners for financial
planning services as well as related payroll taxes and employee benefit costs.
For the fiscal year ended June 30, 2002, salaries and commissions decreased $4.2
million or 6.3% to $62.3 million from $66.5 million for the fiscal year ended
June 30, 2001. The decrease in salaries and commission expense is primarily
attributed to a decrease in commissions paid to financial planners as a result
of the decreased sales of financial planning services.
General and administrative expense. General and administrative expense consist
primarily of expenses for general corporate functions including outside legal
and professional fees, insurance, telephone, bad debt expenses and general
corporate overhead costs. General and administrative expenses for the fiscal
year ended June 30, 2002 increased by $4.5 million or 50.4% to $13.4 million
from $8.9 million for the fiscal year ended June 30, 2001. The increase in
general and administrative expense is attributed to legal fees related to a
proxy fight of concerned shareholders and due to the audit committee doing an
investigation into alleged accounting irregularities, as well as the opening of
new offices acquired in Fiscal 2002 and the full-year effect of Fiscal 2001
acquisitions, offset in part by the continued implementation of cost containment
initiatives.
Rent Expense. For the fiscal year ended June 30, 2002, rent expense increased by
$0.3 million or 10.3% to $3.5 million compared to $3.2 million for the fiscal
year ended June 30, 2001. The increase in rent expense is primarily attributed
to the acquisition of new offices during Fiscal 2002, the full-year inclusion of
offices opened in Fiscal 2001 and the expansion of office space by some of our
existing offices.
Depreciation and Amortization. For the fiscal year ended June 30, 2002,
depreciation and amortization expense increased by $0.3 million or 9.6% to $3.1
million compared to $2.9 million for the fiscal year ended June 30, 2001. The
increase in depreciation and amortization is primarily attributed to additional
purchases of computer and other equipment and impairment of e1040.com fixed
assets, offset in part by the Company's adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets" on July 1, 2001, which required the Company to stop
28
amortizing goodwill and indefinite lived intangible assets. From a segment
standpoint, the Company's depreciation and amortization expense for fiscal year
2002 comprises 48.3% from the Company's tax and financial planning office
segment, 30.9% from the Company's broker-dealer segment and 20.8% from
e1040.com. For fiscal year 2001, the Company's depreciation and amortization
expense comprises 53.6% from the Company's tax and financial planning office
segment, 37.9% from the Company's broker-dealer segment and 8.5% from e1040.com.
The change in mix is associated with e1040.com goodwill being impaired in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets".
Advertising Expense. Advertising expense for the fiscal year ended June 30, 2002
was $1.6 million compared to $2.6 million for the fiscal year ended June 30,
2001. The decrease of $1.0 million or 40.4% in advertising cost was attributed
to lower print, media and banner advertisements and the continued implementation
of cost containment initiatives.
Goodwill and Other Intangible Assets Impairment Loss. As a result of the Company
adopting SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill and
other intangible assets were determined to be impaired by $7.5 million for the
fiscal year ended June 30, 2002. Of the $7.5 million, $5 million relates to
continuing operations and the remaining $2.5 million relates to the offices that
are included in discontinued operations. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
for impairment. There was no goodwill and impairment loss for the fiscal year
ended June 30, 2001, as SFAS No. 142 was not issued by FASB or adopted by the
Company until July 2001.
Other Income and (Expenses). Other income (expenses) for the fiscal year ended
June 30, 2002 was $(0.6) million compared to $0.5 million for the fiscal year
ended June 30, 2001. The decrease in other income (expenses) of $1.1 million or
(205.4)% is comprised of an increase of $2.1 million or 1130.9% in interest and
investment income recognized, offset by an increase of interest expense of $0.5
million or 36.5% due to higher debt level in Fiscal 2002. Other income (expense)
decreased $2.7 million or (152.0)% from income of $1.7 million in 2001 to
expense of $0.9 million in 2002. Other income in 2001 includes unrealized
trading gains of approximately $1.0 million and approximately $0.7 of gain on
the recession of an acquisition contract recognized in Fiscal 2001. Other
expense of $(0.9) million in 2002 is primarily attributed to unrealized losses
on trading.
(Loss) From Continuing Operations Before Taxes. The Company's loss before taxes
for the fiscal year ended June 30, 2002 was ($23.7) million compared to a loss
of ($2.6) million for the fiscal year ended June 30, 2001, an increase of $21.1
million. From a segment standpoint, the Company's loss from continuing
operations before taxes for the fiscal year ended June 30, 2002 is composed of a
loss of $(18.7) million from the Company's tax and financial planning office
segment, loss of $(3.0) million from the Company's broker-dealer segment and a
loss of $(2.0) million from e1040.com. For the fiscal year ended June 30, 2001,
the Company's loss from continuing operations before taxes is comprised of a
loss of $7.5 million from the Company's tax and financial planning office
segment, income of $5.0 million from the Company's broker-dealer segment, a loss
of $.6 million from e1040.com and income of $.6 from Progressive Mail Services.
The increased loss at e1040.com was attributed to increased price competition,
which lowered revenue significantly. The loss at the Company's tax and financial
planning and the broker-dealer segments, is primarily attributed to lower
financial planning revenues without a corresponding decrease in fixed costs,
impairments of goodwill and other intangibles and losses on trading securities.
Income Tax Provision (Benefit). The Company's income tax (benefit) for the
fiscal year ended June 30, 2002 was $(0.1) million compared to an income tax
provision of $0.7 million for the fiscal year ended June 30, 2001 for a decrease
of $1.6 million or 233.2%. The decrease in the income tax provision is the
result of the increased losses in Fiscal 2002 compared to profitability in
Fiscal 2001.
Loss from Continuing Operations. The Company's loss from continuing operations
after income taxes for the fiscal year ended June 30, 2002 was $22.7 million
compared to a loss of $3.3 million for the fiscal year ended June 2001, a
decrease of $19.5 million. The decrease is primarily attributed to a decline in
revenues and impairment of goodwill and other intangible assets.
Income from Discontinued Operations. The Company's income from discontinued
operations for the fiscal year ended June 30, 2002 was $.4 million compared to
income of $3.0 million for the fiscal year ended June 30, 2001, a decrease of
$2.6 million. The decrease is primarily attributed to the decline in revenues
and the impairment of goodwill and intangibles related to discontinued
operations of $2.5 million.
29
Net (Loss). The Company's net loss for the fiscal year ended 2002 was $22.3
million compared to a loss of $.2 million in fiscal year ended 2001, an increase
of $22.1 million or 10,384.4%.
The Company's business is seasonal, with a significant component of its revenue
earned during the tax season of January through April. The effect of inflation
has not been significant to the Company's business in recent years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues have been, and are expected to continue to be,
significantly seasonal. As a result, the Company must generate sufficient cash
during the tax season, in addition to its available bank credit, to fund any
operating cash flow deficits in the first half of the following fiscal year.
Operations during the non-tax season are primarily focused on financial planning
services along with some ongoing accounting and corporate tax revenue. Since its
inception, the Company has utilized funds from operations, proceeds from its
initial public offering and bank borrowings to support operations, finance
working capital requirements and complete acquisitions. As of June 30, 2003 the
company had $1.0 million in cash and cash equivalents and $0.8 million in
marketable securities. Prime and North Ridge are subject to the SEC's Uniform
Net Capital Rule 15c 3-1 (Prime) and 15c 3-3 (North Ridge), which require the
maintenance of minimum regulatory net capital and that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed the greater of 15
to 1 or $100,000 and $25,000, respectively.
In February 2002, Prime Partners, Inc. of New York (previously known as Prime
Financial Services, Inc., New York) loaned to the Company $1.0 million at a
stated interest rate of 10% which was repaid in full plus accrued interest of
$14,855 in April 2002. During the fiscal year ended June 30, 2001, Prime
Partners, Inc. loaned to the Company an aggregate of $600,000. A total of
$465,608 in loans were made by Prime Partners, Inc. to the Company during Fiscal
2003. As of June 30, 2003, the Company owed Prime Partners, Inc. $710,100.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
major shareholders of Prime Partners, Inc.
The Company received total consideration under the Pinnacle Asset Purchase of
approximately $7,270,000 (see Note 20 of the "Notes to Consolidated Financial
Statements"). In addition to the Pinnacle transaction, in Fiscal 2003, the
Company completed the sale of 13 other offices to various parties for an
aggregate sales price of approximately $2,332,294, consisting of approximately
$490,091 of cash and $1,842,203 of promissory notes due to the Company (see Note
1of the "Notes to Consolidated Financial Statements").
The Company's cash flows used in operating activities totaled $1.5 million for
the fiscal year ended June 30, 2003 compared to cash flows used by operating
activities of $4.6 million for the fiscal year ended June 30, 2002. The decrease
of $3.1 million in cash used in operating activities was due primarily to a
decrease in net loss as a result of continued cost containment efforts, offset
by decreases in depreciation and amortization and impairment charges.
Net cash provided by investing activities totaled $1.5 million for the fiscal
year ended June 30, 2003 compared to cash flows used in investing activities of
$.4 million for the fiscal year ended June 30, 2002. The increase in cash
provided of $1.9 million was primarily attributed to proceeds received from the
sale of discontinued operations as well as a decrease in capital expenditures.
These were partially offset by a decrease in cash proceeds from the sale of
properties.
The Company's cash flows used in financing activities totaled $1.3 million for
the fiscal year ended June 30, 2003 compared to cash flows provided by financing
activities of $1.8 million for the fiscal year ended June 30, 2002. The decrease
of $3.1 million in cash used in financing is due primarily to a decrease in
proceeds received from banks and other loans, partially offset by a decrease in
payouts of bank and capital lease obligations.
30
CONTRACTUAL OBLIGATION AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to June 30, 2003 and thereafter. The amounts represent the
maximum future cash contractual obligations.
Payment Due by Period
---------------------
2005 2007 After
Contractual Obligations Total 2004 to 2006 to 2008 2008
- ----------------------- ----- ---- ------- ------- ----
Debt $12,842,137 $12,166,618 $ 538,961 $ 83,360 $ 53,198
Operating leases 11,214,533 3,698,058 4,882,334 1,589,755 1,044,386
Capital Leases 642,933 362,759 208,695 48,034 23,446
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $24,699,603 $16,227,435 $ 5,629,996 $ 1,721,149 $ 1,121,030
In connection with the Pinnacle sale, all operating leases associated with the
Purchased Offices were assigned to Pinnacle, but the Company still remains
liable on the leases. Aggregate operating lease commitment amounts included in
the table above with respect to the leases assigned to Pinnacle in November 2002
are $1,430,987, $1,296,148, $791,851, $451,049, $346,348 and $575,586 for the
fiscal years ending June 30, 2004, 2005, 2006, 2007, 2008 and thereafter,
respectively.
The Company is also contractually obligated to certain employees and executives
pursuant to commission agreements and compensation agreements.
MARKET FOR COMPANY'S COMMON EQUITY
The shares of the Company's Common Stock were delisted from the NASDAQ national
market in August 2002 and are now traded in the over-the-counter market on what
is commonly referred to as the "pink sheets". As a result, an investor may find
it more difficult to dispose of or obtain accurate quotations as to the market
value of the securities. In addition, the Company is now subject to Rule 15c2-11
promulgated by the SEC. If the Company fails to meet criteria set forth in such
Rule (for example, by failing to file periodic reports as required by the
Exchange Act), various practice requirements are imposed on broker-dealers who
sell securities governed by the Rule to persons other than established customers
and accredited investors. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to sale.
Consequently, the Rule may have a materially adverse effect on the ability of
broker-dealers to sell the Company's securities, which may materially affect the
ability of shareholders to sell the securities in the secondary market.
The delisting could make trading the Company's shares more difficult for
investors, potentially leading to further declines in share price. It would also
make it more difficult for us to raise additional capital. The Company will also
incur additional costs under state blue-sky laws if we sell equity due to our
delisting.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2003, 2002, 2001 and 2000,
inflation has not had a significant effect on the Company's results of
operations since inception.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management's estimates,
judgments and assumptions are continually evaluated based on available
information and experience. Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those estimates.
31
Certain of the Company's accounting policies require higher degrees of judgment
than others in their application. These include: impairment of intangible
assets, valuation of customer receivables and income tax recognition of deferred
tax items. The Company's policy and related procedures for impairment of
intangible assets, and income tax recognition of deferred tax items are
summarized below.
Impairment of Intangible Assets. Impairment of Intangible Assets results in a
charge to operations whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of an
asset to be held and used is measured by a comparison of the carrying amount of
the asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. The measurement of the future net cash flows to be
generated is subject to management's reasonable expectations with respect to the
Company's future operations and future economic conditions which may affect
those cash flows. The Company tests goodwill for impairment annually or more
frequently whenever events occur or circumstances change, which would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. The measurement of fair value in lieu of a public market for such assets
or a willing unrelated buyer relies on management's reasonable estimate of what
a willing buyer would pay for such assets. Management's estimate is based on its
knowledge of the industry, what similar assets have been valued in sales
transactions and current market conditions.
Income Tax Recognition of Deferred Tax Items. The Company recognizes deferred
tax assets and liabilities based on the differences between the financial
statement carrying amounts and the tax basis of assets and liabilities.
Significant management judgment is required in determining our deferred tax
assets and liabilities. Management makes an assessment of the likelihood that
our deferred tax assets will be recovered from future taxable income, and to an
amount that it believes is more likely than not to be realized.
Revenue Recognition. The Company recognizes all revenues associated with income
tax preparation, accounting services and direct mail services upon completion of
the services. Financial planning services include securities and other
transactions. The related commission revenue and expenses are recognized on a
trade date basis.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Other Significant Accounting Policies. Other significant accounting policies,
not involving the same level of measurement uncertainties as those discussed
above, are nevertheless important to an understanding of the financial
statements. These policies require difficult judgments on complex matters that
are often subject to multiple sources of authoritative guidance. Certain of
these matters are among topics currently under reexamination by accounting
standards setters and regulators. Although no specific conclusions reached by
these standard setters appear likely to cause a material change in the Company's
accounting policies, outcomes cannot be predicted with confidence. Also see Note
2 to the consolidated Financial Statements, which discusses accounting policies
that must be selected by management when there are acceptable alternatives.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("Opinion 30"), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
32
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, SFAS 144 provides guidance on how a long-lived asset
that is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike Statement 121, an impairment assessment under Statement 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for impairment
under Statement No. 142, Goodwill and Other Intangible Assets.
The Company adopted SFAS 144 on July 1, 2002. Adoption of SFAS 144 did not have
an immediate impact on long-lived assets held for use on the Company's financial
statements because the impairment assessment under SFAS 144 is largely unchanged
from Statement 121. The provisions of SFAS 144 for assets held for sale or other
disposal generally are required to be applied prospectively after adoption to
newly initiated disposal activities. Therefore, management cannot determine the
potential effects that adoption of SFAS 144 will have on the Company's financial
statements (see Note 20 to the "Notes to Consolidate Financial Statements").
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4 required
all gains and losses from the extinguishments of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145
requires gains and losses from certain debt extinguishments not to be reported
as extraordinary items when the use of debt extinguishments is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
requirements for motor carriers. Those transitions are completed; therefore SFAS
No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The provisions relating
to sale-leaseback are effective for transactions after May 15, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring "). The principal
difference between SFAS No. 146 and EITF 94-3 relates to the timing of liability
recognition. Under SFAS No. 146, a liability for a cost associated with an exit
or disposal activity is recognized when the liability is incurred. Under EITF
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's financial position or results of operations.
In October 2002, SFAS No. 147 "Acquisitions of Certain Financial Institutions -
an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9"
("SFAS 147") was issued. FASB Statement No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method, provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both Statement 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of
Statement 72 to recognize (and subsequently amortize) any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of this Statement. In addition, this
Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used. The adoption of SFAS No. 147 is not expected to have a
material impact on the Company's financial position or results of operations.
33
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), "Accounting for
Stock-Based Compensation--Transition and Disclosure", amending FASB Statement
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation. SFAS 148
provides two additional alternative transition methods for recognizing an
entity's voluntary decision to change its method of accounting for stock-based
employee compensation to the fair-value method. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 so that entities will have to (1) make
more-prominent disclosures regarding the pro forma effects of using the
fair-value method of accounting for stock-based compensation, (2) present those
disclosures in a more accessible format in the footnotes to the annual financial
statements, and (3) include those disclosures in interim financial statements.
SFAS 148's transition guidance and provisions for annual disclosures are
effective for fiscal years ending after December 15, 2002; earlier application
is permitted. Management is assessing the effects of SFAS 148 on the financial
statements of the Company.
In April 2003, SFAS No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149") was issued. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The adoption of SFAS No. 149 is not expected to have a material
impact on the Company's financial position or results of operations.
In May 2003, SFAS No. 150 "Accounting for Certain Financial Instruments with
characteristics of both liabilities and equity" ("SFAS 150") was issued. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Some of the provisions
of this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining
provisions of this Statement are consistent with the Board's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. While the Board
still plans to revise that definition through an amendment to Concepts Statement
6, the Board decided to defer issuing that amendment until it has concluded its
deliberations on the next phase of this project. That next phase will deal with
certain compound financial instruments including puttable shares, convertible
bonds, and dual-indexed financial instruments. The adoption of SFAS No. 150 is
not expected to have a material impact on the Company's financial position or
results of operations.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. At June 30, 2002, the Company has certain
guarantees related to operating leases which have been included in the Company's
operating lease commitments included in Note 11 to the Consolidated Financial
Statements. Management is currently evaluating the effect FIN 45 may have on the
Company's financial statements as a result of the sale of offices to Pinnacle,
which included the assumption by Pinnacle of certain leases of such offices, on
November 26, 2002.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), "Consolidation
of Variable Interest Entities". FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Management is evaluating the
impact, if any, that adoption of the provisions of FIN 46 will have upon its
financial condition or results of operations.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. To date, the Company's exposure to market risk has been limited and
it is not currently hedging any market risk, although it may do so in the
future. The Company does not hold or issue any derivative financial instruments
for trading or other speculative purposes. The Company is exposed to market risk
associated with changes in the fair market value of the marketable securities
that it holds. The Company's revenue and profitability may be adversely affected
by declines in the volume of securities transactions and in market liquidity,
which generally result in lower revenues from trading activities and
commissions. Lower securities price levels may also result in a reduced volume
of transactions, as well as losses from declines in the market value of
securities held by the Company in trading, investment and underwriting
positions. Sudden sharp declines in market values of securities and the failure
of issuers and counterparts to perform their obligations can result in illiquid
markets in which the Company may incur losses in its principal trading and
market making activities.
Interest Rate Risk. The Company's obligations under its Wachovia and Travelers
credit facilities bear interest at floating rates and therefore, the Company is
impacted by changes in prevailing interest rates.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company has presented the following financial statements:
o Fiscal year ended June 30, 2003 audited by Radin, Glass & Co., whose
report is included below.
o Fiscal year ended June 30, 2002 had been audited by another
accounting firm. Because of a financial disagreement between the
Company and that firm, the previous auditing firm has neither
reviewed this filing nor consented to the inclusion of the report it
previously issued. Accordingly, the financial statements for the
year ended June 30, 2002 are presented as unaudited. Management
believes that the financial statements include all adjustments that
are necessary for a fair presentation of the Company's financial
position and results of operations. At such time as the financial
disagreement is resolved, the Company will seek to have the previous
auditors consent to the inclusion of their report. There may be
revisions to the financial disclosures for the year ended June 30,
2002 as a result of their review.
o Fiscal year ended June 30, 2001 was audited by Arthur Andersen &
Co., who has not consented to the inclusion of its report as
indicated below.
As discussed in Note 2(i) to the financial statements, the Company adopted
Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets on July 1, 2001.
35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Public Accountants.......................... 38
Consolidated Balance Sheets as of June 30, 2003 and 2002........... 39
Consolidated Statements of Operations
for the years ended June 30, 2003, 2002 and 2001.............. 40
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended June 30, 2003, 2002 and 2001.............. 41-44
Consolidated Statements of Cash Flows
for the years ended June 30, 2003, 2002 and 2001.............. 45-46
Notes to Consolidated Financial Statements......................... 47-76
All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes
thereto.
36
INDEPENDENT AUDITORS REPORT
Shareholders and Directors of
Gilman + Ciocia, Inc.
Poughkeepsie, NY
We have audited the accompanying consolidated balance sheet of Gilman + Ciocia,
Inc. and subsidiaries as of June 30, 2003 and the related consolidated
statements of operations, shareholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements for the prior years were
audited by other auditors which reports are not included herein as indicated
above.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gilman + Ciocia, Inc. and
subsidiaries at June 30, 2003 and the results of its operations and cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations in each of
its last four years and is in breach of covenants in connection with its loan
agreements. These matters raise substantial doubt about its ability to continue
as a going concern. Note 1 to the financial statements describes management's
plans in regard to these matters. The financial statements do not include any
adjustments that may result from the outcome of these matters.
/s/ Radin, Glass & Co., LLP
New York, NY
January 16, 2004
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Gilman + Ciocia, Inc.:
We have audited the accompanying consolidated balance sheets of Gilman + Ciocia,
Inc. and subsidiaries as of June 30, 2001 and 2000, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the periods ended June 30, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the financial position of Gilman + Ciocia, Inc. and
subsidiaries as of June 30, 2001 and 2000 and the results of their operations
and their cash flows for each of the years ended June 30, 2001, 2000 and 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen, LLP
September 28, 2001
New York, New York
This Report of Independent Certified Public Accountants is a copy of a
previously issued Arthur Andersen LLP ("Andersen") report and has not been
reissued by Andersen. The inclusion of this previously issued Andersen report is
pursuant to the "Temporary Final Rule and Final Rule; Requirements for Arthur
Andersen LLP Auditing Clients," issued by the U.S. Securities and Exchange
Commission in March 2002. Note that this previously issued Andersen report
includes references to certain fiscal years, which are not required to be
presented in the accompanying financial statements as of and for the fiscal year
ended June 30, 2002.
38
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, June 30,
2003 2002
------------ ------------
Assets
Cash and cash equivalents $ 955,097 $ 2,223,806
Marketable securities 969,622 1,759,742
Trade accounts receivable, net 5,408,252 6,958,346
Receivables from officers, shareholders
and employees, net 555,839 1,129,092
Assets of Discontinued Operations 3,568 4,736,375
Due From Office Sales - Current 237,302 --
Prepaid expenses and other current assets 476,397 150,810
Income taxes receivable 27,590 748,678
------------ ------------
Total current assets 8,633,668 17,706,849
Fixed assets, net 2,396,313 3,239,502
Goodwill 3,900,072 5,264,858
Intangible assets, net 6,133,248 9,303,400
Due from Office Sales - Non Current 522,090 --
Other assets 1,010,449 1,657,904
------------ ------------
Total assets $ 22,595,840 $ 37,172,513
============ ============
Liabilities and Shareholders' Equity (Deficit)
Accounts payable and accrued expenses $ 14,043,809 $ 12,808,741
Current portion of notes payable and
capital leases 12,166,618 12,393,867
Liabilities of Discontinued Operations 1,725,707 3,407,335
------------ ------------
Total current liabilities 27,936,134 28,609,943
Long term portion of notes payable and
capital leases 650,622 851,501
Other liabilities 11,000 --
------------ ------------
Total liabilities 28,597,756 29,461,444
------------ ------------
Shareholders' Equity (Deficit)
Preferred stock, $0.001 par value; 100,000 shares authorized; no
shares issued and outstanding at June 30, 2003, and 2002 respectively
Common stock, $0.01 par value 20,000,000 shares authorized; 10,039,561
and 9,203,027 shares issued at June 30, 2003, and 2002, respectively 100,395 92,030
Additional paid in capital 29,850,805 29,534,307
Treasury stock 278,222 and 263,492 shares of common stock,
respectively, at cost (1,075,593) (1,065,996)
Note receivable for acquired shares (105,000) (105,000)
Retained deficit (34,772,523) (20,744,272)
------------ ------------
Total shareholders' Equity (Deficit) (6,001,916) 7,711,069
------------ ------------
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 22,595,840 $ 37,172,513
============ ============
The accompanying notes are an integral part of these financial statements
39
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------------------------
Revenues: 2003 2002 2001 Restated
(Unaudited) See Note 2A
------------ ------------ -------------
Financial planning services $ 56,093,323 $ 59,511,847 $ 72,598,200
Tax preparation fees 6,763,879 7,411,422 8,385,390
e1040.com -- 69,096 791,621
Direct mail services -- 505,407 966,519
------------ ------------ ------------
Total revenues 62,857,202 67,497,772 82,741,730
------------ ------------ ------------
Operating Expenses:
Salaries and commissions 51,990,466 62,284,371 66,465,474
General and administrative 10,421,483 13,383,994 8,900,584
Advertising 832,256 1,566,442 2,629,706
Brokerage fees and licenses 1,598,880 1,739,294 1,770,027
Rent 2,980,548 3,534,472 3,204,398
Depreciation and amortization 2,009,950 3,128,347 2,855,180
Loss on sale of equipment 85,326 -- --
Goodwill Impairment 3,851,585 4,990,315
------------ ------------ ------------
Total operating expenses 73,770,493 90,627,234 85,825,369
------------ ------------ ------------
Income (loss) from
continuing operations before other ------------ ------------ ------------
income and expenses (10,913,292) (23,129,462) (3,083,639)
------------ ------------ ------------
Other Income (Expenses):
Interest and investment income 129,679 2,268,390 184,284
Interest expense (1,850,933) (1,915,138) (1,403,210)
Other income (expense), net (905,629) 1,742,995
------------ ------------ ------------
Total other income (expense) (1,721,254) (552,377) 524,069
------------ ------------ ------------
Loss from continuing operations ------------ ------------ ------------
before income taxes (12,634,546) (23,681,840) (2,559,570)
------------ ------------ ------------
------------ ------------
Income taxes (benefit) 86,500 (929,419) 697,764
------------ ------------
------------ ------------ ------------
Loss from continuing operations (12,721,046) (22,752,421) (3,257,334)
------------ ------------ ------------
Discontinued Operations:
Income (loss) from discontinued operations (1,228,413) 1,529,926 3,044,595
Gain (loss) on disposal of
discontinued operations (72,292) (17,339) --
Income taxes (benefit) 6,500 1,064,465 --
------------ ------------ ------------
Income (loss) from discontinued operations (1,307,205) 448,122 3,044,595
------------ ------------ ------------
Net income (loss) $(14,028,251) $(22,304,299) $ (212,739)
============ ============ ============
Net Loss per share:
Basic and diluted net loss ($ 1.49) ($ 2.58) ($ 0.03)
============ ============ ============
Weighted Average number of common shares
outstanding:
Basic and diluted shares outstanding 9,440,815 8,647,966 8,082,674
============ ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
40
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
RETAINED EARNINGS
ADDITIONAL PAID IN (ACCUMULATED
COMMON STOCK CAPITAL DEFICIT)
------------ ------------------ -----------------
Balance at June 30, 2000 8,030,834 $ 80,308 $ 23,976,897 $ 1,772,766
Comprehensive loss:
Net loss, as restated -- -- -- (212,739)
Comprehensive loss
Purchase of treasury stock -- -- -- --
Re-issuance of treasury stock -- -- -- --
Re-issuance of treasury
stock-employee stock purchase
plan -- -- (122,252) --
Issuance of warrants in
connection with refinancing -- -- 800,000 --
STOCK
SUBSCRIPTIONS/
TREASURY STOCK NOTE TOTAL
-------------- RECEIVABLE FOR SHAREHOLDERS
SHARES AMOUNT SHARES SOLD EQUITY (DEFICIT)
------------ ------------ -------------- ----------------
Balance at June 30, 2000 247,895 $ (1,012,130) $ (105,000) $ 24,712,841
Comprehensive loss:
Net loss, as restated -- -- -- (212,739)
Purchase of treasury stock 160,439 (648,503) -- (648,503)
Re-issuance of treasury stock (200) 1,025 -- 1,025
Re-issuance of treasury
stock-employee stock purchase
plan (70,615) 330,513 -- 208,261
Issuance of warrants in
connection with refinancing -- -- -- 800,000
41
RETAINED
COMMON STOCK EARNINGS
------------ ADDITIONAL PAID IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT)
------------ ------------ ------------------ ------------
Issuance of common stock 10,000 100 30,105 --
Issuance of common stock and
options in connection with
business combinations 594,617 5,947 2,921,748 --
Issuance of common stock in
lieu of cash payment 5,250 52 52,466 --
Stock based compensation 14,128 141 52,989 --
------------ ------------ ------------ ------------
Balance at June 30, 2001 8,654,829 $ 86,548 $ 27,711,953 $ 1,560,027
Comprehensive loss:
Net loss -- -- -- (22,304,299)
Comprehensive loss -- -- -- --
Purchase of treasury stock -- -- -- --
Issuance of common stock in
connection with exercise of
stock options 3,500 35 9,590 --
Re-issuance of treasury
stock-employee stock purchase
plan -- -- (54,516) --
Issuance of warrants in
connection with refinancing -- -- 300,000 --
Issuance of common stock in
connections with loan
agreement 195,298 1,953 448,047 --
Issuance of common stock in
connection with business
combinations 390,576 3,906 1,239,468 --
Rescindment of acquisition (41,176) (412) (120,235) --
------------ ------------ ------------ ------------
Balance at June 30, 2002 9,203,027 $ 92,030 $ 29,534,307 $(20,744,272)
============ ============ ============ ============
42
STOCK
SUBSCRIPTIONS/
TREASURY STOCK NOTE TOTAL
-------------- RECEIVABLE FOR SHAREHOLDERS'
SHARES AMOUNT SHARES SOLD EQUITY
------------ ------------ -------------- ------------
Issuance of common stock -- -- -- 30,205
Issuance of common stock and
options in connection with
business combinations -- -- -- 2,927,695
Issuance of common stock in
lieu of cash payment -- -- -- 52,518
Stock based compensation -- -- -- 53,130
------------ ------------ ------------ ------------
Balance at June 30, 2001 337,519 $ (1,329,095) $ (105,000) $ 27,924,433
UNAUDITED
Comprehensive loss:
Net loss -- -- -- (22,304,299)
Purchase of treasury stock 47,937 (120,576) -- (120,576)
Issuance of common stock in
connection with exercise of
stock options -- -- -- 9,625
Re-issuance of treasury
stock-employee stock purchase
plan (121,964) 383,675 -- 329,159
Issuance of warrants in
connection with refinancing -- -- -- 300,000
Issuance of common stock in
connections with loan
agreement -- -- -- 450,000
Issuance of common stock in
connection with business
combinations -- -- -- 1,243,374
Rescindment of acquisition -- -- -- (120,647)
------------ ------------ ------------ ------------
Balance at June 30, 2002 - UNAUDITED 263,492 $ (1,065,996) $ (105,000) $ 7,711,069
============ ============ ============ ============
43
RETAINED
COMMON STOCK EARNINGS
ADDITIONAL PAID IN (ACCUMULATED
Shares Amount CAPITAL DEFICIT)
------------ ------------ ------------------ ------------
Net Loss $(14,028,251)
Issuance of stock in connection
With earnout agreement 16,534 165 6,448
Issuance of stock in connection
With default on note payable 820,000 8,200 310,050 18,250
------------ ------------ ------------ ------------
10,039,561 $ 100,395 $ 29,850,805 $(34,772,523)
STOCK
SUBSCRIPTIONS/
TREASURY STOCK NOTE TOTAL
-------------- RECEIVABLE FOR SHAREHOLDERS'
SHARES AMOUNT SHARES SOLD EQUITY
------------ ------------ -------------- ------------
Net Loss $(14,028,251)
Issuance of stock in connection
With earnout agreement 6,613
Issuance of stock in connection
With default on note payable 318,250
Purchase of Treasury Shares 14,730 $ (9,597) $ (9,597)
------------ ------------ ------------ ------------
Balance June 30, 2003 278,222 $ (1,075,593) $ (105,000) $ (6,001,916)
============ ============ ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
44
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-------------------------------------------------------
(Unaudited) 2001 RESTATED
2003 2002 SEE NOTE 2(a)
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($14,028,251) ($22,304,299) ($ 212,739)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,167,256 3,651,001 3,156,629
Issuance of common stock for debt default penalties and interest 318,250 -- --
Goodwill and other intangible assets impairment loss 3,851,585 7,489,099 --
Amortization of debt discount 482,834 267,258 166,248
Provision (benefit) for income taxes 93,000 135,046 456,000
Loss (gain) on a rescission of an acquisition contract 205,832 (600,000)
(Gain) Loss on sale of equipment and properties 85,325 (218,015) --
Amortization of deferred and other compensation -- -- 50,057
Bad debt expense 289,231 1,879,280 --
(Income) Loss from joint venture (66,747) 4,808 --
Changes in assets and liabilities:
Accounts receivable, net 1,681,603 1,321,801 (4,458,184)
Prepaid and other current assets (321,480) 744,216 155,860
Change in marketable securities 798,862 (1,486,439) 17,111
Receivables from officers, shareholders and employees 372,208 (300,170) (353,556)
Other assets 539,761 (400,950) (127,450)
Accounts payable and accrued expenses 1,611,005 4,336,352 687,301
Income taxes receivable (payable) 608,087 68,879 2,396,221
Increase in Other Liabilities 31,000
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,486,471) (4,606,301) 1,333,498
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (146,090) (1,004,689) (1,517,505)
Cash paid for acquisitions, net of cash acquired (326,774) (262,500) (1,837,545)
Cash paid for the sale of businesses (25,000)
Proceeds from the sale of discontinued operations 1,863,254
Proceeds from the sale of joint ventures 90,000
Proceeds from the sale of property and equipment 14,000 861,220 --
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES 1,469,390 (405,969) (3,355,050)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock (9,597) (120,576) (648,503)
Proceeds from bank and other loans 1,541,561 10,250,000 12,273,175
Payments of bank loans and capital lease obligations (2,783,592) (8,316,647) (8,780,944)
Net proceeds from issuance of common stock and
exercise of common stock options and warrants 9,625 30,205
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES: (1,251,628) 1,822,402 2,873,933
------------ ------------ ------------
Net change in cash and cash equivalents (1,268,709) (3,189,868) 852,381
Cash and cash equivalents at beginning of period 2,223,806 5,413,674 4,561,293
------------ ------------ ------------
Cash and cash equivalents at end of period $ 955,097 $ 2,223,806 $ 5,413,674
============ ============ ============
45
2001 RESTATED
-------------
2003 2002 SEE NOTE 2(a)
----------- ----------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 510,334 $ 577,450 $ 992,896
=========== =========== ===========
Income taxes $ 33,833 $ 309,773
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Re-issuance of treasury stock at fair value 0 383,675 331,538
Common stock and options issued in connection with
business combination 6,613 893,374 2,927,695
Issuance of common stock for debt default penalties and interest 318,250
Exercise of stock options -- -- --
Equipment acquired under capital leases 70,860 422,254 414,240
Issuance of common stock upon loan obligation 0 450,000 --
Note receivable on rescission of acquisition contract -- -- 1,000,000
Value of warrants issued $ 0 $ 300,000 $ 800,000
Details of business combinations:
Fair value of assets acquired $ 326,774 $ 1,165,874 $ 5,455,552
Less: liabilities assumed 0 (10,000) (690,312)
Less: Stock issued 0 (893,374) (2,927,695)
----------- ----------- -----------
Cash paid for acquisitions $ 326,774 $ 262,500 $ 1,837,545
=========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
46
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002, AND 2001
The information for the year ended June 30, 2002 is presented as unaudited as
indicated by the information preceding the Index to the Financial Statements
1. ORGANIZATION AND NATURE OF BUSINESS
(a) Description of the Company
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, the
"Company") is a corporation that was organized in 1981 under the laws of the
State of New York and reincorporated under the laws of the State of Delaware in
1993. The Company provides financial planning services, including securities
brokerage, insurance and mortgage agency services, and federal, state and local
tax preparation services to individuals, predominantly in the middle and upper
income tax brackets. In Fiscal 2003, approximately 89% of the Company's revenues
were derived from commissions on financial planning services and approximately
11% were derived from fees for tax preparation services. As of June 30, 2003,
the Company had 43 offices operating in 5 states (New York, New Jersey,
Connecticut, Florida and Colorado).
In Fiscal 2003, the Company had total revenues of $62.9 million representing a
decrease of $4.6 million or 7.4% compared to $67.5 million in revenues from
continuing operations in Fiscal 2002. The decline was primarily attributed to
the reduction in commissions from financial planning services, which decreased
$3.4 million or 6.1% to $56.1 million in Fiscal 2003 from $59.5 million in
Fiscal 2002. In addition, revenues from tax preparation services decreased by
$.6 million or 8.7% to $6.8 million in Fiscal 2003 from $7.4 million in Fiscal
2002. The reduction in financial planning revenue is primarily due to office
sales (which were not part of the Company's discontinued operations) and weak
financial markets. The decline in revenues from tax preparation is primarily
attributable to the impact of office sales (which were not part of the
discontinued operations) and non-returning clients, offset in part by new
clients. See Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
47
The Company's financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered losses from operations in
each of its last four years, and is in default under its three largest financing
agreements, raising substantial doubt about its ability to continue as a going
concern. During Fiscal 2003, the Company incurred net losses of $14,028,251 and
at June 30, 2003 had a working capital deficit of $19,302,466. The Company's
ability to continue as a going concern and its future success is dependent on
its ability to reduce costs and generate revenues.
As a result of a number of defaults under its agreements with Wachovia Bank,
National Association ("Wachovia"), on November 27, 2002, the Company entered
into a debt forbearance agreement with Wachovia and subsequently amended the
debt forbearance agreement on June 18, 2003. Another of its lenders, Travelers
Insurance Company ("Travelers") 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 debt is also subordinated to Wachovia. 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. See
"Recent Developments" and Note 9 to Consolidated Financial Statements.
(b) Delisting of the Company Stock
The Company's common stock was delisted from the NASDAQ national market in
August 2002, and is now traded in the over-the-counter market on what is
commonly referred to as the pink sheets. As a result, an investor may find it
more difficult to dispose of or obtain accurate quotations as to the market
value of the Company's securities. In addition, the Company is now subject to
Rule 15c2-11 promulgated by the Securities and Exchange Commission. If the
Company fails to meet criteria set forth in such Rule (such as failing to file
required periodic reports pursuant to the Exchange Act) various practice
requirements are imposed on broker-dealers who sell securities governed by the
Rule to persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transactions prior to sale. Consequently, the Rule may have a
materially adverse effect on the ability of broker-dealers to sell the Company's
securities, which may materially affect the ability of shareholders to sell the
securities in the secondary market.
The delisting has made trading the Company's shares more difficult for
investors, potentially leading to further declines in share price. It would also
make it more difficult for the Company to raise additional capital, although the
Company has no intentions to do so. The Company will also incur additional costs
under state blue-sky laws if it sells equity.
(c) Basis of Presentation and Going Concern
The Company's June 30, 2003 Consolidated Financial Statements have been prepared
assuming the Company will continue as a going concern. The Company has suffered
losses from operations in each of its last four years, and is in default under
its three largest credit facilities, raising substantial doubt about its ability
to continue as a going concern. During Fiscal 2003, the Company incurred net
losses totaling $14,028,251 and, at June 30, 2003, was in a working capital
deficit position of $19,302,466., from continuing operations. At June 30, 2003,
the Company had $955,097 of cash and cash equivalents and $5,408,252 of trade
receivables to fund short-term working capital requirements. The Company's
ability to continue as a going concern and its future success is dependent upon
its ability to reduce costs, and generate revenues to: (1) satisfy its current
obligations and commitments, and (2) continue its growth.
48
(d) Necessary Steps to Meet Cash Flow Requirements
The Company believes that it will be able to complete the necessary steps in
order to meet its cash flow requirements throughout fiscal 2004. Management's
plans in this regard include, but are not limited to, the following:
1. Management has engaged in an extensive campaign to reduce corporate
overhead, consisting primarily of closing the White Plains, New York
executive offices and consolidating those functions into the Poughkeepsie,
New York home office. This has resulted in savings of approximately
$170,000 per month.
2. The company's current strategy is not to actively pursue acquisitions.
3. The company has negotiated with certain strategic vendors to settle
current liabilities and will continue to do so.
Management believes that these actions will be successful. However, there can be
no assurance that the Company will generate sufficient revenues or reduce costs
to provide positive cash flows from operations to permit the Company to realize
its plans. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Restatements
The Consolidated Financial Statements as of June 30, 2001 and for the year then
ended have been restated to correct an overstatement error of $600,000 in the
previously reported revenue amount as indicated below. During the quarter ended
December 31, 2001 of Fiscal 2002, management identified the overstatement error
from Fiscal 2001 during a review of its' intercompany accounts. Cash amounts of
$600,000 advanced by a subsidiary during the quarter ended March 30, 2001 of
Fiscal 2001 were not eliminated properly and erroneously reported as revenue.
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
AS PREVIOUSLY
REPORTED AS RESTATED
-------- -----------
BALANCE SHEET:
Accounts payable and accrued expenses $ 9,831,363 $ 10,431,363
Deferred tax assets, net of current 1,460,160 1,709,160
Retained earnings 1,911,027 1,560,027
STATEMENT OF OPERATIONS:
Revenue (*) $ 106,513,173 $ 104,900,310
Provision for income taxes 946,764 697,764
Net income (loss)(**) 138,261 (212,739)
NET INCOME (LOSS) PER SHARE:
Basic and diluted $ 0.02 $ (0.03)
(*) $1,012,863 representing net trading gains previously included in financial
planning revenue have been reclassified to other income (expense) on the
accompanying statements of operations for the year ended June 30, 2001.
(**) Retained earnings as of July 1, 2001 have been decreased by $351,000 for
the effect of the restatements on prior years.
(***) Such amounts do not reflect the effect of discontinued operations.
49
(b) Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and
all majority owned subsidiaries from their respective dates of acquisition (Note
3). All significant intercompany transactions and balances have been eliminated.
(c) Reclassifications
Certain prior years' information has been reclassified to conform to current
year presentation.
(d) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include
investments in money market funds and are stated at cost, which approximates
market value. Cash at times may exceed FDIC insurable limits.
(f) Marketable Securities
The Company accounts for its short-term investments in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). The Company's short-term
investments consist of trading securities and are stated at quoted market
values, with unrealized gains and losses reported as investment income in
earnings. During the fiscal years ended June 30, 2003, 2002, and 2001 the
Company recognized unrealized gains (losses) from trading securities of
$(163,769 ), $(957,031) and $1,071,849 respectively. Realized gains, realized
losses and declines in value judged to be other-than-temporary, are included in
other income (expense). All such gains and losses are calculated on the basis of
specific-identification method. During the fiscal year ending June 30, 2003 the
Company recognized $1,518,089 in realized gains . Interest earned is included in
earnings. The original cost included in the carrying value of marketable
securities at June 30, 2003 is $881,015.
Securities sold, but not yet purchased, are stated at quoted market values with
unrealized gains and losses reflected in the statements of operations.
Subsequent market fluctuations of securities sold, but not yet purchased, may
require purchasing the securities at prices that may differ from the market
values reflected in the accompanying balance sheets. The liability attributable
to securities sold short, but not yet purchased, is $74,700 and is included in
accounts payable and accrued expenses.
(g) Accounts Receivable
The Company's accounts receivable consist primarily of amounts due related to
financial planning commissions and tax/accounting services performed. The
allowance for doubtful accounts represent an amount considered by management to
be adequate to cover potential losses, if any.
(h) Property and Equipment
Property and equipment are carried at cost. Amounts incurred for repairs and
maintenance are charged to operations in the period incurred.
50
Depreciation is calculated on a straight-line basis over the following useful
lives:
Buildings 31.5 years
Equipment 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements 5-10 years
Software 5 years
Assets under capital lease 3-7 years
(i) Goodwill and Other Intangible Assets
Goodwill and other intangibles, net relates to our acquisitions accounted for
under the purchase method. Intangible assets include covenants not to compete,
customer lists, goodwill, independent contractor agreements and other
identifiable intangible assets. Goodwill represents acquisition costs in excess
of the fair value of net tangible and identifiable intangible assets acquired as
required by SFAS No. 141 "Business Combinations". On July 1, 2001, the Company
adopted the full provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 requires that purchased goodwill and certain
indefinite-lived intangibles no longer be amortized, but instead be tested for
impairment at least annually. Prior to SFAS 142 goodwill was amortized over an
expected life of 20 years. This testing requires the comparison of carrying
values to fair value and, when appropriate, requires the reduction of the
carrying value of impaired assets to their fair value. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives. Amortization of finite lived intangible
assets is calculated on a straight-line basis over the following lives:
Customer Lists 5-20 years
Broker-Dealer Registration 20 years
Non-Compete Contracts 3-5 years
House Accounts 15 years
Administrative Infrastructure 7 years
Independent Contractor Agreements 15 years
As required, the Company performed the fair value impairment tests prescribed by
SFAS 142 during the fiscal year ended June 30, 2002 (see Notes 6 & 7).
As of June 30, 2003, the remaining amount of the Company's goodwill, net of
amortization recorded prior to June 30, 2002, was approximately $3,900,072. As
required by SFAS 142, the following table shows the Company's Fiscal 2001
results, which are presented on a basis comparable to the Fiscal 2002and Fiscal
2003 results, adjusted to exclude amortization expense related to goodwill.
51
YEAR ENDED JUNE 30,
RESTATED SEE
2003 2002 2001 Note 2
-------------- ------------ ------------
Net loss - as reported $ (14,028,251) $(22,304,299) $ (212,739)
Add back: Goodwill amortization -- 331,228
-------------- ------------ ------------
Net income (loss) - as adjusted (14,028,251) (22,304,299) 118,489
Basic and diluted net loss per share:
Basic and diluted net loss per share - as reported $ (1.49) $ (2.58) $ (0.03)
Add back: Goodwill & other intangible amortization 0.04
-------------- ------------ ------------
Net income (loss) per share - as adjusted $ (1.49) $ (2.58) $ 0.01
============== ============ ============
Weighted average shares:
Basic and diluted 9,440,815 8,647,966 8,082,674
(j) Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", ("SFAS 144") the Company reviews its' recorded long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable and provides currently
for any identified impairments. SFAS 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", and provides guidance on classification and accounting for such assets when
held for sale or abandoned.
(k) Website Development and Internal Use Software Costs
In accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," as well as
Emerging Issues Task Force ("EITF') 00-02, "Accounting for Website Development
Costs," the Company capitalized costs incurred in the application development
stage related to the development of its website and its internal use software in
the amount of approximately $0 and $162,000 in Fiscal 2003 and 2002,
respectively. Amortization expense is computed on a straight-line basis over a
period of three to five years, the expected useful life, and amounted to
approximately $94,681 and $52,000 for the years ended June 30, 2003 and 2002
(see Note 5).
(l) Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting services and direct mail services upon completion of the services.
Financial planning services include securities and other transactions. The
related commission revenue and expenses are recognized on a trade date basis.
(m) Advertising Costs
The costs to develop direct-mail advertising are accumulated and expensed upon
the first mailing of such advertising in accordance with SOP 93-7, "Reporting on
Advertising Costs". The costs to develop tax season programs and associated
printing and paper costs are deferred in the first and second Fiscal quarters
and expensed in the third Fiscal quarter upon the first use of such
advertisements in the advertising programs.
(n) Interest Income (Expenses)
Interest expense relates to interest owed on the Company's debt. Interest
expense is recognized over the period the debt is outstanding at the stated
interest rates (see Note 9). Interest income relates primarily to interest
earned on bonds by the broker-dealer segment. Interest is recognized from the
last interest payment date up to but not including the settlement date of the
sale.
(o) Income Taxes
Income taxes have been provided using the liability method. Deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
estimated tax rates and laws to taxable years in which such differences are
expected to reverse.
(p) Stock-based Compensation
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"),
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation awards to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
52
At June 30, 2003, the Company has one stock-based employee compensation plan.
Prior to 2000, the Company accounted for those plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Effective July 1, 2000, the Company
adopted the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-based Compensation, prospectively to all employee awards
granted, modified, or settled after January 1, 2002. Awards under the Company's
plans vest over periods ranging from three to five years. There, the cost
related to stock-based employee compensation included in the determination of
net income for 2002 and 2003 is less than that which would have been recognized
if the fair value based method had been applied to all awards since the original
effective date of Statement 123. The following table illustrates the effect on
net income and earnings per share if the fair value based method had been
applied to all outstanding and unvested awards in each period.
Year Ended June 30,
2003 2002 2001
Net Loss, as reported $(14,028,251) $(22,304,299) $ (212,739)
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 198,844 2,604,707 2,810,047
------------ ------------ ------------
Proforma net loss $(14,227,095) $(24,909,006) $ (3,022,786)
Basic and diluted earnings per share:
As reported (1.49) (2.58) (0.03)
Proforma (1.51) (2.88) (0.37)
Accordingly, the compensation cost for stock options awarded to employees and
directors is measured as excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee or director
must pay to acquire the stock. As required, the Company follows SFAS 123 to
account for stock-based compensation awards to outside consultants. Accordingly,
the compensation costs for stock option awards granted to outside consultants
and non-employee financial planners is measured at the date of grant based on
the fair value of the award using the Black-Scholes option-pricing model (see
Note 12).
(q) Net Income (Loss) Per Share
Net income (loss) per common share amounts ("basic EPS") are computed by
dividing net earnings (loss) by the weighted average number of common shares
outstanding and exclude any potential dilution. Net income (loss) per common
share amounts assuming dilution ("diluted EPS") are computed by reflecting
potential dilution from the exercise of stock options and warrants (See Note
14). As the Company has lost money in the last three years, there is no dilutive
effect.
53
(r) Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, marketable securities, accounts receivable, notes receivable, and
accounts payable, approximated fair value as of June 30, 2003 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.
(s) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of trade receivables. The majority of the Company's trade
receivables are commissions earned from providing financial planning services
that include securities/brokerage services, insurance and mortgage agency
services. As a result of the diversity of services, markets and the wide variety
of customers, the Company does not consider itself to have any significant
concentration of credit risk.
(t) Segment Disclosure
The Company discloses financial and detailed information about its operating
segments in a manner consistent with internal segment reporting used by the
Company to allocate resources and assess financial performance (see Note 16).
(u) Recent Accounting Pronouncements
In August 2001, SFAS 144 was issued, which supercedes both SFAS No. 121,
Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of ("SFAS 121") and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("Opinion 30"), for the disposal of a segment
of a business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset that
is used, as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS 121, an impairment assessment under SFAS 144 will never result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS
142. As required, the Company adopted SFAS 144 on July 1, 2002. Adoption of SFAS
144 did not have an immediate impact on long-lived assets held for use on the
Company's financial statements because the impairment assessment under SFAS 144
is largely unchanged from SFAS 121. The Company has adopted SFAS 144.
In April 2002, SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment
of SFAS No. 13, and Technical Corrections" ("SFAS 145") was issued. SFAS No. 4
required all gains and losses from the extinguishments of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS 145
requires gains and losses from certain debt extinguishments not to be reported
as extraordinary items when the use of debt extinguishments is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
requirements for motor carriers. Those transitions are completed; therefore SFAS
145 rescinds SFAS No. 44. SFAS 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS 145 is effective
for fiscal years beginning after May 15, 2002. The provisions relating to
sale-leaseback are effective for transactions after May 15, 2002. The Company
adopted SFAS 145 on July 1, 2002. The adoption of SFAS 145 is not expected to
have a material impact on the Company's prospective financial position or
results of operations.
54
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") was issued. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". The principal difference between SFAS 146 and EITF 94-3
relates to the timing of liability recognition. Under SFAS 146, a liability for
a cost associated with an exit or disposal activity is recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The provisions
of SFAS 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS 146 is not expected to have a
material impact on the Company's financial position or results of operations.
In October 2002, SFAS No. 147 "Acquisitions of Certain Financial Institutions -
an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9"
("SFAS 147") was issued. FASB Statement No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method, provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both Statement 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of
Statement 72 to recognize (and subsequently amortize) any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of this Statement. In addition, this
Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used. The adoption of SFAS No. 147 is not expected to have a
material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), "Accounting for
Stock-Based Compensation--Transition and Disclosure", amending FASB Statement
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation. SFAS 148
provides two additional alternative transition methods for recognizing an
entity's voluntary decision to change its method of accounting for stock-based
employee compensation to the fair-value method. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 so that entities will have to: (1) make
more-prominent disclosures regarding the pro forma effects of using the
fair-value method of accounting for stock-based compensation; (2) present those
disclosures in a more accessible format in the footnotes to the annual financial
statements; and (3) include those disclosures in interim financial statements.
SFAS 148's transition guidance and provisions for annual disclosures are
effective for fiscal years ending after December 15, 2002; earlier application
is permitted. The Company has adopted SFAS 148.
In April 2003, SFAS No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149") was issued. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The adoption of SFAS No. 149 is not expected to have a material
impact on the Company's financial position or results of operations
In May 2003, SFAS No. 150 "Accounting for Certain Financial Instruments with
characteristics of both liabilities and equity" ("SFAS 150") was issued. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Some of the provisions
of this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining
provisions of this Statement are consistent with the Board's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. While the Board
still plans to revise that definition through an amendment to Concepts Statement
6, the Board decided to defer issuing that amendment until it has concluded its
deliberations on the next phase of this project. That next phase will deal with
certain compound financial instruments including puttable shares, convertible
bonds, and dual-indexed financial instruments. The adoption of SFAS No. 150 is
not expected to have a material impact on the Company's financial position or
results of operations.
55
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. Management is currently evaluating the effect
FIN 45 may have on the Company's financial statements as a result of the sale of
offices to Pinnacle, which included the assumption by Pinnacle of certain leases
of such offices, on November 26, 2002.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Management is evaluating the
impact, if any, that adoption of the provisions of FIN 46 will have upon its
financial condition or results of operations (unaudited).
3. BUSINESS COMBINATIONS AND SOLD OFFICES
(A) During Fiscal 2001, the Company acquired four financial planning practices
with a valuation of $3.4 million, and thirteen tax practices with a valuation of
$3.3 million. The acquisitions were made with an initial purchase payment of
approximately 50% at closing with a combination of cash and stock or all stock.
The remaining 50% of the purchase payment will be paid if the acquired practice
meets or exceeds the agreed upon profitability targets post closing for a period
of generally five years. In Fiscal 2001, the Company recorded $5.4 million as
the measurable fair value of the assets acquired with the balance recorded in
2002 through 2006 if performance targets are met in accordance with the purchase
agreements. In Fiscal 2001, the Company rescinded one acquisition contract
resulting in a gain upon rescission of $0.6 million with a total recovery of
$1.0 million, including the return of the initial acquisition capital. The $1.0
million note receivable has a term of 3 years and bears interest of 6% per year.
This note will be repaid through the withholding of future financial planning
production of the debtor, cleared by the Company.
During Fiscal 2002, the Company acquired two tax and financial planning
practices with an aggregate valuation of approximately $1.1 million. The
acquisition of Copans & Company CPAs P.C. ("Copans") on July 1, 2001 was
completed for consideration of $216,250 in cash, 69,683 shares of the Company's
stock valued at $256,250 and a contingent payment of up to $512,500 which is
payable in five annual installments with interest at 9% contingent on the Copans
practice meeting annual EBITDA of at least $205,000.
In Fiscal 2002 the Company rescinded two previous acquisitions. On July 1, 2001
Tri-Star Sports & Entertainment Group, Inc. repurchased certain assets from the
Company for $350,000 in cash and 41,176 shares of the Company's common stock
valued at $120,647, resulting in a loss on disposal to the Company of $169,974.
On April 30, 2002 Helen White repurchased certain assets from the Company
resulting in a recovery of $65,000 in cash and a loss on disposal to the Company
of $36,269.
All of the above acquisitions have been accounted for by the purchase method.
56
The pro forma results for Fiscal 2002 and 2001, assuming the acquisitions had
been made at the beginning of the fiscal year, would not be materially different
from reported results.
(B) The company has financed the sale of a few offices with the receipt of notes
to be paid over various terms up to 54 months. The principal payments are to be
made at a minimum from 10% of gross financial planning revenues received by the
sold office. 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:
2004 $237,302
2005 $147,064
2006 $157,270
2007 $172,490
2008 $ 43,266
(C) See Note 20 to Consolidated Financial Statements for a discussion of the
sale of offices to Pinnacle.
(D) Financial Data on discounted operations of offices sold.
For the Year Ended June 30
--------------------------
2003 2002 2001
---- ---- ----
Revenues 4,833,822 25,536,311 22,158,580
Pre-tax Profits (Loss) (1,300,705) 1,512,579 3,044,620
4. RECEIVABLES FROM OFFICERS, STOCKHOLDERS AND EMPLOYEES
Receivables from officers, stockholders and employees consist of the following:
As of June 30, 2003 2002
Demand loans from officers, non-interest bearing Notes
receivable from stockholders of the Company. Interest is
charged at rates between 6% and 10% per annum, due in 1-5 years 109,938 1,023,563
Demand loans from employees and advances to financial planners (a) 776,866 738,403
--------- ---------
886,804 1,761,966
Less: Current portion 555,838 1,129,092
--------- ---------
Long-term portion (included in other assets) 330,966 632,874
========= =========
(a) The balance at June 30, 2003 includes notes receivable and accrued interest
from financial planners and employees of $1,440,951 and $180,173 of commission
advances in excess of earnings. Included above are reserves of $734,321 and
534,383 for the fiscal years ended June 30, 2003 and 2002 respectively.
57
Interest income from officers and stockholders was approximately $0, $0 and
$10,750 for the fiscal years ended June 30, 2003, 2002 and 2001, respectively.
5. PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment consist of the following:
AS OF JUNE 30,
2003 2002
---- ----
Buildings 317,737 $ 317,737
Equipment 4,094,599 4,103,973
Furniture and fixtures 686,462 116,196
Leasehold improvements 705,459 1,103,883
Software 674,338 999,360
---------- ----------
6,478,595 6,641,149
Less: Accumulated depreciation and amortization 4,082,282 3,401,647
Total 2,396,313 $3,239,502
========== ==========
Property and equipment under capitalized leases was $1,681,648 at June 30, 2003
and $1,928,613 at June 30, 2002, respectively. Accumulated amortization related
to capital leases was $1,186,847 and $1,025,362 at June 30, 2003 and June 2002,
respectively.
Depreciation expense for property and equipment was $1.0 million, $1.6 million,
and $1.3 million for the fiscal years ended June 30, 2003, 2002 and 2001,
respectively.
6. GOODWILL
Goodwill included on the accompanying balance sheets as of June 30, 2003 and
2002 was $3,900,072 and $5,264,858, respectively. The Company's goodwill at June
30, 2003 all relates to acquisitions of its broker-dealer subsidiaries completed
during or prior to the fiscal year ended June 30, 1999, which were accounted for
under the purchase method.
The impairment testing for goodwill in the broker-dealer reporting unit was
performed using future discounted cash flows and an independent appraisal. In
the third quarter of Fiscal 2002, the Company recognized an impairment loss of
$233,750 of goodwill associated with the e1040.com business as the result of a
change in business strategy. In the fourth quarter fiscal 2003, the Company
recognized an impairment loss of $3,479,792 of goodwill and intangible based on
management's assessment of such intangible and estimated future cash flows.
7. INTANGIBLE ASSETS
During the fiscal years ended June 30, 2003, 2002 and 2001, the Company acquired
aggregate intangible assets valued at $0, $1,165,874 and $5,455,552
respectively, in connection with acquisitions which are accounted for under the
purchase method.
58
Intangible assets consist of the following:
AS OF JUNE 30,
2003 2002
---- ----
Customer Lists $ 5,231,316 $ 5,166,625
Broker-Dealer Registration 200,000 200,000
Non-Compete Contracts 800,000 920,946
House Accounts 900,000 900,000
Administrative Infrastructure 700,000 700,000
Independent Contractor Agreements 5,380,000 5,700,000
----------- -----------
13,211,316 13,587,571
Less: Accumulated amortization 7,078,068 4,284,171
And Impairment
Total 6,133,248 9,303,400
=========== ===========
Amortization expense for the fiscal years ended June 30, 2003 and 2002 was
computed on a straight-line basis over periods of five to twenty years, and it
amounted to $1.4 million and $1.4 million, respectively. Annual amortization
expense will be approximately $1.2 million subsequent to Fiscal 2003.
As required, the Company performed the fair value impairment tests prescribed by
SFAS 142 during the fiscal year ended June 30, 2003. Fair value was determined
based on recent comparable sale transactions and future cash flow projections.
As a result, during the fiscal year ended June 30, 2003 the company recognized
impairment losses of $371,793 on customer lists.
Accumulated amortization at June 30, 2003 for customer lists and independent
contractor agreements was $2,921,966 and $312,816, respectively.
8. ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
AS OF JUNE 30,
2003 2002
---- ----
Accounts payable $ 3,652,608 $ 3,771,581
Commissions payable 4,585,069 5,372,196
Accrued compensation 769,638 523,809
Accrued Bonuses 1,049,007 1,311,282
Accrued vacation 391,000 450,000
Deferred Revenue 433,539 299,430
Accrued Litigation 1,741,011 447,654
Accrued Audit fees and tax fees 365,000 243,750
Accrued Other 1,932,644 2,081,405
Less: amounts related to (875,707) (1,692,366)
Liabilities of Discontinued Operations
------------ ------------
Total $ 14,043,809 $ 12,808,741
============ ============
59
9. DEBT
Debt consists of the following:
As of June 30,
2003 2002
---------------------------
Wachovia Bank 5,073,333 6,583,333
Traveler's Insurance Company Facility
($4,750,000 and $4,750,000 less unamortized
debt discount of $394,893 and $677,185 at June 30,
2002 and 2002, respectively) 4,355,107 4,072,815
Unsecured promissory notes 1,263,128 1,092,690
Unsecured promissory note ($1,000,000 less unamortized
debt discount of $250,000 at June 30, 2002) 1,000,000 750,000
Note Payable 73,909 80,061
Note Payable 165,000 165,000
Notes Payable for client settlements, payable over
periods of up to 7 years at varying interest rates
to 10% 443,208 225,102
Capitalized lease obligations 642,933 1,139,866
---------------------------
13,016,618 14,108,867
Less: Liabilities for Discontinued Operations (199,378) (863,499)
Less: Current Portion (12,166,618) (12,393,867)
---------------------------
Total 650,622 851,501
===========================
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"). The
interest rate on the Term Loan and the Revolving Credit Loan is LIBOR plus
2.75%. The Term Loan was being amortized over five years and the Revolving
Credit Loan had a term of two years.
On November 27, 2002, the Company and Wachovia entered into a forbearance
agreement (the "Forbearance Agreement") whereby Wachovia agreed to forbear from
acting on certain defaults of financial covenants by the Company under the
Revolving Credit Loan and under the Term Loan. The Company had changed its
control without Wachovia's consent and failed to meet requirements under the
Loan to pay scheduled debt service and to maintain certain financial ratios
including senior funded debt to EBITDA. The Company paid the debt service to
Wachovia and Wachovia agreed to forbear from enforcing its default remedies and
extended the time of payment for the Loan to November 1, 2003 ("Maturity Date").
Pursuant to the Forbearance Agreement, the interest rate charged on the Loans
was increased by 1% to LIBOR plus 3.75%.
With respect to the Revolving Credit Loan, during the period of forbearance, the
Company is obligated to make interest payments monthly until the Maturity Date.
Principal payments in the amount of $250,000 each were due on March 10, 2003,
April 10, 2003, May 10, 2003 and June 10, 2003 with the remaining principal
balance due on the Maturity Date. The Company timely made the $250,000 principal
payments due on March 10, 2003 and on April 10, 2003. In an Amendment to
Forbearance Agreement entered into between the Company and Wachovia as of June
18, 2003, Wachovia rescheduled the May 10, 2003 and June 10, 2003 payments and
the Company did not make these payments.
60
With respect to the Term Loan, during the period of forbearance the Company is
obligated to make its regular payments of principal in the amount of $83,333
plus interest until the Maturity Date when remaining principal balance is due.
In addition, commencing on May 1, 2003, the Company is obligated to make
payments on the 10th day of each month to Wachovia in an amount equal to fifty
percent (50%) of the amount of cash and marketable securities possessed by the
Company that exceeds $1,500,000 on the last day of the preceding month. However,
amounts contained in the broker-dealer reserve to the extent of regulatory
requirements and historical levels will not be included in the calculation of
cash and marketable securities for purposes of this payment.
On March 5, 2003, the Company received a notice of default from the attorneys
for Wachovia. Wachovia alleged that the Company was in default for the following
reasons: selling eleven offices without the written consent of Wachovia; failing
to remit to Wachovia the proceeds of the sales of the offices; and failing to
provide to Wachovia the monthly reports required under the Forbearance
Agreement. By letter dated March 10, 2003, counsel for Wachovia advised the
Company that Wachovia rescinded the notice of default. Wachovia also consented
to the sale of certain Company offices. Wachovia's forbearance and consent were
made in reliance on the Company's agreement that it would obtain Wachovia's
prior consent for all future sales of offices and that the cash payments
received or to be received from the approved sales would be remitted to Wachovia
in reduction of the Company's scheduled principal payments.
Upon a subsequent review of the Forbearance Agreement, on March 21, 2003 the
Company notified the attorneys for Wachovia that it was not in compliance with
the following provisions of the Forbearance Agreement: late filing of several
local personal property tax returns and late payment of the taxes owed; late
payment of several local license fees and late payment of several vendors of
materials and supplies; and failure to make rent payments on a few vacant
offices for which the Company was negotiating workout payments with the
landlords. The total amount due for these payables was not material and the
Company was verbally advised by counsel to Wachovia that Wachovia would not
issue a notice of default for any of the items.
At a meeting with Wachovia on May 13, 2003, the Company notified Wachovia that
it was in technical default under the Forbearance Agreement for failing to pay
payroll tax withholdings due which resulted from a bookkeeping error from
switching to a new payroll company. All payroll tax withholdings were
immediately paid by the Company after discovering the error.
By an Amendment to Forbearance Agreement dated as of June 18, 2003, the Company
and Wachovia amended the Forbearance Agreement to change, among other things,
the following provisions of the Forbearance Agreement: the Maturity Date was
extended to July 1, 2004; the Company's reporting requirements to Wachovia were
changed; the May 10, 2003 and June 10, 2003 principal payments of $250,000 were
rescheduled; principal payments in amounts of $250,000 are now due on March 10,
2004, April 10, 2004, May 10, 2004 and June 10, 2004; and the Company was
required to pay to Wachovia fifty percent (50%) of the excess over $1,000,000 of
any lump sum payment received from Pinnacle. The Company may be in technical
default of other provisions of the Loan, the Forbearance Agreement and the
Amendment to Forbearance Agreement. However, the Company does not believe that
Wachovia will issue a note of default for any of these technical defaults.
The Company's credit facility with Travelers closed on November 1, 2000. It was
a $5 million debt financing. As part of the debt facility financing with
Travelers, the Company issued warrants to purchase 725,000 shares of the
Company's common stock. Of this amount, 425,000 warrants were issued to purchase
at $4.23 per share, representing the average closing price for 20 days before
the effective date. The 425,000 warrants were exercisable before May 2, 2003. As
of May 2003, the warrants were not exercised and subsequently expired. The
remaining warrants to purchase 300,000 shares of the Company's common stock were
awarded on February 28, 2002 with a strike price of $2.43 and will expire on
October 31, 2005. The value, as determined by an external appraisal of these
warrants issued on February 28, 2002, was set at $300,000. The warrant
valuations were treated as a debt discount and are being amortized over the five
year term of the Debt Facility under the effective interest rate method. The
amortization of the debt discount for the fiscal years ended June 30, 2003, 2002
and 2001 was approximately $282,292, $256,600 and $166,000, respectively. At
June 30, 2003 and June 30, 2002, the Term Loan had an outstanding principal
balance of $4,750,000 and $4,750,000, respectively.
61
On September 24, 2002, the Company received a notice from the attorneys for
Travelers alleging that the Company was in default under its debt facility with
Travelers due to nonpayment of a $100,000 penalty for failure to meet sales
production requirements as specified in the debt facility. The Company sent a
letter to the attorneys denying that the Company was in default. Although the
Traveler's notice stated that all unpaid interest and principal under the Debt
Facility were immediately due and payable and that Travelers reserved its rights
and remedies under the debt facility, it also stated that Travelers intended to
comply with the terms of a subordination agreement between Travelers and
Wachovia. Such subordination agreement greatly restricts the remedies which
Travelers could pursue against the Company. No further notices have been
received from Travelers.
On October 30, 2001, the Company borrowed $1,000,000 from Rappaport pursuant to
a written note without collateral and without stated interest (the "Loan"). The
Loan was due and payable on October 30, 2002. Additionally, the Loan provided
that: Rappaport receive 100,000 shares of Rule 144 restricted shares of common
stock of the Company upon the funding of the Loan, subject to adjustment so that
the value of the 100,000 shares was $300,000 when the Rule 144 restrictions were
removed; there was a penalty of 50,000 shares to be issued to Rappaport if the
Loan was not paid when due and an additional penalty of 10,000 shares per month
thereafter until the Loan was paid in full. The 100,000 shares were issued on
October 31, 2001 at a value of $3 per share. On December 26, 2001, Rappaport
subordinated the Loan to the $7,000,000 being loaned to the Company by Wachovia.
In consideration of the subordination, the Loan was modified by increasing the
10,000 shares penalty to 15,000 shares per month and by agreeing to issue 50,000
additional shares to Rappaport if the Loan was not paid in full by March 31,
2002, subject to adjustment so that the value of the shares issued was $150,000
when the Rule 144 restrictions were removed. The Loan was not paid by March 31,
2002. Accordingly, Rappaport was issued 95,298 common shares with a value of
$150,000 on May 7, 2002 for the March 31, 2002 penalty. When the Rule 144
holding period was satisfied in October, 2002 with respect to the 100,000 shares
of the Company's common stock issued to Rappaport on the funding of the Loan,
the stock price was $.40 per share. As a result, on October 31, 2002, Rappaport
was issued an additional 650,000 common shares to be added to the 100,000 shares
issued upon the funding of the Loan so that the total value of the original
shares issued was $300,000. By June 30, 2003, Rappaport received a total of
1,015,298 shares for all interest and penalties and will receive 15,000 shares
per month as additional penalties until the Loan is paid in full.
Debt Maturities
The stated maturities of all long term debt due after June 30, 2004 are as
follows:
Fiscal Year Ended June 30:
2004 2,166,618
2005 464,824
2006 74,137
2007 52,037
2008 31,323
Thereafter 53,198
-----------
12,842,137
===========
10. CAPITAL LEASE OBLIGATIONS
The Company is the lessee of certain equipment under capital leases expiring
through 2006. The assets and liabilities under capital leases are carried at the
lower of the present value of minimum lease payments or the fair market value of
the asset. The assets are depreciated over the shorter of their estimated useful
lives or their respective lease terms. Depreciation of assets under capital
leases is included in depreciation expense.
62
Minimum future lease payments under capital leases as of June 30, 2003 are as
follows:
2003 392,770
2004 252,853
2005 55,301
2006 26,080
2007 --
Thereafter --
---------
726,984
---------
---------
Less amount representing finance charge 84,051
---------
---------
Present value of net minimum lease payments 642,933
=========
Capital equipment leases have the lease rate factor (finance charge) built in to
the monthly installment and range from 9% to 11.7%.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under various non-cancelable lease agreements for the
rental of office space through 2012. The lease agreements for office space
contain escalation clauses based principally upon real estate taxes, building
maintenance and utility costs.
The following is a schedule by fiscal year of future minimum rental payments
required under operating leases as of June 30, 2003:
2004 3,698,058
2005 3,023,391
2006 1,858,943
2007 924,428
2008 665,327
Thereafter 1,044,386
------------
Total $ 11,214,533
============
Aggregate operating lease commitment amounts included in the table above with
respect to the leases assigned to Pinnacle in November 2002 are $1,430,987,
$1,296,148, 791,851, $451,049, $346,348 and $575,586 for the fiscal years ending
June 30, 2004, 2005, 2006, 2007, 2008 and thereafter, respectively.
Rent expense from continuing operations for the fiscal years ended June 30,
2003, 2002 and 2001 was $3.0 million, 3.5 million, and $3.2 million,
respectively.
63
Professional Liability or Malpractice Insurance
The Company does not maintain any professional liability or malpractice
insurance policy for income tax preparation. The Company does maintain an
"Errors and Omissions" insurance policy for its security business. Although the
Company believes it complies with all applicable laws and regulations, no
assurance can be given that the Company will not be subject to professional
liability or malpractice suits.
Clearing Agreements
The Company is a party to clearing agreements with unaffiliated correspondent
brokers, which in relevant part states that the Company will assume customer
obligations in the event of a default. At June 30, 2003, the clearinghouse
brokers held approximately $150,000 of cash as a deposit requirement, which is
included in current liabilities on the accompanying balance sheet at June 30,
2003 as a reduction to amounts due to such brokers.
Net Capital Requirements
PCS and North Ridge are subject to the SEC's Uniform Net Capital Rule 15c
3-1(PCS) and 15c 3-3 (North Ridge), which require the maintenance of minimum
regulatory net capital and that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed the greater of 15 to 1 or $100,000
and $25,000, respectively. As of June 30, 2003 the Company was in compliance
with these regulations.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, PCS and North Ridge execute, as agents,
transactions on behalf of customers. These activities may expose the Company to
risk in the event customers, other brokers and dealers, banks depositories or
clearing organizations are unable to fulfill their contractual obligations. The
Company continuously monitors the creditworthiness of customers and third party
providers. If the agency transactions do not settle because of failure to
perform by either the customer or the counter parties, PCS and North Ridge may
be obligated to discharge the obligation of the non-performing party and, as a
result, may incur a loss if the market value of the security is different from
the contract amount of the transactions.
The Company was informed by the NASD in their Notice to Members 03-47 that it
must take prompt and immediate action to provide refunds to customers of the
Company who did not receive the proper mutual fund breakpoint commission
discounts. Previously, in January 2003, the Company became part of an industry
wide test group for the Sec in evaluating brokers overcharging customers on
mutual fund breakpoint concessions. The SEC report to the Company in its letter
dated February 27, 2003, that out of approximately 50,000 transactions selected,
the Company overcharged customers in twenty- three cases. Later in March 2003,
the NASD required all member firms to conduct a self-assessment. The Company
completed the self assessment in April 2003 and communicated its results to the
NASD. The Company's management believes that the amount of the liability will
have no material effect on the Company's financial statements.
Litigation
The Company and its B/D Subsidiaries are defendants and respondents in lawsuits
and NASD arbitrations in the ordinary course of business. On June 30, 2003,
there were 39 pending lawsuits and arbitrations and management accrued
$1,741,011 as a reserve for potential settlements, judgments and awards. Twenty
one of these matters were related to Prime Capital Services, Inc. and its
registered representatives. Prime Capital Services has Errors & Omissions
coverage for such matters. In addition, under the Prime Capital Services
Registered Representatives contract, each registered representative has
indemnified the Company for these claims. Accordingly, the Company believes that
these lawsuits and arbitrations will not have a material impact on its financial
position.
SEC Investigation
The Company is the subject of a formal investigation by the Securities and
Exchange Commission ("SEC"). The investigation concerns, among other things, the
restatement of the Company's financial results for the fiscal year ended June
30, 2001 and the fiscal quarters ended March 31, 2001 and December 31, 2001
(which have been previously disclosed in the Company's amended quarterly and
annual reports for such periods), the Company's delay in filing Form 10-K for
Fiscal 2002 and 2003 and the Company's past accounting and recordkeeping
practices. The Company had previously received informal, non-public inquiries
from the SEC regarding certain of these matters. On March 13, 2003 three of the
Company's executives received subpoenas from the SEC requesting that they
produce documents and provide testimony in connection with the formal
investigation. In addition, on March 19, 2003 the Company received a subpoena
requesting documents in connection with such investigation. The Company and its
executives have complied fully with the SEC's investigation and will continue to
comply fully with the SEC's investigation. On January 13, 2004 the Company
received subpoenas for two executives to be re-interviewed. One of the
executives is no longer with the Company. Both of these interviews are currently
scheduled. The Company does not believe that the investigation will have a
material effect on the Company's Consolidated Financial Statements.
64
12. SHAREHOLDERS' EQUITY (DEFICIT)
Stock Option Agreements and Stock Option Plans
The Company has granted stock options to employees, directors and consultants
pursuant to individual agreements or to its incentive and non-qualified stock
option plans. ("See Item 5: Market for Common Equity and Related Stockholder
Matters")
In September 1993, the Company's Board of Directors and Stockholders adopted the
Company's "1993 Joint Incentive and Non Qualified Stock Option Plan I" (the
"1993 Plan"). The 1993 Plan provides for the granting, at the discretion of the
Board of Directors, of: (i) options that are intended to qualify as incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees and (ii) options not intended to so qualify to
employees, officers and directors. The total number of shares of common stock
for which options may be granted under the 1993 Plan is 816,000 shares. The
number of shares granted, prices, terms of exercise, and expiration dates are
determined by the Board of Directors.
During Fiscal 2000, options totaling 395,998 were granted under the 1993 Plan
and of these options 87,833 were exercised. At June 30, 2000, all of the 816,000
options have been granted and 432,612 have been exercised. During Fiscal 2001,
options to purchase 220,000 shares were cancelled under this Option Plan and
24,621 of these options were subsequently granted. At June 30, 2001, 195,379
options are available to be granted under the 1993 Plan and 432,612 have been
exercised.
On April 20, 1999, the Board of Directors of the Company adopted the Company's
"1999 Common Stock and Incentive and Non-Qualified Stock Option Plan" (the "1999
Plan"), pursuant to which the Company may grant options to purchase up to an
aggregate of 300,000 shares. The 1999 Plan was approved by the Company's
stockholders on June 22, 1999 such options may be intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Options"), or they may be intended
not to qualify under such section ("Non-Qualified Options").
Under the 1999 Plan, the Company granted options to purchase 136,064 and 229,877
shares in Fiscal 2001 and 2000, respectively. During Fiscal 2001, 64,941 options
to purchase shares were cancelled. None of the shares granted in Fiscal 2001 and
2000 were exercised and zero options are available to be granted under the 1999
Plan.
On October 17, 2001, the Board of Directors of the Company adopted the Company's
"2001 Common Stock and Incentive and Non-Qualified Stock Option Plan" (the "2001
Plan"). The Company's stockholders approved the plan on December 14, 2001. Under
the 2001 Plan, the Company may grant options to purchase up to 1,250,000 shares
of Common Stock to key employees of the Company, its subsidiaries, directors,
consultants and other individuals providing services to the Company. Such
options may be Incentive Stock Options or Non-Qualified Stock Options. The per
share price of any Share or Option shall not be less than 50% of the fair market
value of the Company's Common Stock at the date of issuance of the Share or
granting of the option.
In addition, from time to time, the Company has issued, and in the future may
issue additional non-qualified options pursuant to individual option agreements,
the terms of which vary from case to case.
The Company maintains records of option grants by year, exercise price, vesting
schedule and grantee. In certain cases the Company has estimated, based on all
available information, the number of such options that were issued pursuant to
each plan. The material terms of such option grant vary according to the
discretion of the Board of Directors.
65
The Company charged earnings for compensation expense of $27,409 during the year
ended June 30, 2001 in connection with the issuance of stock options. There has
been no charge to earnings during the years ended June 30, 2003 and 2002 related
to the issuance of stock options.
The table below summarizes plan and non-plan stock option activity:
Schedule of Stock Option Activity
Weighted
Average
Number of Exercise
Shares Price
Outstanding, June 30, 2000 3,493,872 $ 8.36
Granted 1,728,428 $ 6.47
Exercised -- $ --
Cancelled (541,827) $ 9.59
Outstanding, June 30, 2001 4,680,473 $ 7.58
Granted 514,500 $ 5.83
Exercised (3,500) $ 2.75
Cancelled (371,879) $ 7.68
Outstanding, June 30, 2002 4,819,594 $ 7.39
Granted* 80,000 $ 1.04
Exercised -- $ --
Cancelled (2,461,666) $ 7.92
Outstanding, June 30, 2003 2,437,928 $ 6.63
Exercisable June 30, 2001 1,450,031 $ 8.04
Exercisable June 30, 2002 3,464,489 $ 7.71
Exercisable June 30, 2003 2,044,178 $ 7.04
The weighted average fair value of options granted during the years ended June
30, 2003, 2002, and 2001 are $.57, $1.17, and $2.47 per option, respectively.
* A previously unrecorded F2000 option for 10,000 shares is being included as a
new F2003 grant in lieu of restating prior years option activity results. The
remaining 70,000 options when granted pursuant to a pre existing agreement at
market value
66
Stock Option Price Schedule
Weighted
Average Weighted Number Weighted
Number of Remaining Average Exercisable Average
Range of Options Contractual Exercise Options Exercise
Exercise Price Outstanding Life Price Outstanding Price
- -------------- ----------- ----------- --------- ------------ ---------
$0.01-$2.50 140,000 5 $ 1.24 -- $ --
$2.51-$5.00 685,110 3 $ 3.93 615,110 $ 3.92
$5.01-$7.50 653,500 5 $ 6.26 557,250 $ 6.25
$7.51-$10.00 712,193 2 $ 8.39 624,693 $ 8.45
Above $10.00 247,125 2 $ 13.04 247,125 $ 13.04
----------- -----------
2,437,928 2 $ 6.63 2,044,178 $ 7.04
=========== ===========
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following assumptions:
2003 2002 2001
---- ---- ----
Expected Life (years) 2 3 5
Free Interest Rate 1.22% 2.28% 5.82%
Volatility 262.25 65.68 90.01
Dividend Yield 0% 0% 0%
Treasury Stock
During Fiscal 2003, the Company acquired 14,730 shares of its common stock for
an aggregate cost of approximately $9,600.
During Fiscal 2002, the Company acquired 47,937 shares of its common stock for
an aggregate cost of approximately $121,000 and reissued 121,964 shares to
employees in connection with the Company's employee stock purchase plan. During
Fiscal 2001, the Company acquired 160,439 shares of its common stock for an
aggregate cost of approximately $649,000 and reissued 70,815 shares to
employees.
67
Stock Subscriptions Receivable and Note Receivable for Shares Sold
For the years ended June 30, 2003, 2002 and 2001, the Company did not recognize
interest income on stock subscriptions receivable. This note was transferred as
part of the ultimate Pinnacle settlement.
Employee Stock Purchase Plan
On February 1, 2000, the Board of Directors of the Company adopted the Company's
"2000 Employee Stock Purchase Plan" (the "2000 ESPP Plan") and on May 5, 2000,
the 2000 ESPP Plan became effective upon approval by the stockholders. Under the
2000 ESPP Plan, the Company will sell shares of its Common Stock to participants
at a price equal to 85% of the closing price of the Common Stock on (i) the
first business day of a Plan Period or (ii) the Exercise Date (the last day of
the Plan Period), whichever closing price shall be less. Plan Periods are
six-month periods commencing January 1st and July 1st. The 2000 ESPP Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended.
In Fiscal 2002, the Company issued 54,368 and 67,596 shares of common stock
pursuant to the 2000 ESPP Plan at a price of $2.39 per share and $1.95 per
share, respectively. In September 2002, for the offering period commencing on
January 1, 2002 and closing on June 30, 2002, the Company issued 84,834 shares
of common stock pursuant to the 2000 ESPP Plan at a price of $0.91 per share.
There were two offering periods in Fiscal 2003. The first offering period
commenced on July 1, 2002 and closed on December 31, 2002, and the second
offering period started again on January 2, 2002 and closed on June 30, 2003.
The 2000 ESPP Plan is presently being reviewed by outside counsel to determine
the number of shares of common stock to be issued for Fiscal 2003. Cash refunds
will be given to employees who made contributions to the 2000 ESPP Plan in
Fiscal 2003 but are determined not to be entitled to all or part of the shares
they subscribed to. As of June 30, 2002, 66 employees participate in the
automatic withholding election for the 2000 ESPP Plan.
13. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan for the benefit of its eligible employees.
There is no minimum length of service required to participate in the plan and
employees of the Company are eligible to begin participation on designated
quarterly enrollment dates provided that they have reached 21 years of age. The
Company makes annual matching contributions to the plan at its discretion. The
aggregate cost of contributions made by the Company to the 401(k) plan was $0,
$29,486 and $32,439 during the fiscal years ended June 30, 2003, 2002 and 2001,
respectively. The Company is in the process of amending its 5500 filing with the
IRS for Fiscal 2000 and 2001. The 5500 filing for Fiscal 2002 and 2003 are on
extension.
14. LOSS PER SHARE
Basic net loss per share are computed using the weighted average number of
common shares outstanding. The dilutive effect of potential common share
outstanding is included in the diluted net earnings per share. The computations
of basic and diluted net earnings per share are as follows:
FISCAL YEAR ENDED JUNE 30,
2001 Restated
2003 2002 See Note 2(a)
---- ---- -------------
Net loss $(14,028,251) $(22,304,299) $ (212,739)
Basic and diluted weighted average shares 9,440,815 8,647,966 8,082,674
Basic and diluted net loss per share $ (1.49) $ (2.58) $ (0.03)
68
The total number of shares related to the outstanding options and warrants
excluded from the calculation of diluted net loss per share was 2,787,928 for
Fiscal 2003, 4,680,473 for Fiscal 2002 and 3,493,872 for Fiscal 2001,
respectively, because the Company incurred losses in the past three years.
15. RELATED PARTY TRANSACTIONS
James Ciocia, Thomas Povinelli, Michael Ryan and Kathryn Travis personally
guaranteed the repayment of the Company's loan from Travelers. Messrs. Ciocia,
Povinelli and Ryan personally guaranteed the repayment of the Company's loan
from Wachovia. Such stockholders received no consideration for such guarantees
other than their salaries and other compensation.
Seth A. Akabas is a partner in the law firm of Akabas & Cohen and was a director
of the Company until July 21, 2003. Akabas & Cohen was outside counsel for the
Company until August, 2002. During the fiscal year ended June 30, 2003, 2002 and
2001, the Company paid $0, $76,286 and $104,106 in legal fees to Akabas & Cohen.
On July 30, 2003, after Seth Akabas resigned from the Board, the Company entered
into an agreement with Akabas & Cohen to pay a total of $332,000 in outstanding
fees pursuant to an agreed payout settlement. The settlement was assumed by
Pinnacle on December 4, 2003 pursuant to the Asset Purchase settlement with
Pinnacle, and a general release was obtained from Akabas and Cohen.
Edward H. Cohen is of counsel to, and a retired partner of, the law firm Katten
Muchin Zavis Rosenman and also a director of the Company. Since August 2002,
Katten Muchin Zavis Rosenman ("KMZR") has been outside counsel to the Company
and has also, in the past, represented Michael Ryan personally. During Fiscal
2003, the Company paid fees to Katen Muchin Zavis Rosenman. Mr. Cohen does not
share in such fees that the company pays to such law firm and his compensation
is not based on such fees.
Michael Ryan, the Company's President and Chief Executive Officer and Carole
Enisman, the Chief Operating Officer of PCS, are married.
In July 2000, the Company borrowed $250,000 at 12% interest from Mysemia, a
general partnership in which Seth A. Akabas is a general partner with a 33%
interest. This loan was subordinated to the financing with Wachovia pursuant to
a written subordination agreement and could not be paid until the Wachovia
financing is paid in full. No interest or principal was paid on the loan by the
Company. This loan was payable ten business days after demand but could not be
demanded because of the subordination agreement. It is included in the current
portion of long term debt on the accompanying balance sheet as of June 30, 2003
and 2002. As of June 30, 2003, $88,045 in accrued interest was due to Mysemia.
The debt plus accrued interest due to Mysemia was assumed by Pinnacle on
December 4, 2003 pursuant to the Asset Purchase settlement with Pinnacle, and a
general release was obtained from Mysemia.
In January 2001, the Company borrowed $250,000 from Doreen M. Biebusch, a former
Director of the Company. This loan was subordinated to the financing with
Wachovia pursuant to a written subordination agreement and could not be paid
until the Wachovia financing is paid in full. No interest or principal was paid
on the loan by the Company. This loan was payable ten business days after demand
but could not be demanded because of the subordination agreement. It is included
in the current portion of long term debt on the accompanying balance sheet as of
June 30, 2003 and 2002. As of June 30, 2003 $77,976 in accrued interest was due
to Doreen Biebusch. The debt plus accrued interest due to Doreen Biebusch was
assumed by Pinnacle on December 4, 2003, pursuant to the Asset Purchase
settlement with Pinnacle, and a general release was obtained from Ms. Biebusch.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
general partners in a limited partnership, Prime Income Partners, L.P. which
owns the building in Poughkeepsie, New York occupied by PCS, PFS and AFP. As of
August 2002, the building also serves as the Company's executive headquarters.
During the fiscal year ended June 30, 2003, the Company paid $ 331,958 to Prime
Income Partners, L.P. for rent and related charges. Management believes the
amounts charged to the Company for rent to be commensurate with the rental rate
that would be charged to an independent third party.
69
In February 2002, Prime Partners, Inc. of New York (previously known as Prime
Financial Services, Inc., New York) loaned to the Company $1.0 million at a
stated interest rate of 10% which was repaid in full plus accrued interest of
$14,855 in April 2002. During the fiscal year ended June 30, 2001, Prime
Partners, Inc. loaned to the Company an aggregate of $600,000. Other loans were
made by Prime Partners, Inc. to the Company during Fiscal 2003. As of June 30,
2003, the Company owed Prime Partners, Inc. $710,100. Michael Ryan, the
Company's Chief Executive Officer and President, is one of the major
shareholders of Prime Partners, Inc.
16. SEGMENTS OF BUSINESS
The Company's reportable segments are strategic business units that offer
different products and services or are managed separately because the business
requires different technology and marketing strategies. The Company has two
reportable segments Company Tax Preparation and Financial Planning Offices and
Broker/Dealer Operations.
Company Tax Preparation and Financial Planning Offices provide integrated tax
and financial services through Company managed offices. The Company's
broker-dealer operations represents the financial planning and securities
business that clears through either PCS or North Ridge. All Company employed
registered representatives are licensed with one of these broker-dealers.
The accounting policies of the segments are the same as those described in the
summary of accounting policies. The Company evaluates performance based on
operating earnings of the respective business segments. The following table sets
forth information covering the Company's operations by reportable segment as of
and for the fiscal years ended June 30, 2003, 2002 and 2001. The intercompany
revenue relates to Company employee financial planning revenue, which clears
through the broker-dealer segment.
FOR THE FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------
2001 RESTATED
-------------
2003 2002 SEE NOTE 2(a)
------------ ------------ -------------
Revenues
Company Tax and Financial Planning Offices:
Tax Preparation Business $ 6,763,879 $ 7,411,422 $ 8,385,390
Financial Planning Business 13,328,279 24,788,849 30,002,465
------------ ------------ ------------
Total Company Tax and Financial Planning Offices 20,092,158 32,200,271 38,387,855
Broker Dealer Operations 59,579,537 68,804,986 78,427,194
e1040.com 69,096 791.621
Direct Mail Services 505,407 966,519
Intercompany revenue (16,814,493) (34,081,988) $(35,831,459)
------------ ------------ ------------
Total revenue $ 62,857,202 $ 67,497,772 $ 82,741,730
Income (loss) from operations:
Company Tax Offices $ (7,218,132) $(16,892,379) (4,726,843)
Broker Dealer Operations (1,684,930) (1,961,392) 4,352,576
e1040.com (280) (689,128) (415,584)
Direct Mail Services (458,213) 561,392
------------ ------------ ------------
Total income (loss) from Operations $ (8,903,342) $(20,001,112) $ (228,459)
Interest expense:
Company Tax Offices $ (1,767,411) $ (1,161,116 $ (831,009)
Broker Dealer Operations (83,522) (78,660) (552,332)
e1040.com (675,362) (19,869)
------------ ------------ ------------
Total interest expense $ (1,850,933) $ (1,915,138) $ (1,403,210)
Interest income:
Company Tax Offices $ 93,118 $ 104,432 $ 12,802
Broker Dealer Operations 36,561 2,163,958 $ 171,482
e1040.com -- -- --
------------ ------------ ------------
Total interest income $ 129,679 $ 2,268,390 $ 184,284
Other income (expenses), net:
Company Tax Offices $ $ (133,326) $ 689,118
Broker Dealer Operations (957,031) 1,050,113
e1040.com 324 3,764
Direct Mail Services 184,404
------------ ------------ ------------
Total other income (expenses) $ -- $ (905,629) $ 1,742,995
Income (loss) before taxes:
Company Tax Offices $ (9,961,752) $(19,580,854) $ (7,467,906)
Broker Dealer Operations (2,672,513) (1,800,206) 5,021,839
e1040.com (280) (287,300) (674,895)
Direct Mail Services (2,013,480) 561,392
------------ ------------ ------------
Total income (loss) before taxes $(12,634,545) $(23,681,840) $ (2,559,570)
Depreciation and amortization:
Company Tax Offices $ 1,069,327 $ 1,498,459 $ 1,529,577
Broker Dealer Operations 940,623 967,078 1,082,397
e1040.com 649,314 243,206
Direct Mail Services 13,496
------------ ------------ ------------
Total depreciation and amortization $ 2,009,950 $ 3,128,347 $ 2,855,180
Identifiable assets:
Company Tax Offices $ 21,480,345 $ 44,132,556 $ 45,772,431
Broker Dealer Operations 18,431,058 21,794,777 23,787,300
e1040.com 7,883 821,864
Intercompany eliminations (17,315,563) (28,762,703) (17,701,700)
------------ ------------ ------------
Total identifiable assets $ 22,595,840 $ 37,172,513 $ 52,679,895
Capital expenditures:
Company Tax Offices $ $ 733,749 $ 820,378
Broker Dealer Operations 8,245 270,940 397,006
e1040.com 137,845 300,121
------------ ------------ ------------
Total capital expenditures $ 146,090 $ 1,004,689 $ 1,517,505
70
17. TAXES ON INCOME
The provisions for income taxes and income tax benefits in the Consolidated
Financial Statements for the June 30 fiscal years consist of the following:
FOR THE FISCAL YEAR ENDED JUNE 30,
----------------------------------------------
2001 RESTATED
-------------
2003 2002 SEE NOTE 2(a)
--------- --------- -------------
Current:
Federal $ -- $(593,000) $ (11,000)
State and local 93,000 (39,000) 253,000
--------- --------- ---------
Total current tax (benefit) provision $ 93,000 $(632,000) $ 242,000
Deferred:
Federal $ -- $ 154,000 $ 437,000
State and local -- 613,000 19,000
--------- --------- ---------
Total deferred tax provision (benefit) $ -- $ 767,000 $ 456,000
--------- --------- ---------
Total income tax provision (benefit) $ 93,000 $ 135,000 $ 698,000
========= ========= =========
A valuation allowance has been established against the deferred tax assets as of
June 30, 2003 as the Company has suffered large recurring losses from
operations, and management believes that the future tax benefit associated with
the deferred tax asset may not be realized.
71
At June 30, 2003 the Company's operating loss carryforwards expire as follows:
Years of expiration Federal State
------------------- ----------- -----------
2020 $ 1,890,000 $ 7,981,000
2021 37,000 236,000
2022 9,191,000 10,579,000
2023 10,176,000 10,176,000
----------- -----------
$21,294,000 $18,796,000
The ability to utilize net operating loss carryovers may be restricted based on
Internal Revenue Code Section 382 "changes in ownership."
A reconciliation of the federal statutory rate to the provision for income taxes
is as follows:
FISCAL YEAR ENDED JUNE 30,
2001 RESTATED SEE
2003 2002 NOTE 2(a)
---- ---- -----------------
Federal income taxes (benefit) computed
at statutory rates (4,910,000) (35.0%) $(7,538,000) (34.0%) $ 165,000 34.0%
State and local taxes (benefit), net of
federal tax benefit (749,000) (5.3%) (1,344,000) (6.1%) 44,000 9.1%
Amortization of intangible assets with no
benefit 1,579,000 11.3% 530,000 2.4 378,000 77.9%
AMT credit disallowed per IRS exam and
previously benefited -- -- -- -- 172,000 35.5%
Income tax receivable not previously
recognized -- -- -- -- (99,000) (20.4%)
Other (97,000) (.04%) 38,000 7.8%
Valuation Reserve 4,173,000 29.7% 8,584,000 38.7% -- --
----------- ----- ----------- ----- ----------- -----
Total income tax (benefit)/provision $ 93,000 0.7% 135,000 0.6% $ 698,000 143.9%
=========== ===== =========== ===== =========== =====
18. BAD DEBT RESERVE AND RELATED ACTIVITY IS AS FOLLOWS:
The bad debt reserve and related activity is as follows:
Balance at Write-offs,
Beginning Bad Debt Net of Balance at
of Year Expense Recoveries Other End of Year
------- ------- ---------- ----- -----------
Year ended June 30, 2003 $614,972 153,414 $461,559
Year ended June 30, 2002 291,000 323,972 -- -- 614,972
Year ended June 30, 2001 264,800 26,200 -- -- 291,000
72
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL PER SHARE WEIGHTED
YEAR: INCOME (LOSS) TAX PROVISION NET (LOSS) AVERAGE
2003 REVENUE BEFORE TAXES (BENEFIT) INCOME BASIC DILUTED
FROM CONTINUING FROM CONTINUING
OPERATIONS OPERATIONS
---- ------------ --------------- ------------- --------------- ------ -------
Q1 $ 15,308,101 $ (2,968,350) $ 43,000 $ (3,011,350) (0.34) (0.34)
Q2) $ 14,835,911 $ (6,383,643) $ 15,000 $ (6,398,643) (0.68) (0.68)
Q3 $ 15,734,002 $ 686,725 $ 15,000 $ 671,725 0.07 0.07
Q4 (a) $ 16,979,188 $ (3,969,278) $ 13,500 $ (3,982,778) (0.54) (0.54)
------------ ------------ ------------ ------------ ----- -----
TOTAL $ 62,857,202 $(12,634,546) 86,500 $(12,721,046) (1.49) (1.49)
============ ============ ============ ============ ===== =====
FISCAL PER SHARE WEIGHTED
YEAR: INCOME (LOSS) TAX PROVISION NET (LOSS) AVERAGE
2002 REVENUE BEFORE TAXES (BENEFIT) INCOME BASIC DILUTED
FROM CONTINUING FROM CONTINUING
OPERATIONS OPERATIONS
---- ------------ --------------- ------------- --------------- ------ -------
Q1 $ 16,759,784 $ (3,854,205) $ (2,026,000) $( 1,828,205) $(0.21) $(0.21)
Q2 $ 14,835,711 $ (3,750,114) $ 13,600 $ (3,763,714) (0.16) (0.16)
Q3 $ 15,734,002 $ (215,219) $ 15,000 $ (230,219) (0.20) (0.20)
Q4 $ 20,168,275 $(15,862,302) $ 1,067,981 $(16,930,283) (2.01) (2.01)
------------ ------------ ------------ ------------ ------ ------
TOTAL $ 67,497,772 $(23,681,840) $ (929,419) $(22,752,421) $(2.58) $(2.58)
============ ============ ============ ============ ====== ======
(a) Two significant items included in the net loss are the recognition of $3.48
million in impairment losses and increase in legal reserves by $1.0 million.
BEFORE BREAKOUT OF DISCOUNTED OPERATIONS
FISCAL PER SHARE WEIGHTED
YEAR: INCOME (LOSS) TAX PROVISION NET (LOSS) AVERAGE
2001 REVENUE BEFORE TAXES (BENEFIT) INCOME BASIC DILUTED
---- ------------ --------------- ------------- --------------- ------ -------
Q1 $ 21,339,780 $ (2,178,774) $ (769,107) $ (1,409,667) $(0.18) $(0.18)
Q2 19,449,289 (2,156,397) (1,229,146) (927,251) (0.11) (0.11)
Q3 32,301,173 2,928,346 1,653,441 1,274,905 0.16 0.16
Q4 (b,c) 31,810,068 1,891,850 1,042,576 849,274 0.10 0.10
------------ ------------ ------------ ------------ ------ ------
TOTAL $104,900,310 $ 485,025 $ 697,764 $ (212,739) $ (.03) $ (.03)
============ ============ ============ ============ ====== ======
(b) As restated.
(c) $1,012,863 representing net trading gains previously included in financial
planning revenue have been reclassified to other income on the accompanying
statements of operations for the year ended June 30, 2001.
73
20. SUBSEQUENT EVENTS - (UNAUDITED)
Pinnacle Settlement
On November 26, 2002, the Company finalized a transaction pursuant to an asset
purchase agreement (the "Purchase Agreement") with Pinnacle, whereby Pinnacle an
entity controlled by Thomas Povinelli and David Puyear, former executive
officers of the Company, purchased certain assets of the Company. The effective
date of the closing under the Purchase Agreement was September 1, 2002. The
Company sold to Pinnacle 47 offices ("Pinnacle Purchased Offices") and all
tangible and intangible net assets (the "Purchased Assets") which were
associated with the operations of the Pinnacle Purchased Offices, together
representing approximately $17,690,000 or approximately 19.0% of the Company's
annual revenue for the fiscal year ended June 30, 2002. Included in the net
assets sold to Pinnacle was approximately $1,550,000 in debt plus accrued
interest of approximately $280,000 and other payables of approximately $400,000
which were to be assumed by Pinnacle, subject to creditor approval. As part of
the sale of the Purchased Offices, 137 employees of the Purchased Offices were
terminated by the Company as of November 15, 2002 and were hired by Pinnacle. In
addition, all registered representatives of the Purchased Offices licensed with
Prime Capital Services, Inc. (a wholly owned broker-dealer subsidiary of the
Company) transferred their registrations to Royal Alliance Associates ("Royal").
The net purchase price payable by Pinnacle after it assumed all liabilities and
payables was $4,745,463, subject to final adjustments. The sum of $3,422,108,
(the "Closing Payment") was paid pursuant to a promissory note (the "Initial
Note") which was given by Pinnacle to the Company at the date of closing (the
"Closing") with interest at 10% commencing 30 days from the Closing. The Initial
Note was guaranteed by Mr. Povinelli and Mr. Puyear and Mr. Povinelli pledged
his entire holdings of the Company's common stock to secure the Initial Note.
The Initial Note was due and payable on the earlier of February 26, 2003 or on
the date that Pinnacle closes a debt or equity financing. The balance of the
purchase price of $1,323,355, subject to adjustment and less certain debts of
the Company that Pinnacle assumed, was to be paid pursuant to a second
promissory note (the "Second Note") which was secured by Pinnacle's assets. The
Initial Note was secured by collateral assignment of 75% of Pinnacle's
commission overrides to be paid to Pinnacle from Royal each month up to
$250,000, pursuant to an agreement between Pinnacle and Royal. The Second Note
was payable in three equal consecutive annual installments, with interest
calculated at the prime rate of Pinnacle's primary lender in effect as of the
Closing, on the first, second and third anniversaries of the Closing.
During the quarter ended December 31st, 2002, the Company recognized a
$1,509,229 loss on the sale of the Pinnacle Purchased Offices. This loss
consisted of the sale of assets net of liabilities assumed totaling $1,685,343,
less cash received of $176,114.
During the quarter ended March 31st, 2003, the Company recognized a $1,159,229
gain on the sale of the Pinnacle Purchased Offices. This gain consisted of the
write-off of a note payable ($700,000) and related accrued interest ($144,443)
totaling $844,443 and cash received of $314,786. The note and related accrued
interest were payable to Mr. Povinelli and were written off as a result of
Pinnacle's default under the Initial Note.
During the quarter ended June 30, 2003, the Company recognized a $687,054 gain
on the sale of the Pinnacle Purchased Offices. This gain consisted entirely of
cash received of $687,054.
As a result of the transaction with Pinnacle, a gain of approximately $4.6
million was calculated by management in December 2002. However, due to the
uncertainties associated with payment on the Initial Note and Second Note, the
Company deferred the gain recognition until proceeds from payment of cash or
collateral by Pinnacle were received on the Initial Note and Second Note. As of
June 30, 2003, the Company had received payments totaling $1,153,362 but has not
received certain payments required under the Initial Note and an equipment
sublease. The Company's position was that Pinnacle was in default under the
Initial Note, the Second Note and the equipment sublease. Accordingly, on May
16, 2003, the Company initiated a lawsuit against Pinnacle seeking payments for
all amounts due. The Company entered into a Stock Purchase Agreement with Mr.
Povinelli whereby he transferred 1,048,616 of his Company shares back to the
Company for a credit of approximately $230,000 against the principal due on the
Initial Note. Due to the uncertainty of the transaction, these shares are
included in the Company's outstanding shares as of June 30, 2003. After the
commencement of the lawsuit, Pinnacle agreed to give the Company a direct
assignment of its income and fixed annuity revenue from InsurMark and Career
Brokerage in addition to 75% of Pinnacle's commission overrides being paid to
the Company by Royal.
74
On December 4, 2003, the Company entered into a settlement with Pinnacle and the
Company collected all amounts due from Pinnacle under the Purchase Agreement. As
part of the settlement, the parties agreed to discontinue all litigation and
legal disputes between the parties.
In connection with the settlement, Pinnacle negotiated a release of the Company
from its obligations pursuant to the lease for the Company's former White Plains
offices, subject to the consent of the landlord's primary lender. In the event
that a fully executed unconditional release of the Company by the landlord is
not delivered on or before January 22, 2004, the Company will receive $50,000
and Wachovia will receive $50,000. Both payments will be made from funds
currently in escrow. In addition, the Company and Wachovia will each receive an
additional $50,000 from Pinnacle on April 30, 2004, and an additional $45,500
from Pinnacle in 12 monthly payments of $3,791.66 commencing on July 1, 2004.
Pinnacle agreed to pay the Company $2,067,799.93. At closing, Wachovia was wired
$636,397.22 pursuant to a preexisting forbearance agreement, as amended, between
the Company and Wachovia, including $100,000 to obtain its final consent. The
balance of $1,431,402.71 was wired to the Company. The settlement amount
constitutes the global settlement amount in connection with the resolution of
all monetary disputes between Pinnacle and the Company under Asset Purchase.
Including the $2,067,799.93 settlement payment, the Company received total
consideration under the Asset Purchase of approximately $7,270,000, comprised of
the following:
Cash payments to the Company $4,410,000
Company debt assumed by Pinnacle $2,630,000
Credit to Pinnacle for the transfer to the Company $ 230,000
By Povinelli of 1,048,616 shares of Company
Common stock
As part of the settlement, the Company received the following indemnifications
in addition to the indemnification contained in the Asset Purchase. All of the
indemnifications include any monies paid by judgment, settlement or otherwise,
costs and reasonable attorney's fees.
5. Pinnacle, Povinelli and Puyear agreed to indemnify and hold harmless
the Company for: all claims arising from Pinnacle's assumption of
the Company debt of the Company owed to any employee of the Company
who became an employee of Pinnacle with the exception of William
Hellmers; and all vendor debt assumed by Pinnacle.
6. Pinnacle, Povinelli, Puyear and Gerlad Hoenings each personally
guaranteed and indemnified the payment of all real estate lease
obligations which the Company is still liable for under leases
assumed by Pinnacle. In addition, Richard Boehm and Serafino
Maiorano guaranteed certain of these real estate lease obligations.
7. Pinnacle, Povinelli and Puyear agreed to indemnify and hold the
Company harmless from all claims under personal property leases
which Pinnacle assumed and which the Company remains liable for.
8. Pinnacle, Povinelli and Puyear agreed to indemnify and hold the
Company harmless for any damages resulting from Pinnacle renewing
any real estate leases which Pinnacle assumed and for which the
Company remains liable for.
In addition, the release given to Pinnacle, Povinelli and Puyear by the Company
under the Asset Purchase was modified to exclude: their representations,
warranties, duties, obligations and indemnification sunder the Asset Purchase as
modified by the settlement agreement; and for items for claims and liabilities
asserted against the Company by third parties that use as a basis events that
occurred during the time when Povienlli was CEO of the Company and/or Puyear was
CFO of the Company which are commitments made by Povinelli and/or Puyear but
which were not disclosed on the books and records of the Company.
75
Chief Accounting Officer
On January 6, 2004, Dennis Conroy was appointed Chief Accounting Officer of the
Company by a unanimously approved resolution of the Board of Directors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 27, 2002, the Company engaged Grant Thornton LLP ("Grant Thornton") to
serve as the Company's independent auditors for the year ended June 30, 2002.
The Company's independent auditors were previously Arthur Andersen LLP
("Andersen").
The Company's relationship with Andersen terminated on August 27, 2002 with the
engagement of Grant Thornton and the general discontinuance over the past
several months of public audit services by Andersen.
During the years ended June 30, 2002 and June 30, 2001 and for the interim
period through the date the relationship ended, there were no disagreements with
Andersen on any matter of accounting principle or practice, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Andersen's
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their reports.
The audit reports of Andersen on the Company's Consolidated Financial Statements
as of and for the fiscal years ended June 30, 2001 and June 30, 2000 did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles. However, the
Company restated its financial results for the fiscal year ended June 30, 2001,
and the second and third quarters thereof, and Andersen has not audited such
restated financial results. Grant Thornton conducted its own audit of the
adjustments that led to the restated financial results for fiscal 2001.
During the fiscal year ended June 30, 2001 Andersen did not advise the
registrant of any reportable events under Item 304(a)(1)(v) of Regulation S-K,
except that on May 14, 2002 Andersen sent a letter to Doreen Biebusch, the
chairperson of the Company's audit committee. The letter notified Ms. Biebusch
that Andersen had been informed of an internal disagreement between the
Company's controller and the Company's chief financial officer at the time, with
respect to a $600,000 negative adjustment to gross revenue relating to the
second and possibly the third quarter of fiscal 2001, and requested that the
Company hire independent counsel to conduct an investigation of the matter. A
copy of this letter is attached as Exhibit 99.1. The $600,000 negative
adjustment was reflected in the Company's restated financial results for the
fiscal year ended June 30, 2001 and the second and third quarters thereof. The
Company has since revised its internal controls and financial reporting
procedures. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition". Andersen did not send any communications to the
Company regarding this matter subsequent to its letter of May 14, 2002 due to
its general discontinuance of public audit services.
On November 7, 2003, the Company engaged Radin Glass & Co., LLP ("Radin Glass")
to serve as the Company's independent auditors for the year ending June 30, 2003
and for the year ending June 30, 2004. The Company dismissed Grant Thornton on
November 5, 2003 by unanimous resolution of its Board of Directors. The
ratification of the appointment of auditors for the year ending June 30, 2004
will be considered by the Company's stockholders at the next annual meeting
anticipated to be held in March 2004.
During the year ending June 30, 2003 and for the interim period through the date
the relationship ended, there were no disagreements with Grant Thornton on any
matter of accounting principle or practice, financial statement disclosure, or
auditing scope or procedure which, if not resolved to Grant Thornton's
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their reports.
76
The audit reports of Grant Thornton on the Company's consolidated financial
statements as of and for the fiscal year ending June 30, 2002 did not contain
any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles, except that
Grant Thornton's audit report included in the Company's Annual Report on 10-K
for the fiscal year ended June 30, 2002 included an explanatory paragraph
relating to substantial doubt as to the Company's ability to continue as a going
concern due to recurring losses from operations and its breach of covenants in
the Company's loan agreements.
During the fiscal year ending June 30, 2003 and for the interim period through
the date the relationship ended, Grant Thornton did not advise the Company of
any reportable events under Item 304(a)(1)(v) of Regulation S-K, except that:
(i) On September 29, 2003, in connection with the audit of the Company's
wholly-owned subsidiary, Prime Capital Services, Inc. ("Prime"), Grant Thornton
sent Prime a letter advising Prime that material deficiencies had been found in
its internal controls, but that such material deficiencies had been remedied
through the hiring of additional personnel and the implementation of new
supervisory procedures. A copy of such letter is attached as Exhibit 99.1.
(ii) On November 10, 2003, Grant Thornton sent the Company a letter concluding
that the Company had material weaknesses in its system of internal controls. In
that letter, Grant Thornton stated that it had to expand the scope of its audit
procedures in several areas, and had not completed its audit at the date of its
termination. The Company intends, with Radin Glass, to address the issues raised
by Grant Thornton in its letter.
During the year ending June 30, 2003 and through November 5, 2003, the Company
did not consult Radin Glass regarding any matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
9(A) CONTROLS AND PROCEDURES
Nothing regarding internal controls were communicated in writing to the Company
during Fiscal 2003, but discussions were had and improvements were made. No
change occurred in the Company's internal controls concerning financial
reporting during Fiscal 2003 that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting. During the first and second quarters of fiscal 2004, the Company has
received recommendations from both its current and former auditors regarding its
internal controls over financial reporting and is considering such
recommendations. As of the end of the period covered by this report, under the
supervision and with the participation of the Company's management, the Chief
Executive Officer and the Chief Accounting Officer of the Company have evaluated
the disclosure controls and procedures of the Company as defined in Exchange Act
Rule 13(a)-15(e) and have determined that such controls and procedures are
adequate and effective.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
CHANGE IN MANAGEMENT
During Fiscal 2003, the Company underwent a transition in senior management and
in the composition of its Board of Directors. On August 8, 2002, Michael Ryan
was appointed President and Chief Executive Officer of the Company, Thomas
Povinelli resigned as the Company's President and Chief Executive Officer and as
a director of the Company, and David Puyear resigned as the Company's Chief
Financial Officer. In addition, on August 8, 2002, Edward H. Cohen, Steve
Gilbert and Michael Ryan were added to the Board. On May 15, 2003, Louis Karol
and Doreen Biebusch resigned from the Board, and on July 24, 2003, Seth Akabas
resigned from the Board.
77
TABLE OF OFFICERS AND DIRECTORS
The following table sets forth information regarding the executive officers and
directors of Gilman + Ciocia, Inc:
NAME AGE POSITION
- ---- --- --------
James Ciocia 46 Chairman of the Board and Director
Michael P. Ryan 45 Chief Executive Officer, President and
Director
Kathryn Travis 54 Secretary and Director
Ted Finkelstein 50 Vice President and General Counsel
Steven Gilbert 47 Director
Edward H. Cohen 65 Director
Dennis Conroy 32 Chief Accounting Officer
EXECUTIVE OFFICERS AND DIRECTORS
JAMES CIOCIA, CHAIRMAN. Mr. Ciocia is a principal founder of the Company having
opened the Company's first tax preparation office in 1981. In addition to
serving the Company as its Chief Executive Officer until November 6, 2000, Mr.
Ciocia is a registered representative of Prime. Mr. Ciocia holds a B.S. in
Accounting from St. John's University and he is a member of the International
Association for Financial Planners. Mr. Ciocia is serving a term as a director,
which expired in 2002 and continues until a qualified successor is appointed or
elected.
MICHAEL P. RYAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Ryan was appointed
the Company's Chief Executive Officer on August 8, 2002. Mr. Ryan co-founded
Prime Capital Services, Inc. and has, except for a one month period in July and
August of 2002, served as its President since 1987. In addition, Carole Enisman
Mr. Ryan's spouse, has served as Executive Vice President of Prime Capital
Services, Inc. since April 5, 1999. Mr. Ryan is a Certified Financial Planner
and a founding member and past President of the Mid-Hudson Chapter of the
International Association for Financial Planning. Mr. Ryan is a Registered
Principal with the National Association of Securities Dealers and serves on the
Independent Firms Committee of the Securities Industry Association (SIA). Mr.
Ryan holds a B.S. in Finance from Syracuse University. Mr. Ryan was first
elected as a director on June 22, 1999, resigned as a director on April 3, 2002
and was re-appointed to the Board on August 9, 2002. He will stand for election
as a Class C director at the next Annual Meeting of Stockholders.
KATHRYN TRAVIS, SECRETARY AND DIRECTOR. Ms. Travis began her career with the
Company in 1986 as an accountant and has served as Secretary, Vice President and
a director since November 1989. Ms. Travis currently supervises all tax
preparation personnel and she is a registered representative of Prime. Ms.
Travis holds a B.A. in Mathematics from the College of New Rochelle. Ms. Travis
is serving a term which expired in 2002 and continues until a qualified
successor is appointed or elected.
TED FINKELSTEIN, VICE PRESIDENT AND GENERAL COUNSEL. Ted Finkelstein is the
General Counsel and Vice President of the Company. He has a Bachelor of Science
degree in Accounting. He is a Cum Laude graduate of Union University, Albany Law
School and also has a Master of Laws in Taxation from New York University Law
School. Ted has over 25 years of varied legal experience including acting as
outside counsel for Prime Capital Services, Inc. for almost 15 years. Ted has
been General Counsel and Vice President of the Company since June, 2001.
STEVEN GILBERT, DIRECTOR. Mr. Gilbert is the Company's senior salesperson and
head of the Company's Clearwater, Florida office. His responsibilities include
the training of sales representatives and general management of the Company's
Clearwater office. Mr. Gilbert has also historically been one of the Company's
most productive sales representatives.
EDWARD H. COHEN, DIRECTOR. Mr. Cohen has, since February 2002, been counsel to,
and for more than five years prior thereto was a partner in, the New York City
law firm of Katten Muchin Zavis Rosenman (with which he has been affiliated
since 1963). During Fiscal 2003 the Company paid fees to Katten Muchin Zavin
Rosenman. Mr. Cohen does not share in such fees that the company pays to such
law firm and his compensation is not based on such fees. Mr. Cohen is a director
of Phillips-Van Heusen Corporation, a manufacturer and marketer of apparel and
footwear, Franklin Electronic Publishers, Incorporated, an electronic publishing
company, Levcor International, Inc., a converter of textiles for sale to
domestic apparel manufacturers, and Merrimac Industries, Inc., a manufacturer of
passive RF and microwave components for industry, government and science.
78
DENNIS CONROY, CHIEF ACCOUNTING OFFICER. Mr. Conroy began his career with the
Company in 1998 as an accountant for its Prime Financial Services subsidiary. He
was appointed as the Company's Chief Accounting Officer effective January 6,
2004. He has a Bachelor of Science degree in Accounting. He is a registered
Financial and Operations Principle with the NASD.
The Company's executive officers serve at the discretion of the Board of
Directors.
COMMITTEES
The Audit Committee, which was comprised of Doreen M. Biebusch, Seth A. Akabas
and Louis P. Karol, was disbanded on August 18, 2002 and the entire Board
undertook its duties. The Company is interviewing new directors to replace Seth
Akabas, Doreen Biebusch and Louis Karol. The Board of Directors will
reconstitute the Audit Committee after new directors are elected.
The Company's Board of Directors does not include an "audit committee financial
expert" as that term is defined in SEC regulations. The Company's securities are
not listed on any national securities exchange and the Company is not required
to have an audit committee. The Company is presently engaged in a search for
additional independent directors and the Company intends that one or more of the
candidates for such independent directors will qualify as an audit committee
financial expert.
CODE OF ETHICS
The Company has adopted a Code of Ethics for its Chief Executive Officer and its
Senior Financial Executive. A copy of the Code of Ethics is filed as Exhibit 14
to this Annual Report on Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the SEC initial reports of ownership and
reports of changes in ownership of Common Stock. The SEC requires such officers,
Directors and greater than 10% stockholders to furnish to the Company copies of
all forms that they file under Section 16(a).
To the Company's knowledge, all officers, directors and/or greater than 10%
stockholders of the Company complied with all Section 16(a) filing requirements
during the fiscal year ended June 30, 2002 or, in the case of Michael Ryan,
failed to timely file certain statements of changes in Beneficial Ownership on
Form 4. Mr. Ryan filed a late Statement of Changes in Beneficial Ownership on
Form 4 on April 10, 2002 and has fully complied with all Section 16(a) filing
requirements since that date.
79
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the compensation of the Chief Executive Officer,
and the four other most highly compensated executive officers (collectively, the
"Named Executive Officers"), and information with respect to annual and
long-term compensation earned during the last three Fiscal Years:
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS NUMBER OF
SHARES
NAME AND FISCAL OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- ------------------ ---- ------ ----- ------------ -------
James Ciocia
Chairman of the Board 2003 -- -- (2) $565,480
2002 $430,000 (3) $312,693 -- --
2001 $438,712 (1) $ 6,694 --
Michael P. Ryan
Chief Executive Officer and
Director 2003 $195,693 -- (1) $ 19,238 --
2002 $430,000 (3) $490,384 (1) $ 9,600 250,000
2001 $350,000 (1) $ 9,600 250,000
Kathryn Travis
Secretary, Vice President and
Director 2003 $138,421 (1) $ 9,259 --
2002 $281,538 (1) $ 9,259 --
2001 $313,712 (1) $ 9,259 --
David Puyear
Former Chief Financial Officer 2003 $ 9,615
2002 $201,923 -- --
2001 $209,000 -- 200,000
Thomas Povinelli
Former Chief Executive Officer and
Director 2003 $ 49,615
2002 $380,385 (1) $ 7,200 --
2001 $358,366 (1) $ 7,200 --
Ted Finkelstein
Vice President and General Counsel
2003 $157,617 -- --
2002 184,615 --
(1) Auto expense
(2) Represents commission override payment.
(3) Accrued compensation not paid.
INSURANCE
On June 30, 2003, the Company maintained $2 million Key Man life insurance
policies on James Ciocia and Michael P. Ryan. These policies, and an additional
$2 million policy owned by the Company on Thomas Povinelli, are pledged to
Wachovia as collateral security for the Company's financing with Wachovia.
DIRECTORS
The Company is currently reviewing its compensation policy with its independent
directors of the Company. Historically, independent directors have not received
compensation.
OPTION GRANTS
The following table sets forth information regarding options to purchase shares
of Common Stock granted to the Named Executive Officers during Fiscal 2003.
80
OPTION GRANTS IN FISCAL 2003
INDIVIDUAL GRANTS
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS GRANTED IN 2002 ($/SHARE) GRANT DATE DATE FAIR VALUE
---- --------------- ------- --------- ---------- ---- ----------
None
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND 2003 YEAR-END OPTION
VALUES
The following table sets forth for each of the Named Executive Officers (a) the
number of options exercised during Fiscal 2003, (b) the total number of
unexercised options for Common Stock (exercisable and un-exercisable) held at
June 30, 2003, and (c) the value of those options that were in-the-money on June
30, 2003 based on the difference between the closing price of our Common Stock
on June 30, 2003 and the exercise price of the options on that date.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED STOCK OPTIONS AT IN-THE-MONEY STOCK OPTIONS
FISCAL YEAR-END (#) AT FISCAL YEAR-END
SHARES
ACQUIRED
ON VALUE UN- UN-
NAME EXERCISE(#) REALIZED EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
- ---- ----------- -------- ----------- ----------- ----------- -----------
James Ciocia
Chairman of - - 62,508 - - -
the Board
Michael P. Ryan
Chief Executive - - 500,000 - - -
Officer and
Director
Kathryn Travis
Secretary, Vice - - 30,340 - - -
President and
Director
Ted Finkelstein Vice
President and
General Counsel - - 10,000 - - -
STOCK OPTION PLANS
The Company maintains records of option grants by year, exercise price, vesting
schedule and grantee. In certain cases the Company has estimated, based on all
available information, the number of such options that were issued pursuant to
each plan. The Company has not in the past consistently recorded the plan
pursuant to which the option was granted. The Company is implementing new record
keeping procedures regarding options that will ensure this information is
accurately recorded and processed. The material terms of each option grant vary
according to the discretion of the Board of Directors.
81
1993 Plan
On September 14, 1993, the Company adopted the "1993 Joint Incentive and
Non-Qualified Stock Option Plan" ("1993 Plan") pursuant to which the Company may
grant options to purchase up to an aggregate of 816,000 shares. Such options may
be intended to qualify as "incentive stock options" ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or they may be intended not to qualify under such Section
("Non-Qualified Options").
The 1993 Plan is administered by the committee of three independent directors of
the Board of Directors of the Company, which has the authority to determine the
persons to whom the options may be granted, the number of shares of Common Stock
to be covered by each option, the time or times at which the options may be
granted or exercised, whether the options will be Incentive Stock Options or
Non-Qualified Stock Options, and other terms and provisions of the options. The
exercise price of the Incentive Stock Options granted under the 1993 Plan may
not be less than the fair market value of a share of Common Stock on the date of
grant (110% of such value if granted to a person owning in excess of ten percent
of the Company's securities). Options granted under the 1993 Plan may not have a
term longer than 10 years from the date of grant (five years if granted to a
person owning in excess of ten percent of the Company's securities) and may not
be granted more than ten years from the date of adoption of the 1993 Plan.
1999 Plan
On April 20, 1999, the Board of Directors of the Company adopted the Company's
1999 Common Stock and Incentive and Non-Qualified Stock Option Plan (the "1999
Plan"). The Company's stockholders approved the plan on June 22, 1999.
Under the 1999 Plan, the Company may grant options to purchase up to 300,000
shares of Common Stock to key employees of the Company, its subsidiaries,
directors, consultants and other individuals providing services to the Company.
Such options may be Incentive Stock Options or Non-Qualified Stock Options.
The Board of Directors administers the 1999 Plan. The 1999 Plan allows the Board
of Directors of the Company to designate a committee of at least two
non-employee directors to administer the 1999 Plan for the purpose of complying
with Rule 16(b)(3) under the Securities Exchange Act of 1934, as amended, with
respect to future grants under the 1999 Plan. Until such delegation, the Board
will select the persons who are to receive options and the number of shares to
be subject to each option (the administrator of the 1999 Plan, including the
Board of Directors and/or a committee is referred to herein as the "Committee").
In selecting individuals for options and determining the terms, the Board may
consider any factors that it deems relevant, including present and potential
contributions to the success of the Company. Options granted under the 1999 Plan
must be exercised within a period fixed by the Board, which may not exceed ten
years from the date of grant. Options may be made exercisable immediately or in
installments, as determined by the Board.
The purchase price of each share for which an Incentive Stock Option is granted
and the number of shares covered by such Option will be within the discretion of
the Committee based upon the value of the grantee's services, the number of
outstanding shares of Common Stock, the market price of such Common Stock, and
such other factors as the Committee determines are relevant; provided however,
that such purchase price may not be less than the par value of the Common Stock.
The purchase price of each share for which an Incentive Stock Option is granted
under the 1999 Plan ("Incentive Option Price") shall not be less than the amount
which the Committee determines, in good faith, at the time such incentive stock
option is issued or granted, constitutes 100% of the then fair market value of a
share of Common Stock.
Grantees under the 1999 Plan may not transfer options otherwise than by will or
the laws of descent and distribution, but the Committee has the right to
determine whether the individual Option shall be transferable. No transfer of an
Option permitted by terms of such Option or by will or the laws of descent and
distribution will bind the Company unless the Company has been furnished with
written notice thereof and a copy of the will and/or such other evidence as the
Company may deem necessary to establish the validity of the transfer and the
acceptance by the transferee or transferees of the terms and conditions of such
Option. In the case of an Option, during the lifetime of the grantee, unless
transferred as permitted by the 1999 Plan and the Option, the Option may only be
exercised by the grantee, except in the case of disability of the grantee
resulting in termination of employment, in which case the Option may be
exercised by such grantee's legal representative.
82
The Committee will adjust the total number of shares of Common Stock which may
be purchased upon the exercise of Options granted under the 1999 Plan for any
increase or decrease in the number of outstanding shares of Common Stock
resulting from a stock dividend, subdivision, combination or reclassification of
shares or any other change in the corporate structure or shares of the Company;
provided, however, in each case, that, with respect to Incentive Stock Options,
no such adjustment shall be authorized to the extent that such adjustment would
cause the 1999 Plan to violate Section 422(b)(1) of the Code. If the Company
dissolves or liquidates or upon any merger or consolidation, the Committee may
make such adjustment with respect to Options or act as it deems necessary or
appropriate to reflect or in anticipation of such dissolution, liquidation,
merger or consolidation, including, without limitation, the substitution of new
options or the termination of existing options.
Under the 1999 Plan, the Company will grant to each employee and those
affiliated financial planners who have entered into commission sharing
agreements with the Company, including officers and directors, options to
purchase 100 shares of Common Stock for each whole $25,000 of revenues for tax
preparation and commissions generated by such individual for the Company in the
calendar years 1998, 1999 and 2000. Each option will be exercisable for a period
of five years to acquire one share of Common Stock at the market price on the
date of grant of the option. In Fiscal 2000, the Company granted options to
purchase 229,877 shares under the 1999 Plan. During Fiscal 2001, 65,941 options
to purchase shares were cancelled and 136,064 options to purchase shares were
granted, with zero options available to be granted.
2000 Plan
On 2/1/2000, the Board of Directors of the Company adopted the Company's "2000
Common Stock and Incentive and Non-Qualified Stock Option Plan" (the "2000
Plan"). The Company's stockholders approved the plan on 5/5/2000.
The 2000 Plan is administered by the Company's Board of Directors (the "Board")
or by a Committee appointed by the Board (the "Committee"). The Board or the
Committee has authority to make rules and regulations for the administration of
the Plan and its interpretation and decisions with regard thereto shall be final
and conclusive. The Board may at any time, and from time to time, amend this
Plan in any respect, except that (a) if the approval of any such amendment by
the shareholders of the Company is required by Section 423 of the Code, such
amendment shall not be effected without such approval, and (b) in no event may
any amendment be made which would cause the Plan to fail to comply with Section
423 of the Code.
All employees are eligible to participate in any one or more of the offerings of
Options to purchase Common Stock under the 2000 ESPP Plan provided that: (a)
they are customarily employed by the Company or a Designated Subsidiary for more
than 20 hours a week and for more than five months in a calendar year; and (b)
they have been employed by the Company or a Designated Subsidiary for at least
thirty days prior to enrolling in the Plan; and (c) they are employees of the
Company or a Designated Subsidiary on the first day of the applicable Plan
Period. No employee may be granted an Option under the 2000 ESPP Plan if such
employee, immediately after the Option is granted, owns 5% or more of the total
combined voting power or value of the stock of the Company or any subsidiary of
the Company. For purposes of the preceding sentence, the attribution rules of
Section 424(d) of the Code shall apply in determining the stock ownership of an
employee, and all stock that the employee has a contractual right to purchase
shall be treated as stock owned by the employee.
The Company will make one or more offerings ("Offerings") to employees to
purchase stock under the 2000 ESPP Plan. Offerings will begin each January 1 and
July 1, or the first business day thereafter (the "Offering Commencement
Dates"). Each Offering Commencement Date will begin a six-month period (a "Plan
Period") during which payroll deductions will be made and held for the purchase
of Common Stock at the end of the Plan Period. The Board or the Committee may,
at its discretion, choose a different Plan Period of twelve (12) months or less
for subsequent Offerings.
83
The Company will maintain payroll deduction accounts for all participating
employees. With respect to any Offering made under the 2000 ESPP Plan, an
employee may authorize a payroll deduction in any dollar amount from a minimum
of 2% up to a maximum of 10%, only in a whole integral percentage, or such
lesser amount as the Board or Committee shall determine before the start of each
Plan Period, of the Compensation he or she receives during the Plan Period or
such shorter period during which deductions from payroll are made.
No employee may be granted an Option that permits his rights to purchase Common
Stock under the 2000 ESPP Plan and any other employee stock purchase plan (as
defined in Section 423(b) of the Code) of the Company and its subsidiaries to
accrue at a rate which exceeds $25,000 of the fair market value of such Common
Stock (determined at the Offering Commencement Date of the Plan Period) for each
calendar year in which the Option is outstanding at any time.
An employee may decrease or discontinue his payroll deduction once during any
Plan Period by filing a new payroll deduction authorization form. However, an
employee may not increase his payroll deduction during a Plan Period. If an
employee elects to discontinue his payroll deductions during a Plan Period, but
does not elect to withdraw his funds, the funds deducted prior to his election
to discontinue will be applied to the purchase of Common Stock on the Exercise
Date (as defined below).
Interest will not be paid, unless required by law, on any employee accounts,
except to the extent that the Board or the Committee, in its sole discretion,
elects to credit employee accounts with interest at such per annum rate as it
may from time to time determine.
An employee may at any time prior to the close of business on the last business
day in a Plan Period and for any reason permanently draw out the balance
accumulated in the employee's account and thereby withdraw from participation in
an Offering. Partial withdrawals are not permitted. The employee may not begin
participation again during the remainder of the Plan Period. The employee may
participate in any subsequent Offering in accordance with terms and conditions
established by the Board or the Committee.
Each employee who continues to be a participant in the Plan on the Exercise Date
shall be deemed to have exercised his Option at the option price on such date
and shall be deemed to have purchased from the Company the number of full shares
of Common Stock reserved for the purpose of the Plan that his accumulated
payroll deductions on such date will pay for, but not in excess of the maximum
number determined in the manner set forth above.
Any balance remaining in an employee's payroll deduction account at the end of a
Plan Period will be automatically refunded to the employee without interest,
unless required by law.
Certificates representing shares of Common Stock purchased under the Plan may be
issued only in the name of the employee, in the name of the employee and another
person of legal age as joint tenants with rights of survivorship, or (in the
Company's sole discretion) in the name of a brokerage firm, bank or other
nominee holder designated by the employee. The Company may, in its sole
discretion and in compliance with applicable laws, authorize the use of book
entry registration of (12) shares in lieu of issuing stock certificates.
2001 Plan
On October 17, 2001, the Board of Directors of the Company adopted the Company's
"2001 Common Stock and Incentive and Non-Qualified Stock Option Plan" (the "2001
Plan"). The Company's stockholders approved the plan on December 14, 2001. Under
the 2001 Plan, the Company may grant options to purchase up to 1,250,000 shares
of Common Stock to key employees of the Company, its subsidiaries, directors,
consultants and other individuals providing services to the Company. Such
options may be Incentive Stock Options or Non-Qualified Stock Options. The per
share price of any Share or Option shall not be less than 50% of the fair market
value of the Company's Common Stock at the date of issuance of the Share or
granting of the option.
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Federal Income Tax Consequences of Stock Option Plans
The Company believes that under the present law the following federal income tax
consequences would generally result under the Planss. Rights to purchase shares
under the Plans are intended to constitute "options" issued pursuant to an
"employee stock option plan" within the meaning of Section 423 of the Code: No
taxable income results to the participant upon the grant of right to purchase or
upon the purchase of shares for his or her account under the Plans (although the
amount of a participant's payroll contributions under the Plans will be taxable
as ordinary income to the participant). If the participant disposes of shares
less than two years after the first day of an offering period with respect to
which he or she purchased such shares, then at the time of disposition the
participant will recognize as ordinary income an amount equal to the excess of
the fair market value of the shares on the date of purchase over the amount of
the participant's payroll contributions used to purchase the shares. If the
participant holds the shares for at least two years after the first day of an
offering period with respect to which he or she purchased such shares, then at
the time of the disposition the participant will recognize as ordinary income an
amount equal to the lesser of (i) the excess of the fair market value of the
shares on the first day of the offering period over the option price on that
date, and (ii) the excess of the fair market value of the shares on the date of
disposition over the amount of the participant's payroll contributions used to
purchase such shares. In addition, the participant will recognize a long-term or
short-term capital gain or loss, as the case may be, in an amount equal to the
difference between the amount realized upon any sale of the Common Stock minus
the cost (i.e., the purchase price plus the amount, if any, taxed to the
participant as ordinary income, as noted in (3) above). If the statutory holding
period described above is satisfied, the Company will not receive any deduction
for federal income tax purposes with respect to any discount in the sale price
of Common Stock or matching contribution applicable to such participant. If such
statutory holding period is not satisfied, the Company generally should be
entitled to deduction in an amount equal to the amount taxed to the participant
as ordinary income.
EMPLOYEE STOCK PURCHASE PLAN
On February 1, 2000, the Board of Directors of the Company adopted the Company's
"2000 Employee Stock Purchase Plan" (the "2000 ESPP Plan") and on May 5, 2000,
the 2000 ESPP Plan became effective upon approval by the stockholders. Under the
2000 ESPP Plan, the Company will sell shares of its Common Stock to participants
at a price equal to 85% of the closing price of the Common Stock on (i) the
first business day of a Plan Period or (ii) the Exercise Date (the last day of
the Plan Period), whichever closing price shall be less. Plan Periods are
six-month periods commencing January 1st and July 1st. The 2000 ESPP Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended.
In Fiscal 2002, the Company issued 54,368 and 67,596 shares of common stock
pursuant to the 2000 ESPP Plan at a price of $2.39 per share and $1.95 per
share, respectively. In September 2002, for the offering period commencing on
January 1, 2002 and closing on June 30, 2002, the Company issued 84,834 shares
of common stock pursuant to the 2000 ESPP Plan at a price of $0.91 per share.
There were two offering periods in Fiscal 2003. The first offering period
commenced on July 1, 2002 and closed on December 31, 2002, and the second
offering period started again on January 2, 2002 and closed on June 30, 2003.
The 2000 ESPP Plan is presently being reviewed by outside counsel to determine
the number of shares of common stock to be issued for Fiscal 2003. Cash refunds
will be given to employees who made contributions to the 2000 ESPP Plan in
Fiscal 2003 but are determined not to be entitled to all or part of the shares
they subscribed to. As of June 30, 2002, 66 employees participate in the
automatic withholding election for the 2000 ESPP Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2003, certain information
regarding the ownership of the Company's Common Stock by (i) each of the
Company's current Directors and (ii) all of the Company's directors and officers
as a group. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock. For each
individual or group included in the table, percentage ownership is calculated by
dividing the number of shares beneficially owned by such person or group as
described above by the sum of the 10,039,561 shares of Common Stock outstanding
as of June 30, 2003 and the number of shares of Common Stock that such person or
group had the right to acquire within 60 days of June 30, 2003,, including, but
not limited to, upon the exercise of options.
85
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------------------ -------------------- -----
Michael P. Ryan
11 Raymond Avenue
Poughkeepsie, NY 12603 2,541,471 (1) 25.3%
Prime Partners, Inc.
11 Raymond Avenue
Poughkeepsie, NY 12603 2,035,471 (1) 20.2%
Ralph Porpora
11 Raymond Avenue
Poughkeepsie, NY 12603 2,040,644 (2) 20.3%
Steven Gilbert
2420 Enterprise Road, Suite 100
Clearwater, FL 33763 757,913 (3) 7.5%
James Ciocia
35-50 Francis Lewis Blvd. Suite 205
Flushing, NY 11358 537,194 (4) 5.3%
Kathryn Travis
375 North Broadway
Suite 203
Jericho, NY 11753 203,321 (5) 2.0%
Carole Enisman
11 Raymond Avenue
Poughkeepsie, NY 12603 16,200 (6) *
Edward H. Cohen
c/o Katten Muchin Zavis Rosenman -0- *
575 Madison Avenue New York, NY 10022
Ted Finkelstein
11 Raymond Avenue 10,000 *
Poughkeepsie, NY 12603
6 persons 3,316,980 33.1%
* Less than 1.0%
(1) 6,000 shares are owned by Mr. Ryan personally, 16,200 shares are
beneficially owned by Mr. Ryan's wife, Carole Enisman, 5,700 shares owned by
Prudential Serls Prime Properties (of which Mr. Ryan is a director and 25%
shareholder) and 2,035,471 shares are beneficially owned by Prime Partners, Inc.
and its wholly owned subsidiaries (including 474,686 shares which Prime
Partners, Inc. has the right to acquire pursuant to the Ciocia Agreement and
168,981 shares which Prime Partners, Inc. has the right to acquire pursuant to
the Travis Purchase Agreement, all at an exercise price per share equal to the
greater of 160% of market price or $75, Mr. Ryan has full authority to vote
these shares pursuant to separate Voting Trust Agreements). Includes 250,000
shares issuable to Mr. Ryan upon exercise of stock options at a price of $6.00
per share and 250,000 shares issuable to Mr. Ryan upon exercise of stock options
at a price of $8.00 per share. Mr. Ryan owns 50% percent of the capital stock
of, and serves as an officer and director of, Prime Partners, Inc. Mr. Ryan
disclaims beneficial ownership of the 16,200 shares beneficially owned by Ms.
Enisman, and the 5,700 shares owned by Prudential Serls Prime Properties.
86
(2) Includes 2,035,471 shares beneficially owned by Prime Partners, Inc. and its
wholly owned subsidiaries (including 474,686 shares which Prime Partners, Inc.
has the right to acquire pursuant to the Ciocia Purchase Agreement and 168,981
shares which Prime Partners, Inc. has the right to acquire pursuant to the
Travis Purchase Agreement, all at an exercise price per share equal to the
greater of 160% of market price or $75. Mr. Ryan has full authority to vote
these shares pursuant to separate Voting Trust Agreements), 2,442 shares
issuable upon the exercise of options at a price of $8.1875 per share and 2,731
shares issuable upon the exercise of options at a price of $2.875 per share. Mr.
Porpora owns 50% percent of the capital stock of, and serves as an officer and
director of, Prime Partners, Inc.
(3) Includes 169,854 shares owned by Gilbert Family Limited Partnership of which
Steven Gilbert is a 97% beneficiary. In addition, includes 340,000 shares,
100,000 shares, 75,000 shares, 12,310 shares, 9,9l0 shares, 5,969 shares, 37,500
shares and 7,370 shares issuable upon exercise of options at $3.50, $4.75,
$13.75, $10.l2, $9.8125, $8.1875, $8.00 and $2.875, respectively, per share.
Does not include 70,000 shares issuable upon the exercise of options that do not
vest until December 2003.
(4) Includes 60,000, 1,470 and 1,038 shares issuable upon the exercise of
options at a price of $9.50, $l0.l25, and $8.1875, respectively, per share. Also
includes 474,686 shares which Prime Partners Inc. has the right to acquire
pursuant to the Ciocia Agreement. Michael Ryan has full authority to vote these
shares pursuant to a separate Voting Trust Agreement.
(5) Includes 30,000 and 340 shares issuable upon the exercise of currently
exercisable options at a price of $9.50 and $l0.l25, respectively, per share.
Also includes 168,981 shares, which Prime Partners Inc. has the right to acquire
pursuant to the Travis Agreement. Michael Ryan has full authority to vote these
shares pursuant to a separate Voting Trust Agreement.
(6) Includes 15,000 shares issuable upon the exercise of currently exercisable
options at a price of $6.00.
(7) Includes 10,000 shares issuable upon the exercise of currently exercisable
options at a price of $6.00.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James Ciocia, Thomas Povinelli, Michael Ryan and Kathryn Travis personally
guaranteed the repayment of the Company's loan from Travelers. Additionally,
Messrs, Ciocia, Povinelli and Ryan personally guaranteed the repayment of the
Company's loan from Wachovia. Such stockholders received no consideration for
such guarantees other than their salaries and other compensation.
Seth A. Akabas is a partner in the law firm of Akabas & Cohen and a director of
the Company until July 21, 2003. Akabas & Cohen was outside counsel for the
Company until August, 2002. During the fiscal year ended June 30, 2003, 2002 and
2001, the Company paid $0, $76,286 and $104,106 in legal fees to Akabas & Cohen.
On July 30, 2003, after Seth Akabas resigned from the Board, the Company entered
into an agreement with Akabas & Cohen to pay a total of $332,000 in outstanding
fees pursuant to an agreed payout settlement.
Edward H. Cohen is of counsel to, and a retired partner of, the law firm Katten
Muchin Zavis Rosenman and also a director of the Company. Since August 2002,
Katten Muchin Zavis Rosenman ("KMZR") has been outside counsel to the Company
and has also, in the past, represented Michael Ryan personally. During Fiscal
2003, the Company paid fees to Katen Muchin Zavis Rosenman.
Michael Ryan, the Company's President and Chief Executive Officer and Carole
Enisman, the Chief Operating Officer of PCS, are married.
87
In July 2000, the Company borrowed $250,000 at 12% interest from Mysemia, a
general partnership in which Seth A. Akabas is a general partner with a 33%
interest. This loan was subordinated to the financing with Wachovia pursuant to
a written subordination agreement and could not be paid until the Wachovia
financing is paid in full. No interest or principal was paid on the loan by the
Company. This loan was payable ten business days after demand but could not be
demanded because of the subordination agreement. It is included in the current
portion of long term debt on the accompanying balance sheet as of June 30, 2003
and 2002. As of June 30, 2003, $88,045 in accrued interest was due to Mysemia.
The debt plus accrued interest due to Mysemia was assumed by Pinnacle on
December 4, 2003 pursuant to the Asset Purchase settlement with Pinnacle, and a
general release was obtained from Mysemia.
In January 2001, the Company borrowed $250,000 from Doreen M. Biebusch, a former
Director of the Company. This loan was subordinated to the financing with
Wachovia pursuant to a written subordination agreement and could not be paid
until the Wachovia financing is paid in full. No interest or principal was paid
on the loan by the Company. This loan was payable ten business days after demand
but could not be demanded because of the subordination agreement. It is included
in the current portion of long term debt on the accompanying balance sheet as of
June 30, 2003 and 2002. As of June 30, 2003 $77,976 in accrued interest was due
to Doreen Biebusch. The debt plus accrued interest due to Doreen Biebusch was
assumed by Pinnacle on December 4, 2003, pursuant to the Asset Purchase
settlement with Pinnacle, and a general release was obtained from Ms. Biebusch.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
general partners in a limited partnership, Prime Income Partners, L.P. which
owns the building in Poughkeepsie, New York occupied by PCS, PFS and AFP. As of
August 2002, the building also serves as the Company's executive headquarters.
During the fiscal year ended June 30, 2003, the Company paid $ 331,958 to Prime
Income Partners, L.P. for rent and related charges. Management believes the
amounts charged to the Company for rent to be commensurate with the rental rate
that would be charged to an independent third party.
In February 2002, Prime Partners, Inc. of New York (previously known as Prime
Financial Services, Inc. New York) loaned to the Company $1.0 million at a
stated interest rate of 10% which was repaid in full plus accrued interest of
$14,855 in April 2002. During the fiscal year ended June 30, 2001, Prime
Partners, Inc. loaned to the Company an aggregate of $600,000. A total of
$465,608 in loans were made by Prime Partners, Inc. to the Company during Fiscal
2003. As of June 30, 2003, the Company owed Prime Partners, Inc. $710,100.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
major shareholders of Prime Partners, Inc.
On November 26, 2002, the Company finalized the Asset Purchase with Pinnacle,
whereby Pinnacle, an entity controlled by Thomas Povinelli and David Puyear,
former chief executive and financial officers of the Company, purchased certain
assets of the Company. (See Note 20)
PART IV
ITEM 15. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial Statements at Item
8 on page 35 of this report.
(2) Financial Statement Schedule: See notes to Consolidated Financial Statements
at Item 8 on page 35 of this report
(3) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by reference:
3.1 Registrant's Articles of Incorporation, as amended, incorporated by
reference to the like numbered exhibit in the Registrant's Registration
Statement on Form SB-2 under the Securities Act of 1933, as amended, File No.
33-70640-NY.
88
3.2 Registrant's Amended Articles of Incorporation, incorporated by reference to
the exhibit in the Registrant's Proxy Statement on Form14-A under the Securities
Exchange Act of 1934, as amended, filed on June 22, 1999.
3.3 Registrant's By-Laws, incorporated by reference to the like numbered exhibit
in the Registrant's Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-70640-NY.
10.1 1993 Joint Incentive and Non-Qualified Stock Option Plan of the Registrant,
incorporated by reference to the like numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY.
10.2 1999 Joint Incentive and Non-Qualified Stock Option Plan of the Registrant,
incorporated by reference to the exhibit in the Registrant's Proxy Statement on
Form 14-A under the Securities Exchange Act of 1934, as amended, filed on June
22, 1999.
10.3 2000 Employee Stock Purchase Plan of the Registrant, incorporated by
reference to the exhibit in the registrant's Proxy Statement on Form 14-A under
the Securities Exchange Act of 1934, as amended, filed on May 5, 2000.
10.4 Stock Purchase Agreement dated November 19, 1998 among Registrant, North
Shore Capital Management and North Ridge Securities Corp., incorporated by
reference to Exhibit 1 on the Registrant's report on Form 8-K, dated November
19, 1998.
10.5 Non-competition Agreement dated November 19, 1998 among Registrant, Daniel
Levy, and Joseph Clinard, incorporated by reference to Exhibit 2 on the
Registrant's report on Form 8-K, dated November 19, 1998.
10.6 Employment Agreement dated November 19, 1998 between Daniel Levy and North
Shore Capital Management Corp and North Ridge Securities Corp., incorporated by
reference to Exhibit 3 on the Registrant's report on Form 8-K, dated November
19, 1998.
10.7 Stock Option Agreement dated November 19, 1998 between Registrant and
Daniel Levy, incorporated by reference to Exhibit 4 on the Registrant's report
on Form 8-K, dated November 19, 1998.
10.8 Consulting Agreement dated November 19, 1998 between Joseph Clinard and
North Ridge Securities Corp., incorporated by reference to Exhibit 5 on the
Registrant's report on Form 8-K, dated November 19, 1998.
10.9 Stock and Asset Purchase Agreement dated April 5, 1999 among Registrant,
Prime Financial Services, Inc., Prime Capital Services, Inc., Asset & Financial
Planning, Ltd., Michael P. Ryan and Ralph Porpora, incorporated by reference to
Exhibit 1 on the Registrant's report on Form 8-K, dated April 5, 1999.
10.11 Non-competition Agreement dated April 5, 1999 among Registrant, Prime
Financial Services, Inc., Michael P. Ryan and Ralph Porpora, incorporated by
reference to Exhibit 2 on the Registrant's report on Form 8-K, dated April 5,
1999.
10.12 Registration Rights Agreement dated April 5, 1999 among Registrant, Prime
Financial Services, Inc., Michael P. Ryan and Ralph Porpora, incorporated by
reference to Exhibit 3 on the Registrant's report on Form 8-K, dated April 5,
1999.
10.13 Limited Liability Company Interest Option Agreement dated April 5, 1999
between Registrant and Prime Financial Services, Inc., incorporated by reference
to Exhibit 4 on the Registrant's report on Form 8-K, dated April 5, 1999.
10.14 Asset Purchase Agreement dated November 26, 2002 between Registrant and
Pinnacle Taxx Advisors LLC, incorporated by reference to Exhibit 1 on the
Registrant's report on Form 8-K, dated December 23, 2002.
14.0 Code of Ethics for Senior Financial Officers and the Principal Executive
Officer of Gilman + Ciocia, Inc.
89
21 List of Subsidiaries.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Accounting Officer.
32.2 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
(1) Current Report on Form 8-K filed with the SEC on July 17, 2002.
(2) Current Report on Form 8-K filed with the SEC on August 9, 2002.
(3) Current Report on Form 8-K filed with the SEC on September 4, 2002.
(4) Current Report on Form 8-K filed with the SEC on December 23, 2002.
90
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: January 20, 2004 By /s/ Michael P. Ryan
Chief Executive Officer
Dated: January 20, 2004 By /s/ Dennis Conroy
Chief Accounting Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 20th day of January, 2004.
/s/ James Ciocia, Chairman
/s/ Michael P. Ryan, Director
/s/ Kathryn Travis, Director
/s/ Steven Gilbert, Director
/s/ Edward H. Cohen, Director
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