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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, 2004 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) 486-0900
(Registrant's Telephone Number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |_| No |X|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the registrant's voting and non-voting common
equity held by non-affiliates as of June 30, 2004 was $2,120,332 based on a sale
price of $.50.
As of October 12, 2004, 9,388,764 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|
Page 1
GILMAN + CIOCIA, INC.
REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2004
TABLE OF CONTENTS
PART I
Item 1. Description of Business............................................................................... 3
Item 2. Properties............................................................................................ 18
Item 3. Legal Proceedings..................................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................................................... 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................. 20
Item 6. Selected Consolidated Financial Data.................................................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................ 37
Item 8. Consolidated Financial Statements and Supplementary Data.............................................. 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 68
Item 9A. Controls and Procedures .............................................................................. 69
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................... 69
Item 11. Executive Compensation................................................................................ 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........ 73
Item 13. Certain Relationships and Related Transactions........................................................ 74
Item 14. Principal Accounting Fees and Services ............................................................... 75
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................... 75
SIGNATURES........................................................................................................ 78
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, 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 the Fiscal year ended June 30, 2004,(1) approximately
90% of the Company's revenues were derived from commissions on financial
planning services and approximately 10% were derived from fees for tax
preparation services. As of June 30, 2004, the Company had 36 offices operating
in 6 states (New York, New Jersey, Connecticut, Florida Colorado and Maryland).
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 2004, the Company had total revenues from continuing operations of
$59.9 million representing an increase of $5.7 million from total revenues from
continuing operations in Fiscal 2003. During Fiscal 2004, the Company had net
income of $5.1 million, had a loss from continuing operations before other
income and expenses of $.003 million and at June 30, 2004 had a working capital
deficit of $(13.8) million. See Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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 financial statements for the three years ended June 30, 2003 (including
Fiscal 2001, not included herein) were restated to correct a timing error in the
recording of receivables and the related accrual for commission liabilities
relating to asset management services. In January 2004, subsequent to the filing
of the Form 10-K for the year ended June 30, 2003, management discovered and
informed the auditors that revenues and related commission expenses for asset
management services, billed and incurred in the quarter ended September 30, 2003
for services to be rendered in that quarter, had been recorded as of June 30,
2003. Further, it was ascertained that this error in revenue and expense
recognition had been occurring since the 1999 acquisition of Asset and Financial
Planning Ltd. and had gone undetected for four years. The receivables and
commissions originally prematurely recorded at each quarter end were received
and paid by the Company during the subsequent quarter. As the error applied to
both the beginning and ending balances of each quarter, the effect on any
individual quarter filing on Form 10-Q was immaterial. On February 13, 2004, the
Company received a letter from Grant Thornton LLP ("Grant Thornton"), its
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(1) Fiscal years are denominated by the year in which they end. Accordingly,
Fiscal 2004 refers to the year ended June 30, 2004.
Page 3
previous auditors, advising the Company that it did not consent to the inclusion
of its 2002 Auditors' Report issued for the Company's Form 10-K for Fiscal 2002
in the Company's Form 10-K/A for Fiscal 2003 filed on February 9, 2004. The
letter stated that Grant Thornton was withdrawing its 2002 Auditors' Report and
that its report could no longer be relied on, and that it was withdrawing its
quarterly review reports for each fiscal quarter during which it served as the
Company's auditors.
During Fiscal 2003 and Fiscal 2004, the Company sold 63 of its offices,
including the sale of 47 offices to Pinnacle Taxx Advisors, LLC described below
("Pinnacle" an entity controlled by former executives of the Company) and two
subsidiaries. The Company recognized a gain of $6.2 million on the sale of these
offices in Fiscal 2004. In accordance with SFAS 144 assets and liabilities
associated with these offices have been reclassified and are included on the
accompanying balance sheets as assets and liabilities held for sale, and the
results of these operations have been reclassified and are separately presented
for all reporting periods as discontinued operations in the accompanying
statements of operations. During the first quarter of Fiscal 2003, the Company
sold to Pinnacle forty seven offices ("Pinnacle Purchased Offices") and all
tangible and intangible net assets (the "Purchased Assets"), and Pinnacle
assumed certain liabilities, 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. See Note 3 to Consolidated Financial Statements for a discussion
of the Pinnacle transaction, the settlement of disputes arising in connection
therewith and certain contingent responsibility of the Company for equipment and
real estate leases (for an aggregate of $1.8 million) assumed by Pinnacle other
than the White Plains, NY lease.
On August 27, 2002, the Company switched independent auditors from Arthur
Andersen LLP ("Arthur Andersen") to Grant Thornton. On November 7, 2003, the
Company switched independent auditors from Grant Thornton to Radin, Glass & Co.,
LLP ("Radin Glass). See Item 9 "Changes in and Disagreements with Accountants
and Accounting and Financial Disclosure."
The Company is the subject of a formal investigation by the Securities and
Exchange Commission ("SEC") which commenced in March 2003. In addition, on
February 4, 2004, the Company was served with a Summons and a Shareholder's
Class Action and Derivative Complaint with the following caption: "Gary Kosseff,
Plaintiff, against James Ciocia, Thomas Povinelli, Michael P. Ryan, Kathryn
Travis, Seth A. Akabas, Louis P. Karol, Edward H. Cohen, Steven Gilbert and
Doreen Biebusch, Defendants and Gilman & Ciocia, Inc., Nominal Defendant". See
Note 11 to Consolidated Financial Statements and Item 3 "Legal Proceedings" for
a discussion of the SEC investigation and all material litigation pending
against the Company.
OTHER SALES
By Stock Purchase Agreement dated as of January 1, 2004, the Company agreed to
sell to Daniel R. Levy and Joseph H. Clinard all of the authorized, issued and
Page 4
outstanding capital stock (the "Shares") of North Ridge Securities Corp. ("North
Ridge") and North Shore Capital Management Corp. ("North Shore"). The total
purchase price for the Shares was $1,100,000 allocated $1,050,000 to the Shares
of North Ridge and $50,000 to the Shares of North Shore. A copy of the Stock
Purchase Agreement is attached as Exhibit 10.15. See Note 3 to Consolidated
Financial Statements for a discussion of these sales.
DEBT DEFAULTS
During Fiscal 2002, 2003 and 2004, the Company was in default of certain
financial covenants under its $7 million term loan/revolving letter of credit
financing with Wachovia Bank, National Association ("Wachovia"), of its $5
million financing with Travelers Insurance Company ("Travelers") and of its $1
million loan with Rappaport Gamma, Ltd. ("Rappaport"). As a result of these
defaults, the Company's debt as to these lenders is classified as current
liabilities on its financial statements. See Note 9 to Consolidated Financial
Statement for a complete discussion of the Company's debt.
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
million individual 2003 federal income tax returns were filed in the United
States through June 30, 2004. 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 2004 tax season. During the 2004 tax season, the Company prepared
approximately 29,000 United States tax returns through its 36 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 specific location of the tax preparation office, local competition, local
economic conditions, quality of on-site office management and increasing the
Company's 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.
Page 5
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 channel of its business by
approximately 120 employees. Almost all of the Company's professional tax
preparers have tax preparation experience and the Company has specifically
trained and tested each one to meet the required level of expertise to properly
prepare tax returns. A large percentage of the Company's seasonal employees
return in the next year. The Company is required to file its own corporate tax
return on a timely basis in order to be able to file returns electronically for
its clients. The Company has obtained an extension of time until March 2005 to
file its return for the year ended June 30, 2004. The Company believes its
return will be filed by such date; if it is not, the Company will be unable to
file electronically for its clients, which would materially adversely affect the
Company's core business.
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
Page 6
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 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.
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 Prime Capital Services, Inc. ("PCS"),
a wholly owned subsidiary of the Company. PCS conducts a securities brokerage
business providing regulatory oversight and products and sales support to its
registered representatives, who provide investment products and services to
their clients. PCS is a registered securities broker-dealer with the SEC and a
member of the National Association of Securities Dealers ("NASD").
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, PCS supervises 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. PCS has been able to recruit and retain experienced and
productive registered representatives who seek to establish and maintain
personal relationships with high net worth individuals. PCS generally does 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.
Page 7
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 PCS, National Financial, which is a wholly
owned subsidiary of Fidelity Investments. 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, PFS, is an authorized insurance
agent in approximately thirty states.
REGULATION (COMPLIANCE AND MONITORING)
PCS, 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. PCS
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 PCS'
operations. PCS 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,
Page 8
including qualification and licensing of supervisory and sales personnel,
limitations on extensions of credit in securities transactions, clearance and
settlement procedures, requirements for the registration, underwriting, sale and
distribution of securities and rules of the SRO's designed to promote high
standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations concerns the relationship between
broker-dealers and their clients. As a result, many aspects of the relationship
between broker-dealers and clients are subject to regulation, including, in some
instances, requirements that brokers make "suitability" determinations as to
certain customer transactions, limitations on the amounts that may be charged to
clients, timing of proprietary trading in relation to client's trades, and
disclosures to clients.
Additional legislation, changes in rules promulgated by the SEC, state
regulatory authorities or SRO's, or changes in the interpretation or enforcement
of existing laws and rules may directly affect the mode of operation and
profitability of broker-dealers. The SEC, SRO's and state securities 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 a registered broker-dealer, PCS is required to, and has established and it
maintains, 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 PCS' abilities to conduct their securities
business. Moreover, under federal law and certain state securities laws, PCS may
be held liable for damages resulting from the unauthorized conduct of their
account executives to the extent that PCS has 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.
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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.
ACQUISITIONS
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, Jackson Hewitt and many
well-known brokerage firms in the financial service field have significantly
greater financial and other resources than the Company.
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 the specific location of the tax preparation office, local
economic conditions, quality of on-site office management and ability to file
tax returns electronically with the IRS. 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.
Page 10
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, 2004, the Company employed 442 persons on a full-time, full-year
basis, including 4 officers. During tax season, the Company employs
approximately 118 seasonal employees who do only tax preparation or provide
support functions. Approximately 75% 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 PCS.
Each of the registered representatives licensed with PCS 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
248 independent registered representatives are also affiliated with PCS and have
entered into similar commission sharing agreements.
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.
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
expressions, as they relate to the Company or its management, are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below. Investors should not rely on past revenues as a prediction of future
revenues.
Significant Deficiencies in Internal Controls Over Financial Reporting;
Increased Compliance Expense. The Company has been advised by Radin Glass LLP of
the existence of certain reportable conditions involving
Page 11
significant deficiencies in the design and operation of the Company's internal
controls over financial reporting that could adversely affect the Company's
ability to record, process, summarize and report financial data consistent with
the assertions of management in the financial statements. Although none of these
conditions individually constitutes a material weakness, collectively, these
deficiencies and the Company's inability to produce timely accurate financial
statements is a material weakness. A material weakness is defined as a
reportable condition in which the design or operation of one or more of the
internal control components does not reduce to a relatively low level the risk
that misstatements caused by error or fraud in amounts that would be material in
relation to the financial statements being audited may occur and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. Changing laws, regulations and standards relating to
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, and newly enacted SEC regulations have created additional compliance
requirements for companies such as ours. We are committed to maintaining high
standards of internal controls over financial reporting, corporate governance
and public disclosure. As a result, we intend to invest appropriate resources to
comply with evolving standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities. See Item
9a, "Controls and Procedures."
SEC Investigation; Financial Statements. The Company is the subject of a formal
investigation by the SEC. See Item 3 "Legal Proceedings" and Note 11 to
Consolidated Financial Statements for a discussion of the SEC investigation.
The Company timely filed on January 21, 2004 its financial statements for Fiscal
2003 in its Form 10-K. The Company then amended its 10-K for Fiscal 2003 in a
Form 10-KA filed on February 9, 2004. However, Grant Thornton, the Company's
prior auditors, refused to consent to the inclusion in the Form 10-KA for Fiscal
2003 of their 2002 audit report with respect to the 2002 financial statements,
as restated. In addition, Arthur Andersen, the Company's auditors for 2001, is
no longer certified to consent to changes in its 2001 audit report. As a result,
the Company was advised by the Staff of the SEC that the SEC's position is that
the Company has not timely filed all required financial statements because the
Company's Form 10-KA for Fiscal 2003 filed in February 2004 included unaudited
financial statements for fiscal years 2002 and 2001. The Company retained Radin
Glass to audit Fiscal 2002 to resolve this matter. As a result of the Staff's
position, until the Company has been current in filing all reports for 12
months, the Company is ineligible to use Forms S-2 and S-3 registration
statements to register securities, and until such audited financial statements
are filed, other registration statements will not be declared effective and the
Company will be unable to effect private placement of its securities under Rules
505 and 506 of Regulation D except for placements exclusively to accredited
investors.
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
Page 12
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 makes trading the Company's shares more difficult for investors,
potentially leading to further declines in share price. It also makes 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 in 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
channel of the Company's business has generated an increasing portion of the
Company's revenues during the past few years, and if such channel does not
continue to be successful, the Company's rate of growth may decrease.
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.
Page 13
If the financial markets deteriorate, the Company's financial planning channel
will suffer decreased revenues. 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.
Dependence on Technology Software and Systems. As an information financial
services company with a subsidiary broker dealer, the Company is greatly
dependent on technology software and systems and on the internet to maintain
customer records, effect securities transactions and prepare and file tax
returns. In the event that there is an interruption to the systems due to
internal systems failure or from an external threat, including terrorist
attacks, fire and extreme weather conditions, the Company's ability to prepare
and file tax returns and to process financial transactions could be affected.
The Company has offsite backup, redundant and remote failsafe systems in place
to safeguard against these threats but there can be no assurance that such
systems will be effective to prevent malfunction and adverse effects on
operation.
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 competitors are H+R Block, Inc. and
Jackson Hewitt 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.
Page 14
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 PCS subsidiary, Ted Finkelstein, its Vice President
and General Counsel, Kathryn Travis, its Secretary, Carole Enisman, the Chief
Operating Officer of its PCS 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 would 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
Page 15
success and its competitive position. The Company has registered its "Gilman +
Ciocia" trademark and its "e1040.com" trademark. 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 future earnings, if any 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.
Third Party Control. The ability of a third party to acquire control of the
Company is made more difficult by the Company's classified board of directors,
which would prevent a third party from acquiring a majority of the Common Stock
or immediately electing a new board of directors, and by the Company's ability
to issue preferred stock without shareholder approval. These impediments to
third party control adversely affect the price and liquidity of the Company's
stock.
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. The release of 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.
Page 16
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.
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.
PCS is subject to periodic examination by the SEC, the NASD, SROs and various
state authorities. PCS 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 PCS, noting perceived deficiencies and requesting PCS
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 PCS and/or their personnel.
Page 17
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 PCS 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. may be liable for the
unauthorized acts of their retail brokers and independent contractors if they
fail to adequately supervise their conduct. PCS is currently a
defendant/respondent 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 PCS
maintains 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 PCS and a cumulative cap on coverage (presently
$3,000,000). 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, 2004, the Company provided services to its clients at 36 local
offices in 6 states: 14 in New York, 14 in Florida, 5 in New Jersey, 1 in
Connecticut, 1 in Maryland and 1 in 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 2004 was approximately $2.0 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.
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.
Page 18
On November 26, 2002, the Company finalized the sale to Pinnacle whereby it sold
47 of its offices to Pinnacle. 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 all equipment and real estate leases, other
than the White Plains, NY lease, after the assignment.
The Company owned a building in Babylon, New York which was sold on July 14,
2004. The company recorded a gain of $31,181 from the sale during Fiscal 2005.
ITEM 3. LEGAL PROCEEDINGS
Litigation
On February 4, 2004, the Company was served with a Summons and a Shareholder's
Class Action and Derivative Complaint with the following caption: "Gary Kosseff,
Plaintiff, against James Ciocia, Thomas Povinelli, Michael P. Ryan, Kathryn
Travis, Seth A. Akabas, Louis P. Karol, Edward H. Cohen, Steven Gilbert and
Doreen Biebusch, Defendants and Gilman & Ciocia, Inc., Nominal Defendant". The
action was filed in the Court of Chancery of the State of Delaware in and for
New Castle County under Civil Action No. 188-N. The Company believes that the
allegations contained in the lawsuit are without merit and the Company intends
to contest the lawsuit vigorously. The nature of the action is that the Company,
its Board of Directors and its management, breached their fiduciary duty of
loyalty in connection with the sale of the Purchased Offices to Pinnacle. The
action alleges that the sale to Pinnacle was for inadequate consideration and
without a fairness opinion by independent financial advisors, without
independent legal advice and without a thorough evaluation and vote by an
independent committee of the Board of Directors. The action prays for the
following relief: a declaration that the action is maintainable as a class
action and certifying the plaintiff as the representative of the class; a
declaration that the Company, its Board of Directors and its management breached
their fiduciary duty and other duties to the plaintiff and to the other members
of the purported class; a rescission of the Purchase Agreement; unspecified
monetary damages; and an award to the plaintiff of costs and disbursements,
including reasonable legal, expert and accountants fees. On March 15, 2004,
counsel for the Company and for all defendants filed a motion to dismiss the
lawsuit. On June 18, 2004, the Plaintiff filed an Amended Complaint. On July 12,
2004, counsel for the Company and for all defendants filed a motion to dismiss
the Amended Complaint. The Company is the subject of a formal investigation by
the "SEC". The investigation concerns, among other things, the restatement of
the Company's financial results for the fiscal year ended June 30, 2001 and the
fiscal quarters ended March 31, 2001 and December 31, 2001 (which have been
previously disclosed in the Company's amended quarterly and annual reports for
such periods), the Company's delay in filing Form 10-K for Fiscal 2002 and 2003,
the Company's delay in filing its 10-Q for the quarter ending September 30, 2002
and the Company's past accounting and recordkeeping practices. The Company had
previously received informal, non-public inquiries from the SEC regarding
certain of these matters. The Company and its executives have complied fully
with the SEC's investigation and will continue to comply fully with the SEC's
investigation. The Company does not believe that the investigation will have a
material effect on the Company's Consolidated Financial Statements.
Page 19
The Company has been advised that the Staff of the SEC has taken the position
that the Company has not timely filed all required financial statements because
the Company's Form 10-KA for Fiscal 2003 filed in February 2004 included
unaudited financial statements for fiscal years 2002 and 2001. This was due to
the refusal of Grant Thornton, the Company's prior auditors, to consent to the
inclusion in the Form 10-KA for Fiscal 2003 of their 2002 audit report with
respect to the 2002 financial statements, as restated. In addition, Arthur
Andersen, the Company's auditors for 2001, is no longer certified to consent to
changes in its 2001 audit report. The Company has retained Radin Glass to audit
Fiscal 2002 to resolve this matter. As a result of the Staff's position, until
the Company has been current in filing all reports for 12 months, the Company is
ineligible to use Forms S-2 and S-3 registration statements to register
securities, and until such audited financial statements are filed, other
registration statements will not be declared effective and the Company will be
unable to effect private placement of its securities under Rules 505 and 506 of
Regulation D except for placements exclusively to accredited investors.
The Company and its PCS Subsidiary are defendants and respondents in lawsuits
and NASD arbitrations in the ordinary course of business. On June 30, 2004,
there were 32 pending lawsuits and arbitrations of which 16 were against PCS and
management accrued $943,600 as a reserve for potential settlements, judgments
and awards. Sixteen of these matters were related to PCS and its registered
representatives. PCS has Errors & Omissions coverage for such matters. In
addition, under the PCS 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 stockholders on December 14, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER REPURCHASES OF EQUITY SECURTITIES
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 SEC. If the Company fails to meet criteria set forth
Page 20
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
stockholders to sell the securities in the secondary market.
The following table sets forth the high and low sales prices for the Common
Stock during the periods indicated as reported by the NASDAQ stock market.
SALES PRICES
QUARTER ENDED HIGH LOW
------------- ---- ---
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
September 30, 2003 $ 0.75 $ 0.10
December 31, 2003 $ 0.75 $ 0.10
March 31, 2004 $ 0.75 $ 0.20
June 30, 2004 $ 0.70 $ 0.25
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 future earnings, if any to finance
the growth of the Company.
HOLDERS OF COMMON STOCK
On June 30, 2004, there were approximately 295 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, 2004, the price of the Common Stock was $.50 per share.
During the fiscal year ended June 30, 2004, the Company issued the following
common stock in privately negotiated transactions that were not registered under
the Securities Act of 1933 pursuant to the exemption provided by Section 4 (2)
of the '33 Act:
Through June 30, 2004, 1,195,298 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.
Page 21
The 1,048,616 of the Company's shares transferred to the Company by Thomas
Povinelli are held by the Company in its name as treasury stock.
No underwriters or brokers participated in any of these transactions. All
such sales were privately negotiated with the individuals with whom the
Company had a prior relationship and were exempt from registration under
the Act pursuant to Section 4 (2) as a sale by an issuer not involving a
public offering.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities to be Weighted-average Number of securities remaining
issued upon exercise of exercise price of available for future issuance under
Plan category outstanding options, warrants outstanding options, equity compensation plans (excluding
and rights warrants and rights securities reflected in column (a)
Equity
compensation
plans approved 136,928 $6.43 1,361,769
by security
Holders (1)
Equity
compensation
plans not 2,040,638 $6.28 -0-
approved by
security holders (2)
----------- -----------
Total 2,177,565 1,361,769
(1) The issued options are based on taking all outstanding production awards
as of June 30, 2004.
(2) The issued options are based on adding up all non-production awards as of
June 30, 2004.
Page 22
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. Prior to September 1, 2002, the Company did not consistently record
the plan pursuant to which the option was granted. Starting in September, 2002,
the Company implemented 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 restated financial statements for the years ended June 30, 2003, 2002 and
2001 were restated to correct a timing error in the recording of receivables and
the related accrual for commission liabilities relating to asset management
services. In January 2004, subsequent to the filing of the Form 10-K for the
year ended June 30, 2003, management discovered and informed the auditors that
revenues and related commission expenses for asset management services, billed
and incurred in the quarter ended September 30, 2003 for services to be rendered
in that quarter, had been recorded as of June 30, 2003. Further, it was
ascertained that this error in revenue and expense recognition had been
occurring since the 1999 acquisition of Asset and Financial Planning Ltd. and
had gone undetected for four years. The receivables and commissions originally
prematurely recorded at each quarter end were received and paid by the Company
during the subsequent quarter. As the error applied to the beginning and ending
balances of each quarter, the effect on any individual quarter filing on Form
10-Q was immaterial.
The financial statements for the three years ended June 30, 2003 were restated
to correct this error. As a result of the restatement, receivables as of June
30, 2003 were reduced by $1,114,725 and commission liabilities were reduced by
$923,658 and the Stockholder's deficit increased by $191,067.
For the years ended 2002 and 2001, commissions receivable were reduced by
$1,174,824 and $1,066,152. Commission liabilities were reduced by $952,422 and
$898,155.
Losses for the year ended June 30, 2003, 2002 and 2001 decreased by $31,334,
increased by $54,405 and increased by $97,747 respectively.
Revenues for the years ended June 30, 2003, 2002, and 2001 increased by $60,009,
decreased by $108,672 and decreased by $363,654 respectively. Commission expense
for the years ended June 30, 2003, 2002 and 2001 increased by $28,765, decreased
by $54,266 and decreased by $265,907 respectively.
The selected consolidated financial data with respect to the Company's
consolidated balance sheets as of June 30, 2004 and 2003 and the related
consolidated statements of operations for the years ended June 30, 2004, 2003
and 2002 have been derived from the Company's Consolidated Financial Statements
which are included herein. The following selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto and the information contained in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
SUMMARY OF CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME
AS OF JUNE 30
Page 23
2004 2003 Restated 2002 Restated 2001 Restated 2000 Restated
(unaudited)
See Note 2 (a) See Note 2 (a) See Note 2 See Note 2 (a)
(1) (1) (a) (1) (1)
Working Capital
(Deficit) $(13,778,035) $(19,493,533) $(11,125,496) $ 516,576 $ (1,681,686)
Total Assets 19,142,969 21,481,114 35,997,688 51,613,742 43,245,680
Long Term Debt 212,440 661,622 851,501 5,425,928 826,476
Total Shareholders' Equity (1,219,125) (6,192,983) 7,488,667 27,756,436 24,642,591
Cash Dividends -- -- -- -- --
Revenues 59,911,049 54,177,962 55,895,952 82,378,076 88,216,839
Commissions 34,361,369 32,018,741 33,527,796
Operating Expenses 25,552,366 28,178,971 45,672,458 85,559,462 95,734,572
Net Income / (Loss) from Continuing
Operations (1,036,690) (7,834,173) (23,982,000) (3,355,081) (6,230,342)
Net Income / (Loss) from Discontinued
Operations 6,088,225 (6,162,735) 1,623,297 3,044,595 --
Net Income / (Loss) $ 5,051,535 $(13,996,908) $(22,358,703) $ (310,486) $ (4,083,342)
The years 2001 and 2000 have not been adjusted to reflect the sale of the
Company's North Ridge Group and certain other offices which have been
discontinued. For the years 2001 and 2000 commission expense is included in
operating expenses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Form 10-K and the exhibits hereto may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are based upon current information, expectations, estimates and
projections regarding the Company, the industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of
Page 24
laws, legislation, regulations, supervision and licensing by federal, state and
local authorities and their impact on the lines of business in which the Company
and its subsidiaries are involved; unforeseen compliance costs; changes in the
economy, problems arising from significant deficiencies in the design and
operation of the Company's systems of internal control over financial reporting;
political or regulatory environments; changes in competition and the effects of
such changes; the inability to implement the Company's strategies; changes in
management and management strategies; the Company's inability to successfully
design, create, modify and operate its computer systems and networks; litigation
involving the Company; and risks described from time to time in reports and
registration statements filed by the Company and its subsidiaries with the
Securities and Exchange Commission. Readers should take these factors into
account in evaluating any such forward-looking statements. The Company
undertakes no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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.
OVERVIEW
In Fiscal 2004, the Company had total revenues from continuing operations of
$59.9 million representing an increase of $5.7 million from total revenues from
continuing operations in Fiscal 2003. During Fiscal 2004, the Company had net
income of $5.1 million, had a loss from continuing operations before other
income and expenses of $.003 million and at June 30, 2004 had a working capital
deficit of $(13.8) million.
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 PCS subsidiary. The Company and PCS 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, 2004, approximately 10% of
the Company's revenues were earned from tax preparation services, 90% were
earned from all financial planning and related services (with 89% from mutual
funds, annuities and securities transactions and 11% 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 channel would
operate as profitably by itself and the two channels 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.
Debt. On December 26, 2001, the Company closed a $7.0 million financing (the
"Loan") with Wachovia. The Loan consisted of a $5.0 million term loan ("Term
Loan") and a $2.0 million revolving letter of credit ("Revolving Credit Loan").
On November 27, 2002, the Company and Wachovia entered into a forbearance
agreement (the "Forbearance Agreement") whereby Wachovia agreed to forbear from
acting on certain defaults of financial covenants by the Company under the
Revolving Credit Loan and under the Term Loan. Wachovia extended the due date of
Page 25
the Loan to November 1, 2003 (the "Maturity Date"). By an Amendment to
Forbearance Agreement entered into between the Company and Wachovia as of June
18, 2003, the Maturity Date was extended to July 1, 2004. By an Amendment to
Forbearance Agreement entered into between the Company and Wachovia dated March
4, 2004: the Maturity Date of the Wachovia Loan was extended to July 1, 2005;
certain $250,000 principal payments due on March 10, 2004, April 10, 2004, May
10, 2004 and June 10, 2004 were deleted; commencing on March 10, 2004, and
continuing on the 10th day of each month thereafter until the new Maturity Date
of the Loan, the Company will make a principal payment to Wachovia in the amount
of $31,250 in addition to the regular monthly payments due Wachovia; the
Applicable Margin to the interest rate of the Loan was increased to four
percent; and the Company's reporting requirements to Wachovia were changed. The
Company is in technical default of several other provisions of the Loan, the
Forbearance Agreement and the Amendments to Forbearance Agreement. However, the
Company does not believe that Wachovia will issue a notice of default for any of
these technical defaults.
The Company's $5 million credit facility with Travelers closed on November 1,
2000. On September 24, 2002, the Company received a notice from 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. No payments have been made to Travelers since April,
2003 pursuant to the terms of the subordination agreement.
On October 30, 2001, the Company borrowed $1,000,000 from Rappaport pursuant to
a written note without collateral and without stated interest (the "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. 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. By June 30, 2004, Rappaport had
received a total of 1,195,298 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.
Page 26
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, the Company's delay in filing its 10-Q for
the quarter ending September 30, 2002 and the Company's past accounting and
recordkeeping practices. The Company had previously received informal,
non-public inquiries from the SEC regarding certain of these matters. The
Company and its executives have complied fully with the SEC's investigation and
will continue to comply fully with the SEC's investigation. The Company does not
believe that the investigation will have a material effect on the Company's
Consolidated Financial Statements.
The Company has been advised that the Staff of the SEC has taken the position
that the Company has not timely filed all required financial statements because
the Company's Form 10-KA for Fiscal 2003 filed in February 2004 included
unaudited financial statements for fiscal years 2002 and 2001. This was due to
the refusal of Grant Thornton, the Company's prior auditors, to consent to the
inclusion in the Form 10-KA for Fiscal 2003 of their 2002 audit report with
respect to the 2002 financial statements, as restated. In addition, Arthur
Andersen, the Company's auditors for 2001, is no longer certified to consent to
changes in its 2001 audit report. The Company has retained Radin Glass to audit
Fiscal 2002 to resolve this problem. As a result of the Staff's position, until
the Company has been current in filing all reports for 12 months, the Company is
ineligible to use Forms S-2 and S-3 registration statements to register
securities, and until such audited financial statements are filed, other
registration statements will not be declared effective and the Company will be
unable to effect private placement of its securities under Rules 505 and 506 of
Regulation D except for placements exclusively to accredited investors.
RESTATEMENTS
The financial statements for the three years ended June 30, 2003 were restated
to correct a timing error in the recording of receivables and the related
accrual for commission liabilities relating to asset management. In January
2004, subsequent to the filing of the Form 10-K for the year ended June 30,
2003, management discovered and informed the auditors that revenues and related
commission expenses for asset management services, billed and incurred in the
quarter ended September 30, 2003 for services to be rendered in that quarter,
had been recorded as of June 30, 2003. Further, it was ascertained that this
error in revenue and expense recognition had been occurring since the 1999
acquisition of Asset and Financial Planning Ltd. and had gone undetected for
four years. The receivables and commissions recorded originally prematurely
recorded at each quarter end were received and paid by the Company during the
subsequent quarter. On February 13, 2004, the Company received a letter from
Grant Thornton, its previous auditors, advising the Company that it did not
consent to the inclusion of its 2002 Auditors' Report issued for the Company's
Page 27
Form 10-K for Fiscal 2002 in the Company's Form 10-K/A for Fiscal 2003 filed on
February 9, 2004. The letter stated that Grant Thornton was withdrawing its 2002
Auditors' Report and that its report could no longer be relied on, and that it
was withdrawing its quarterly review reports for each fiscal quarter during
which it served as the Company's auditors.
The financial statements for the three years ended June 30, 2003 were restated
to correct this error. As a result of the restatement, receivables as of June
30, 2003 have been reduced by $1,114,725 and commission liabilities have been
reduced by $923,658 Stockholder's deficit increased by $191,067.
For the years ended 2002 and 2001 receivables were reduced by $1,174,824 and
$1,066,152. Commission liabilities were reduced by $952,422 and $898,155.
Losses for the year ended June 30, 2003, 2002 and 2001 decreased by $31,334,
increased by $54,405 and increased by $97,747 respectively.
Revenues for the years ended June 30, 2003, 2002, and 2001 increased by $60,009,
decreased by $108,672 and decreased by $363,654 respectively. Commission expense
for the years ended June 30, 2003, 2002 and 2001 increased by $28,765, decreased
by $54,266 and decreased by $265,907 respectively.
As the error applied to the beginning and ending balances of each quarter, the
effect on any individual quarter filing on Form 10-Q was immaterial.
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 2004, 2003 and 2002. The trends illustrated in the following table are not
necessarily indicative of future results. All numbers for Fiscal 2003 and 2002.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Operations
As a Percentage of Revenue
2002
Amounts 2004 2003 RESTATED
RESTATED UNAUDITED
(See Note 2 (A) (1)) (See Note 2 (A)
(1))
Financial Planning Commissions 89.45% 89.20% 88.10%
Tax Preparation Fees 10.55% 10.80% 11.00%
E1040.Com 0.00% 0.00% 0.10%
Direct Mail Services 0.00% 0.00% 0.80%
Total Revenue 100.00% 100.00% 100.00%
Cost of Sales: Commissions 57.35% 59.10% 59.98%
Gross Profit 42.65% 40.90% 40.02%
Salaries 19.72% 23.25% 33.35%
General and Administrative Expense 12.03% 17.07% 20.83%
Advertising 2.27% 0.87% 1.73%
Brokerage Fees & Licenses 2.67% 2.93% 3.05%
Rent 3.40% 4.14% 4.29%
Depreciation and Amortization 2.56% 3.05% 5.06%
Loss on Sold Assets 0.00% 0.00% 0.00%
Goodwill and Other Intangibles Impairment Loss 6.2 0.00% 0.69% 13.40%
Total Operating Expenses 42.65% 52.01% 81.71%
Income (Loss) from Continuing Operations 0.00% -11.11% -41.69%
Other Income (Expense) -1.70% -3.18% -0.97%
Income (loss) before income taxes -1.70% -20.00% -35.20%
Provision (benefit) for income taxes 0.03% -0.10% 1.40%
Net loss from Continuing Operations -1.73% -20.10% -33.80%
Page 28
FISCAL 2004 COMPARED TO FISCAL 2003 (AS RESTATED)
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, 2004 were
$59.9 million compared to $54.2 million for the fiscal year ended June 30, 2003,
an increase of $5.7 million. This increase was primarily attributable to an
increase in financial planning services and an increase in tax preparation
revenues. The increase in financial planning and tax revenue for Fiscal 2004 was
primarily a product of the Company's marketing efforts combined with its focus
on its core business.
Commission Expenses. The Company's commission expense for the Fiscal year ended
June 30, 2004 was $34.4 million on 57.3% of revenue compared to commission
expense of $32.0 million on 59.1% of revenue for Fiscal 2003. This increase of
$2.3 million is attributed to the rise in revenue.
Operating Expenses. The Company's operating expenses for the fiscal year ended
June 30, 2004 were $25.5 million or 42.6% of revenues compared to operating
expenses of $28.1 million or 52.0% of revenues for the fiscal year ended June
30, 2003. Operating expenses for the fiscal year ended June 30, 2004 had a
decrease of $.7 million in salaries, $2.0 million in general and administrative
expenses, $.2 million in rent, $.1 million in depreciation and amortization, $.4
million in goodwill impairment losses and an increase of $.9 million in
advertising expense.
Salaries. Salaries consist primarily of salaries and related payroll taxes and
employee benefit costs. For the fiscal year ended June 30, 2004, salaries
decreased $.7 million or 6.2%, to $11.8 million from $12.5 million for the
fiscal year ended June 30, 2003. The decrease in salaries is primarily
attributed to lower seasonal employment levels and lower employment levels at
the Company's headquarters.
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, 2004 decreased by $2.0 million or 22.06% to $7.2 million
from $9.2 million for the fiscal year ended June 30, 2003. 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.
Page 29
Advertising Expense. Advertising expense for the fiscal year ended June 30, 2004
was $1.4 million compared to $.5 million for the fiscal year ended June 30,
2003. The increase of $.9 million or 18.7% in advertising cost was attributed to
an increase of marketing efforts relating to print and media advertisements and
the continued implementation of seminar and marketing efforts.
Brokerage Fees and Licenses Expense. Brokerage fees and licenses expense for the
fiscal year ended June 30, 2004 was $1.6 million compared to $1.6 million for
the fiscal year ended June 30, 2003.
Rent Expense. For the fiscal year ended June 30, 2004, rent expense decreased by
$.2 million or 9.4% to $2.0 million compared to $2.2 million for the fiscal year
ended June 30, 2003. The decrease in rent expense is primarily attributed to the
closure and consolidation of offices during Fiscal 2003.
Depreciation and Amortization. For the fiscal year ended June 30, 2004,
depreciation and amortization expense decreased by $.1 million or 7.1% to $1.5
million compared to $1.6 million for the fiscal year ended June 30, 2003. 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 2003. The remaining decrease is
attributable to lower depreciation expense as a result of assets reaching their
full depreciable lives during the course of fiscal 2004 as well as reduced
capital spending.
Goodwill 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 $0 million for the fiscal year ended June 30,
2004. 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, 2003 was $.3 million.
Other Income and (Expenses). Other income (expenses) for the fiscal year ended
June 30, 2004 was $(1.0) million compared to $(1.7) million for the fiscal year
ended June 30, 2003. The improvement in other income (expenses) by $.7 million
or 40.9% is comprised of a decrease of $.09 million or 69.2% in interest and
investment income recognized, and a decrease of interest expense of $.8 million
or 42.8% due to higher debt level in Fiscal 2003.
Loss from Continuing Operations Before Income Taxes. The Company's loss from
continuing operations before taxes for the fiscal year ended June 30, 2004 was
$(1.0) million compared to a loss of $(7.8) million for the fiscal year ended
June 30, 2003, an improvement of $6.8 million. The reduction was primarily
related to the Company's continued efforts to raise revenue and cut expenses.
Income Tax Provision. The Company's income tax provision for the fiscal year
ended June 30, 2004 was $16,617 compared to an income tax provision of $93,000
for the fiscal year ended June 30, 2003 for a decrease of $76,383 or 82.1%. The
decrease in the income tax provision is the result of the lower losses in Fiscal
2004 compared to Fiscal 2003. The Company's effective income tax rate for fiscal
year 2004 was 0.0% as compared to 0.7% for Fiscal 2003.
Page 30
Loss from Continuing Operations. The Company's loss from continuing operations
after income taxes for the fiscal year ended June 30, 2004 was $(1.0) million
compared to a loss of $(7.8) million for the fiscal year ended June 2003, an
improvement of $6.8 million or 87%. The decreased loss is primarily attributed
to a decrease in operating expenses, a decrease of impairment of goodwill and
other intangible asset, a decrease in interest expense, 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, 2004 was $(.1) million compared to
a loss of $(6.0) million for the fiscal year ended June 2003, a reduced loss of
$5.8 million or 92.9%. The company realized a gain/loss on the disposal of these
offices. For Fiscal 2004, the Company realized an income of $6.0 million
compared to a loss of ($6.1) million in Fiscal 2003, an increase of $12.2
million.
Net Income. The Company's net income for the fiscal year ended 2004 was $5.05
million compared to a loss of ($13.99) million in fiscal year ended 2003, an
increase of $19.0 million.
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 2003 (AS RESTATED) COMPARED TO FISCAL 2002 (AS RESTATED)
Revenue. The Company's revenues for the fiscal year ended June 30, 2003 were
$54.1 million compared to $55.8 million for the fiscal year ended June 30, 2002,
a decrease of $1.7 million. This decrease was primarily attributable to lower
tax preparation revenues and lower financial planning revenue. 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.
The $.1 million or 1.5% year-to-year increase 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. The Company's financial
planning revenue decreased by $1.2 million or 2.5% to $48.4 million from $49.6
million as a result of marketing and seminar efforts. 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 2003, e1040.com contributed approximately
$0 of revenues compared to approximately $69,000 in Fiscal 2002. This
significant 100% reduction was attributed to a reduced advertising and media
campaign budget, as well as increased price competition for online tax services.
Commission Expenses. The Company's commission expense for the Fiscal year ended
June 30, 2003 was $32.0 million or 59.1% of revenue compared to commission
expense of $33.5 million on 60.0% of revenue for Fiscal 2002.
Operating Expenses. The Company's operating expenses for the fiscal year ended
June 30, 2003 were $28.1 million or 52.0% of revenues compared to operating
Page 31
expenses of $45.6 million or 81.7% of revenues for the fiscal year ended June
30, 2002. Operating expenses for the fiscal year ended June 30, 2003 had
decreases of $6.0 million in salaries; $2.4 million in general and
administrative expenses; $.1 million in rent; $1.2 million in depreciation and
amortization; $7.1 million in goodwill and intangible assets impairment losses;
$.5 million in advertising; and $.1 million in brokerage fees.
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 $2.4 million or 20.7% to $9.2 million from
$11.6 million for the fiscal year ended June 30, 2002. The decrease in general
and administrative expense is attributed to the Company's cost reduction
efforts, lower professional fees, and expenses related to the proxy fight of the
concerned shareholders during Fiscal 2002.
Rent Expense. For the fiscal year ended June 30, 2003, rent expense decreased by
$.1 million or 6.2% to $2.2 million compared to $2.3 million for the fiscal year
ended June 30, 2002. The decrease in rent expense is primarily attributed to
closure of offices.
Depreciation and Amortization. For the fiscal year ended June 30, 2003,
depreciation and amortization expense decreased by $1.1 million or 41.5% to $1.6
million compared to $2.8 million for the fiscal year ended June 30, 2002. The
decrease in depreciation and amortization is primarily attributed to the
Company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" on
July 1, 2001, which required the Company to stop amortizing goodwill and
indefinite lived intangible assets.
Advertising Expense. Advertising expense for the fiscal year ended June 30, 2003
was $.5 million compared to $1.0 million for the fiscal year ended June 30,
2002. The decrease of $.5 million or 51.1% in advertising cost was attributed to
reduced seminar mailings during Fiscal 2003.
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 $.4 million for the
fiscal year ended June 30, 2003 compared to a write down of $7.5 million for
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.
Other Income and (Expenses). Other income (expenses) for the fiscal year ended
June 30, 2003 was $(1.7) million compared to $(0.5) million for the fiscal year
ended June 30, 2002. The increase in other income (expenses) of $(1.1) million
or 217% is comprised of a decrease of $2.1 million or 94.2% in interest and
investment income recognized, a decrease of interest expense of $.06 million or
3.3% due to higher debt level in Fiscal 2002. Other income (expense) decreased
$.9 million or (100)% from income of $.9 million in 2002 to $0 million in 2003.
(Loss) From Continuing Operations Before Taxes. The Company's loss before taxes
for the fiscal year ended June 30, 2003 was ($7.7) million compared to a loss of
($23.8) million for the fiscal year ended June 30, 2002, an improvement of $16.1
million.
Page 32
Income Tax Provision (Benefit). The Company's income tax (benefit) for the
fiscal year ended June 30, 2003 was $.09 million compared to an income tax
provision of $0.13 million for the fiscal year ended June 30, 2002 for a
decrease of $.04 million or .03%. The decrease in the income tax provision is
the result of the increased losses in Fiscal 2003 of subsidiaries with taxable
profits in 2002.
Loss from Continuing Operations. The Company's loss from continuing operations
after income taxes for the fiscal year ended June 30, 2003 was $(7.8) million
compared to a loss of $(23.9) million for the fiscal year ended June 2002, an
increase of $16.1 million. The decrease is primarily attributed to a decline in
expenses and impairment of goodwill and other intangible assets.
Income (loss) from Discontinued Operations. The Company's loss from discontinued
operations for the fiscal year ended June 30, 2003 was $6.1 million compared to
income of $1.6 million for the fiscal year ended June 30, 2002, a decrease of
$7.7 million. The decrease is related to expenses of closed and discontinued
operations.
Net (Loss). The Company's net loss for the fiscal year ended 2003 was $(13.99)
million compared to a loss of $(22.35) million in fiscal year ended 2002, a net
loss decrease of $8.3 million or 37.4%.
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, 2004 the
company had $498,545 in cash and cash equivalents and $1.18 million in
marketable securities. PCS is subject to the SEC's Uniform Net Capital Rule 15c
3-1 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.
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. During Fiscal 2004, the Company repaid a significant portion of Prime
Partner's debt. As of June 30, 2004, the Company owed Prime Partners, Inc.
$276,488. Michael Ryan, the Company's Chief Executive Officer and President, is
one of the major shareholders of Prime Partners, Inc.
Page 33
The Company received total consideration under the Pinnacle Asset Purchase of
approximately $7,270,000. See Note 3 of the Consolidated Financial Statements
for a discussion of the Pinnacle Transaction. In addition to the Pinnacle
transaction, in Fiscal 2004, the Company completed the sale of 3 other offices
to various parties for an aggregate cash sales price of approximately $275,000.
The Company's cash flows used in operating activities totaled $3.1 million for
the fiscal year ended June 30, 2004 compared to cash flows used by operating
activities of $1.5 million for the fiscal year ended June 30, 2003. The increase
of $1.6 million in cash used in operating activities was due primarily to the
payment of outstanding trade payables and settlement of lawsuits and
arbitrations.
On February 17, 2004, the Company closed the Stock Purchase Agreement with
Daniel R. Levy and Joseph Clinard for the sale of all of the authorized, issued
and outstanding capital stock of North Ridge and North Shore. The Company
received $162,500 in cash at the closing, $37,500 was paid to Wachovia against
the principal of the Wachovia Loan, and the $862,500 balance will be paid to the
Company by Mr. Levy in monthly payments pursuant to the terms of a promissory
note commencing on May 1, 2004 and ending on April 1, 2016. The interest rate on
the note is equal to the prime rate at JP Morgan Chase Bank plus 2%, but the
interest rate cannot exceed 8% until January 1, 2009. A copy of the Stock
Purchase Agreement is attached as Exhibit 10.15. See Note 3 of the Consolidated
Financial Statements for a discussion of the Stock Purchase Agreement.
Net cash provided by investing activities totaled $5.8 million for the fiscal
year ended June 30, 2004 compared to cash flows provided by investing activities
of $1.4 million for the fiscal year ended June 30, 2003. The increase in cash
provided was primarily attributed to proceeds received and assumption of debt
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 and decreases in cash paid for acquisitions.
The Company's cash flows used in financing activities totaled $3.1 million for
the fiscal year ended June 30, 2004 compared to cash flows used by financing
activities of $1.2 million for the fiscal year ended June 30, 2003. The increase
of $1.9 million in cash used in financing is due primarily to repayment of bank
and capital lease obligations.
CONTRACTUAL OBLIGATION AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to June 30, 2004 and thereafter. The amounts represent the
maximum future cash contractual obligations.
Payment Due by Period
2006 to 2008 to After
Contractual Obligations Total 2005 2007 2009 2010
-----------------------------------------------------------------------
Debt $ 9,461,655 $ 9,349,493 $ 37,681 $ 41,614 $ 32,867
Operating Leases 6,139,740 2,682,950 2,536,636 529,845 390,350
Capital Leases 355,959 232,023 102,525 21,411 --
-----------------------------------------------------------------------
Total contractual cash obligations $15,957,354 $12,264,416 $ 2,676,842 $ 592,870 $ 423,221
=======================================================================
Page 34
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 $1,040,246, $489,844, $190,103 and $58,095 for the fiscal years ending June
30, 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. See "Certain
Relationships and Related Transactions".
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 stockholders to sell the securities in the secondary market.
The delisting makes trading the Company's shares more difficult for investors,
potentially leading to further declines in share price. It also makes 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 2004, 2003, 2002, 2001 and 2000,
inflation has not had a significant effect on the Company's results of
operations since inception.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management's estimates,
judgments and assumptions are continually evaluated based on available
information and experience. Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those estimates.
Page 35
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, direct mail services and asset management
fees upon completion of the services. Financial planning services include
securities and other transactions. The related commission revenue and expenses
are recognized on a trade date basis.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Page 36
RECENT ACCOUNTING PRONOUNCEMENTS
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 December 2003, the FASB revised SFAS No. 132, Employers' Disclosures about
Pensions and Other Post Retirement Benefits. This revision requires additional
disclosures to those in the original SFAS No. 132 about assets, obligations,
cash flows and the periodic benefit cost of deferred benefit pension plans and
other deferred benefit post-retirement plans. The required information should be
provided separately for pension plans and for other post-retirement benefit
plans. This statement revision is effective for the fiscal years ended after
December 14, 2003 and interim periods beginning after December 15, 2003. The
adoption of this revision is not expected to have a material impact on our
results of operations, financial position or disclosures.
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
Page 37
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, 2004, audited by Radin, Glass & Co., LLP
whose report is included below.
o Restated financial statements for fiscal year ended June 30, 2003,
audited by Radin, Glass & Co. LLP, whose report is included below.
o Fiscal year ended June 30, 2002 was audited by Grant Thornton.
However, on February 13, 2004, the Company received a letter from
Grant Thornton, its previous auditors, advising the Company that it
did not consent to the inclusion of its 2002 Auditors' Report issued
for the Company's Form 10-K for Fiscal 2002 in the Company's Form
10-K/A for Fiscal 2003 filed on February 9, 2004. The letter stated
that Grant Thornton was withdrawing its 2002 Auditors' Report and
that its report could no longer be relied on, and that it was
withdrawing its quarterly review reports for each fiscal quarter
during which it served as the Company's auditors.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Public Accountants................................... 39
Consolidated Balance Sheets as of June 30, 2004 and 2003.................... 40
Consolidated Statements of Operations
for the years ended June 30, 2004, 2003 and unaudited 2002............. 41
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 2004, 2003 and unaudited 2002............. 42
Consolidated Statements of Cash Flows
for the years ended June 30, 2004, 2003 and unaudited 2002 ............. 43
Notes to Consolidated Financial Statements.................................. 44
All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes
thereto.
Page 38
INDEPENDENT AUDITORS REPORT
Stockholders 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, 2004 and 2003 and the related consolidated
statements of operations, stockholders' deficit and cash flows for each the
years 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
year were audited by other auditors which reports are not included herein as
indicated above.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003 and the results of its operations and
cash flows for each of the years then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ Radin, Glass & Co., LLP
New York, NY
September 30, 2004
Page 39
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Restated
June 30, 2004 June 30, 2003
See Note 2 (A) (1)
------------- ------------------
Assets
Cash & Cash Equivalents $ 498,545 $ 955,097
Marketable Securities 1,184,907 969,622
Trade Accounts Receivable, Net 3,678,204 4,293,527
Receivables from Officers, Shareholders
and employees, net 138,564 555,839
Assets of Discontinued Operations 3,568 3,568
Due From Office Sales - Current 287,325 237,302
Prepaid Expenses and Other Current Assets 365,117 476,397
Income Taxes receivable -- 27,590
------------ ------------
Total Current Assets 6,156,230 7,518,942
Fixed Assets, Net 1,616,661 2,396,313
Goodwill 3,837,087 3,900,072
Intangible Assets, Net 5,631,123 6,133,248
Due from Office Sales - Non Current 1,181,128 522,090
Other Assets 505,351 1,010,449
------------ ------------
Total Assets $ 18,927,579 $ 21,481,114
============ ============
Liabilities and Stockholders' Equity (Deficit)
Accounts Payable and Accrued Expenses 10,375,471 13,120,150
Current Portion of Notes Payable & Cap. Leases 9,113,793 11,284,118
Payable to Related Party 445,000 882,500
Liabilities of Discontinued Operations -- 1,725,707
------------ ------------
Total Current Liabilities 19,934,264 27,012,475
Long term portion of notes payable and cap leases 212,440 650,622
Other Liabilities -- 11,000
------------ ------------
Total Liabilities 20,146,704 27,674,097
------------ ------------
Stockholders' Equity (Deficit)
Preferred Stock, $0.001 par value; 100,000 shares authorized; no
shares issued and outstanding at June 30, 2004, and 2003 respectively
Common Stock, $0.01 par value 20,000,000 shares authorized; 10,219,561
and 10,039,561 shares issued at June 30, 2004, and 2003 respectively 102,195 100,395
Additional Paid in Capital 29,897,210 29,850,805
Treasury Stock 1,326,839 and 278,222 shares of common stock,
respectively, at cost (1,306,288) (1,075,593)
Note receivable for acquired shares -- (105,000)
Retained Deficit (29,912,242) (34,963,590)
------------ ------------
Total Stockholders' Equity (Deficit) (1,219,125) (6,192,983)
------------ ------------
Total Liabilities & Stockholders' Equity (Deficit) $ 18,927,579 $ 21,481,114
============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 40
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
------------------------------------------------------
2004 2003 Restated 2002 Restated
(Unaudited)
See Note 2 (a) (1) See Note 2 (a) (1)
------------ ------------------ ------------------
Revenues:
Financial Planning Services $ 53,587,859 $ 48,430,079 $ 49,660,534
Tax Preparation Fees 6,323,190 5,747,883 5,660,915
E1040.com -- -- 69,096
Direct Mail Services -- -- 505,407
------------ ------------ ------------
Total Revenues 59,911,049 54,177,962 55,895,952
------------ ------------ ------------
Cost of Sales/ Commissions 34,361,369 32,018,741 33,527,796
------------ ------------ ------------
Gross Profit: 25,549,681 22,159,221 22,368,156
------------ ------------ ------------
Operating Expenses:
Salaries 11,813,611 12,595,721 18,642,972
General & Administrative 7,207,947 9,247,843 11,643,324
Advertising 1,360,814 474,040 969,358
Brokerage Fees & Licenses 1,599,050 1,590,098 1,706,423
Rent 2,034,374 2,245,373 2,395,592
Depreciation & Amortization 1,536,570 1,654,104 2,825,691
Loss on Sale of Equipment -- -- --
Goodwill Impairment -- 371,793 7,489,098
------------ ------------ ------------
Total Operating Expenses 25,552,366 28,178,971 45,672,458
------------ ------------ ------------
Income (loss) from (2,685) (6,019,750) (23,304,302)
continuing operations before other ------------ ------------ ------------
income and expenses
Other Income (Expenses):
Interest and investment income 39,856 129,462 2,268,122
Interest expense (1,057,244) (1,850,885) (1,915,028)
Other Income (Expense), Net -- (895,746)
------------ ------------ ------------
Total Other Income (Expense) (1,017,388) (1,721,423) (542,652)
------------ ------------ ------------
Loss from continuing operations (1,020,073) (7,741,173) (23,846,954)
before income taxes ------------ ------------ ------------
Income taxes (benefit) 16,617 93,000 135,046
------------ ------------ ------------
Loss from continuing operations (1,036,690) (7,834,173) (23,982,000)
------------ ------------ ------------
Discontinued Operations:
Income (loss) from discontinued operations (125,047) (6,005,118) 1,654,144
------------ ------------ ------------
Gain (loss) on disposal of 6,213,272 (157,617) (30,847)
discontinued operations ------------ ------------ ------------
Income taxes (benefit) -- -- --
Income (loss) from discontinued operations 6,088,225 (6,162,735) 1,623,297
------------ ------------ ------------
Net Income (loss) $ 5,051,535 $(13,996,908) $(22,358,703)
============ ============ ============
Net Income (Loss) per share:
Basic and diluted net loss $ 0.54 $ (1.48) $ (2.59)
============ ============ ============
Weighted Average number of common shares
outstanding
Basic and diluted shares outstanding 9,388,764 9,440,815 8,647,966
============ ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 41
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
Common Stock Additional Paid In Retained Earnings
Shares Amount Capital (Accumulated Deficit)
------------ ------------ ------------ ---------------------
Opening Balances- July 1, 2001(Unaudited) 8,654,829 86,548 27,711,953 1,392,030
Comprehensive loss:
Net loss, as restated -- -- -- (22,358,704)
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
connections with business
combinations 390,576 3,906 1,239,468 --
Rescindment of acquisition (41,176) (412) (120,235) --
Balance June 30, 2002 (Unaudited) 9,203,027 92,030 29,534,307 (20,966,674)
---------------------------------------------------------------------------
Opening Balances- July 1, 2002 9,203,027 92,030 29,534,307 (20,966,674)
Net Loss (as restated) (13,996,916)
With earnout agreement 16,534 165 6,448
Issuance of stock in connection 820,000 8,200 310,050
Purchase of Treasury Shares
Balance June 30, 2003 10,039,561 100,395 29,850,805 (34,963,590)
---------------------------------------------------------------------------
Net Income 5,051,535
Treasury Shares reclaimed
Issuance of stock in connection 180,000 1,800 46,200
with default of note
Reversal of Stock Subscriptions
---------------------------------------------------------------------------
Balances June 30, 2004 10,219,561 102,195 $ 29,897,005 $(29,912,055)
===========================================================================
Treasury Stock Subscriptions/Note
Receivable for Total Stockholders'
Shares Amount Shares Sold Equity
------------ ------------ -------------- -------------------
Opening Balances- July 1, 2001(Unaudited) 337,519 (1,329,095) (105,000) 27,756,436
Comprehensive loss:
Net loss, as restated -- -- -- (22,358,704)
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
connections with business
combinations -- -- -- 1,243,374
Rescindment of acquisition -- -- -- (120,647)
Balance June 30, 2002 (Unaudited) 263,492 (1,065,996) (105,000) 7,488,667
------------------------------------------------------------------------
Opening Balances- July 1, 2002 263,492 (1,065,996) (105,000) 7,488,667
Net Loss (as restated) (13,996,916)
With earnout agreement 6,613
Issuance of stock in connection 318,250
Purchase of Treasury Shares 14,730 (9,597) (9,597)
Balance June 30, 2003 278,222 (1,075,593) (105,000) (6,192,983)
------------------------------------------------------------------------
Net Income 5,051,535
Treasury Shares reclaimed 1,048,616 (230,677) (230,677)
Issuance of stock in connection 48,000
with default of note
Reversal of Stock Subscriptions -- 105,000 105,000
------------------------------------------------------------------------
Balances June 30, 2004 1,326,838 $ (1,306,270) $ -- $ (1,219,125)
=======================================================================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 42
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
------------------------------------------------------
2003 Restated 2002 Restated
(Unaudited)
2004 See Note 2 (a) (1) See Note 2 (a) (1)
------------ ------------------ ------------------
Cash Flows From Operating Activities:
Net Loss / Income $ 5,051,535 $(13,996,916) $(22,358,704)
Adjustments to reconcile net loss to net casy used in
operating activities:
Depreciation and amortization 1,539,867 2,167,256 3,651,001
Issuance of common stock for debt default penalties and interest 48,000 318,250 --
Goodwill and other intangible assets impairment loss -- 3,851,585 7,489,099
Amortization of debt discount 209,015 482,834 267,258
Provision (benefit) for income taxes -- 93,000 135,046
Loss (gain) on a rescission of an acquisition contract -- -- 205,832
(Gain) Loss on sale of discontinued operations (6,213,707) -- --
(Gain) Loss on sale of equipment and properties -- 85,325 (218,015)
Due From Office Sales (709,061) -- --
Increase in Allowance for Doubtful accounts 169,839 289,231 1,879,280
(Income) Loss from joint venture -- (66,747) 4,808
Changes in assets and liabilities: -- -- --
Accounts receivable, Net 445,486 1,621,503 1,430,473
Prepaid and other current assets 111,281 (321,480) 744,216
Change in marketable securities (215,285) 798,862 (1,486,439)
Receivables from officers, shareholders and employees 417,275 372,208 (300,170)
Other Assets 505,098 539,761 (400,950)
Accounts Payable and accrued expenses (4,470,386) 1,639,770 4,282,085
Income taxes receivable (payable) 27,589 608,087 68,879
Decrease in Other liabilities (11,000) 31,000 --
------------ ------------ ------------
Net cash provided by (used in) operating activities (3,094,453) (1,486,471) (4,606,301)
------------ ------------ ------------
Cash Flows from investing activities:
Capital Expenditures (72,524) (146,090) (1,004,689)
Cash paid for acquisitions, net of cash acquired (122,582) (326,774) (262,500)
Cash Paid for the sale of businesses -- (25,000) --
Proceeds from the sale of discountinued operations 6,004,709 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) provided by investing activities 5,809,603 1,469,390 (405,969)
------------ ------------ ------------
Cash Flows from Financing Activities:
Adquisition of treasury stock (230,695) (9,597) (120,576)
Notes Recieveable for Shares 105,000
Proceeds from bank and other loans 583,249 1,541,561 10,250,000
Payments of bank loans and capital lease obligations (3,629,256) (2,783,592) (8,316,647)
Net proceeds from issuance of common stock and
exercise of common stock options and warrants -- -- 9,625
------------ ------------ ------------
Net cash (used in) provided by Financing Activities: (3,171,702) (1,251,628) 1,822,402
------------ ------------ ------------
Net change in cash and cash equivalents (456,552) (1,268,709) (3,189,868)
Cash and cash equivalents at beginning of period 955,097 2,223,806 5,413,674
------------ ------------ ------------
Cash and cash equivalents at end of period $ 498,545 $ 955,097 $ 2,223,806
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the period for:
Interest $ 1,057,244 $ 510,334 $ 577,450
============ ============ ============
Income Taxes $ -- $ 33,833
Supplemental Disclosure of Non-Cash Transactions:
Re-Issuance of treasury stock at fair value -- -- 383,675
Common stock and options issued in connection with
business combination -- 6,613 893,374
Issuance of common stock for debt default penalties and interest 48,000 318,250 --
Exercise of stock options -- -- --
Equipment acquired under capital leases 20,987 70,860 422,254
Issuance of common stock upon loan obligation -- -- 450,000
Note receivable on rescission of acquisition contract -- -- --
Value of warrants issued $ -- $ -- $ 300,000
Details of business combinations:
Fair value of assets acquired $ -- $ 326,774 $ 1,165,874
Less: Liabilities assumed -- -- (10,000)
Less: Stock Issued -- -- (893,374)
------------ ------------ ------------
Cash Paid for Acquisitions $ -- $ 326,774 $ 262,500
============ ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 43
GILMAN + COCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003, AND Unaudited 2002
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 2004, approximately 89% of the Company's revenues
were derived from commissions on financial planning services and approximately
11% were derived from fees for tax preparation services. As of June 30, 2004,
the Company had 36 offices operating in 6 states (New York, New Jersey,
Connecticut, Florida, Maryland and Colorado).
As a result of a number of defaults under its agreements with Wachovia, on
November 27, 2002, the Company entered into a debt forbearance agreement with
Wachovia and subsequently amended the debt forbearance agreement on June 18,
2003 and on May 4, 2004. Another of its lenders, 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 was due on October 30, 2002, but
remains unpaid. This debt is also subordinated to Wachovia. Rappaport 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
Note 9 to Consolidated Financial Statements for a discussion of the Company's
debt.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Restatements
(1) The financial statements for the three years ended June 30, 2003 were
restated to correct a timing error in the recording of receivables and the
related accrual for commission liabilities relating to asset management
services. In January 2004, subsequent to the filing of the Form 10-K for the
year ended June 30, 2003, management discovered and informed the auditors that
revenues and related commission expenses for asset management services, billed
and incurred in the quarter ended September 30, 2003 for services to be rendered
in that quarter, had been recorded as of June 30, 2003. Further, it was
ascertained that this error in revenue and expense recognition had been
occurring since the 1999 acquisition of Asset and Financial Planning Ltd. and
had gone undetected for four years. The receivables and commissions recorded
originally prematurely recorded at each quarter end were received and paid by
the Company during the subsequent quarter.
Page 44
The financial statements for the three years ended June 30, 2003 were restated
to correct this error. As a result of the restatement, receivables as of June
30, 2003 were reduced by $1,114,725 and commission liabilities were reduced by
$923,658. Stockholder's deficit increased by $191,067.
For the year ended 2002 receivables were reduced by $1,174,824. Commission
liabilities were reduced by $952,422.
Losses for the year ended June 30, 2003 and 2002 decreased by $31,334 and
increased by $54,405 and increased by $97,747 respectively.
Revenues for the years ended June 30, 2003 and 2002 increased by $60,009 and
decreased by $108,672 respectively. Commission expense for the years ended June
30, 2003 and 2002 have increased by $28,765 and decreased by $54,266
respectively.
As the error applied to the beginning and ending balances of each quarter, the
effect on any individual quarter filing on Form 10-Q was immaterial.
(2) On February 13, 2004, the Company received a letter from Grant Thornton, its
previous auditors, advising the Company that it did not consent to the inclusion
of its 2002 Auditors' Report issued for the Company's Form 10-K for Fiscal 2002
in the Company's Form 10-K/A for Fiscal 2003 filed on February 9, 2004. The
letter stated that Grant Thornton was withdrawing its 2002 Auditors' Report and
that its report could no longer be relied on, and that it was withdrawing its
quarterly review reports for each fiscal quarter during which it served as the
Company's auditors.
(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 inter-company 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.
Page 45
(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, 2004, 2003, and 2002 the
Company recognized unrealized gains (losses) from trading securities of
$(49,904), $(163,769 ) and $(957,031) 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, 2004 the
Company recognized $1,737,960 in realized gains. Interest earned is included in
earnings. The original cost included in the carrying value of marketable
securities at June 30, 2004 is $1,207,376.
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 $12,210 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. The recorded allowance at June
30, 2004 and 2003 was $629,999 and $346,586 respectively.
(h) Property and Equipment
Property and equipment are carried at cost. Amounts incurred for repairs and
maintenance are charged to operations in the period incurred.
Depreciation is calculated on a straight-line basis over the following useful
lives:
Buildings 31.5 years
Equipment 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements 5-10 years
Software 5 years
Assets under capital lease 3-7 years
Page 46
(i) Goodwill, Other Intangible Assets and Long-lived 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". 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
The Company reviews long-lived assets, certain identifiable assets and any
related to those assets for impairment at least annually or whenever
circumstances and situations change such that there is an indication that the
carrying amounts may not be recoverable. To the extent carrying values have
exceeded fair values, and impairment loss has been recognized in operating
results.
(j) 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 2004 and Fiscal 2003.
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 $91,333,
$94,681 and $52,000 for the years ended June 30, 2004, 2003 and 2002 (see Note
5).
(k) Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting services, direct mail services and asset management fees upon
completion of the services. Financial planning services include securities and
other transactions. The related commission revenue and expenses are recognized
on a trade date basis.
(l) 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.
Page 47
(m) 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 channel. Interest is recognized from the
last interest payment date up to but not including the settlement date of the
sale.
(n) 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.
(o) 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.
Prior to 2000, the Company accounted for its stock-based compensation plans
under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. Effective
July 1, 2000, the Company adopted the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-based Compensation, prospectively to all
employee awards granted, modified, or settled after January 1, 2002. Awards
under the Company's plans vest over periods ranging from three to five years.
Therefore, the cost related to stock-based employee compensation included in the
determination of net income for 2002 and 2003 is less than that which would have
been recognized if the fair value based method had been applied to all awards
since the original effective date of Statement 123. The following table
illustrates the effect on net income and earnings per share if the fair value
based method had been applied to all outstanding and unvested awards in each
period.
Year Ended June 30,
2004 2003 2002
(Unaudited)
Net (Loss) Income, As Reported, As Restated $ 5,051,535 $(13,996,916) $(22,358,704)
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
------------- ------------ ------------
Proforma Net Income (loss) $ 5,051,535 $(14,195,760) $(24,963,411)
============= ============ ============
Earning (loss) per share
As reported $ .54 $ (1.48) $ (2.59)
Proforma $ .54 $ (1.50) $ (2.89)
Page 48
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).
(p) 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).
(q) 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.
(r) 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.
(s) Segment Disclosure
As a result of the Company's recent restructuring, Management believes the
Company operates as one segment.
Page 49
(t) Recent Accounting Pronouncements
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 December 2003, the FASB revised SFAS No. 132, Employers' Disclosures about
Pensions and Other Post Retirement Benefits. This revision requires additional
disclosures to those in the original SFAS No. 132 about assets, obligations,
cash flows and the periodic benefit cost of deferred benefit pension plans and
other deferred benefit post-retirement plans. The required information should be
provided separately for pension plans and for other post-retirement benefit
plans. This statement revision is effective for the fiscal years ended after
December 14, 2003 and interim periods beginning after December 15, 2003. The
adoption of this revision is not expected to have a material impact on our
results of operations, financial position or disclosures.
3. BUSINESS COMBINATIONS AND SOLD OFFICES
(A) 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:
Page 50
Business Combinations and Sold Offices
2005 $ 285,376
2006 213,981
2007 204,289
2008 187,941
2009 85,319
Thereafter 491,146
----------
Total $1,468,452
==========
(B) On November 26, 2002, the Company finalized a transaction pursuant to an
asset purchase agreement (the "Purchase Agreement") with Pinnacle, whereby
Pinnacle an entity controlled by Thomas Povinelli and David Puyear, former
executive officers of the Company, purchased certain assets of the Company. The
effective date of the closing under the Purchase Agreement was September 1,
2002. The Company sold to Pinnacle forty seven offices ("Pinnacle Purchased
Offices") and all tangible and intangible net assets (the "Purchased Assets")
which were associated with the operations of the Pinnacle Purchased Offices,
together representing approximately $17,690,000 or approximately 19.0% of the
Company's annual revenue for the fiscal year ended June 30, 2002.
The purchase price payable by Pinnacle, including certain liabilities and
payables assumed by Pinnacle, was approximately $6,975,000, subject to final
adjustments. After the closing, the Company alleged that Pinnacle was in default
under the Asset Purchase Agreement, and on May 16, 2003, the Company initiated a
lawsuit against Pinnacle seeking payments for all amounts due.
On December 4, 2003, the Company entered into a settlement with Pinnacle and the
Company collected all amounts due from Pinnacle under the Purchase Agreement. As
part of the settlement, the parties agreed to discontinue all litigation and
legal disputes between the parties. Pinnacle agreed to pay the Company
$2,067,799. At closing, Wachovia was wired $636,397 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 was wired to the
Company. The settlement amount constituted the global settlement amount in
connection with the resolution of all monetary disputes between Pinnacle and the
Company under the Asset Purchase Agreement.
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
office. This release was finalized in an Assignment and Assumption of Lease and
Consent dated as of February 18, 2004. 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, or guarantors Thomas Povinelli and David Puyear, do not
pay. The aggregate of these lease amounts on June 30, 2004 was $1,296,148.
Page 51
Including the $2,067,800 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
by Povinelli of 1,048,616 shares of Company Common
stock $ 230,000
The Company recognized a $ 10,650 gain in Fiscal 2003 and a gain of $4,121,733
in the second quarter of Fiscal 2004 from the Pinnacle sale consisting of:
$2,483,562 of cash received, $1,872,532 on the release of obligations assumed by
Pinnacle, and other items totaling $125,695.
(C) During Fiscal 2004 and 2003, the Company sold 63 of its offices. The Company
recognized a gain of $6.2 million on the sale of these offices in Fiscal 2004.
By Stock Purchase Agreement dated as of January 1, 2004, the Company agreed to
sell to Daniel R. Levy and Joseph H. Clinard all of the authorized, issued and
outstanding capital stock (the "Shares") of North Ridge Securities Corp. ("North
Ridge") and North Shore Capital Management Corp. ("North Shore"). The total
purchase price for the Shares was $1,100,000 allocated $1,050,000 to the Shares
of North Ridge and $50,000 to the Shares of North Shore. The sum of $162,500 was
paid to the Company in cash at the closing, the sum of $37,500 was paid to
Wachovia at the closing, the sum of $37,500 was to be paid to the Company on or
about sixty (60) days after the closing when certain contingencies were met and
the $862,500 balance was to be paid to the Company by Mr. Levy in monthly
payments pursuant to the terms of a promissory note commencing on May 1, 2004
and ending on April 1, 2016. The interest rate on the note is equal to the prime
rate at JP Morgan Chase Bank plus two (2%) percent, but the interest rate cannot
exceed eight (8%) percent until January 1, 2009. The Company reported $1.1
million in income from the sale in Fiscal 2004. The transaction closed on
February 17, 2004 and Wachovia received the sum of $37,500 on February 17, 2004
and the Company received the sum of $162,500 on February 18, 2004. Mr. Levy: did
not pay to the Company the interest payments due on the note on February 1,
2004, March 1, 2004, April 1, 2004 and May 1, 2004; did not pay to the Company
the principal payment due on May 1, 2004; and did not obtain and collaterally
assign to the Company the term life insurance policy required in the note.
Accordingly, on May 6, 2004, the Company sent Mr. Levy a notice of default
advising Mr. Levy that the $862,500 principal of the note, and all accrued
interest, were accelerated and immediately due and payable, and that the
interest rate on the note increased to 16% on February 6, 2004, five (5) days
from the date that the first interest payment was due. On May 11, 2004, Mr.
Levy's attorney faxed the Company a letter denying that Mr. Levy was in default.
In addition, he advised the Company that Mr. Levy had paid and would continue to
pay all required principal and interest payments due on the note into the
attorney's escrow account. The Company entered into an Amended Stock Purchase
Agreement dated as of August 18, 2004 with Mr. Levy and Mr. Clinard settling the
dispute with Mr. Levy and Mr. Clinard. Mr. Levy remitted to the Company all
payments due under the Promissory Note and he cured all other defaults under the
note. The Company credited Mr. Levy with the sum of $35,000 for cash agreed to
be an asset of North Ridge as of January 1, 2004.
Page 52
(D) Financial Data on discontinued operations of offices sold.
For the Year Ended June 30,
2004 2003 2002
Unaudited
Revenues $ 3,044,487 $ 13,573,167 $ 37,029,466
Pre-tax Profits (Loss) (277,141) ($ 6,005,118) $ 1,654,144
4. Receivables from officers, stockholders and employees:
As of June 30,
2004 2003
Demand loans from officers, non-interest bearing Notes $ -- $109,938
receivable from stockholders of the Company. Interest is imputed
at rates between 6% and 10% per annum, due in 1-5 years
Demand loans from employees and advances to financial planners 974,299 776,866
-------- --------
974,299 886,804
Less: Current Portion 563,918 555,838
-------- --------
Long-term portion (included in other areas) $410,380 $330,966
======== ========
Note: Not included in the above numbers are the allowances for uncollectible
notes and draws. The reserve amounts for Receivables from officers, stockholders
and employees and due from Office Sales are $1,038,679 and $ 924,581, for 2004,
and 2003 respectively.
5. PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment consist of the following:
AS OF JUNE 30,
2004 2003
Buildings $ 317,737 $ 317,737
Equipment 4,048,137 4,094,599
Furniture and Fixtures 630,626 686,462
Leasehold Improvements 714,694 705,459
Software 674,338 674,338
----------- -----------
6,385,532 6,478,595
Less: Accumulated Depreciation & Amortization (4,768,871) (4,082,282)
----------- -----------
Total $ 1,616,661 $ 2,396,313
=========== ===========
Page 53
Property and equipment under capitalized leases was $2,015,040 at June 30, 2004
and 2,165,547 at June 30, 2003 respectively. Accumulated amortization related to
capital leases was $1,429,563 at June 30, 2004 and $1,305,504 at June 30, 2003,
respectively.
Depreciation expense for property and equipment was $.7 million and $1.0 million
for the fiscal years ended June 30, 2004 and June 30, 2003, respectively.
6. GOODWILL
Goodwill included on the accompanying balance sheets as of June 30, 2004 and
2003 was $3,837,086 and $3,900,072, respectively. The Company's goodwill at June
30, 2004 all relates to acquisitions of its broker-dealer subsidiary 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, 2004 and 2003, the Company acquired
aggregate intangible assets valued at $0 and $1,165,874 respectively, in
connection with acquisitions which are accounted for under the purchase method.
Intangible Assets Consist of the following:
As of June 30,
2004 2003
---- ----
Customer Lists $ 5,353,899 $ 5,231,316
Broker-Dealer Registration 100,000 200,000
Non-Compete Contracts 500,000 800,000
House Accounts 600,000 900,000
Administrative Infrastructure 500,000 700,000
Independent Contractor Agreements 3,100,000 5,380,000
------------ ------------
Total 10,153,899 13,211,316
Less: Accumulated Amortization &
And Impairment (4,522,775) (7,078,068)
------------ ------------
Total $ 5,631,123 $ 6,133,248
============ ============
Page 54
Amortization expense for the fiscal years ended June 30, 2004 and 2003 was
computed on a straight-line basis over periods of five to twenty years, and it
amounted to $.6 million and $1.4 million, respectively. Annual amortization
expense will be approximately $.6 million subsequent to Fiscal 2004.
As required, the Company performed the fair value impairment tests prescribed by
SFAS 142 during the fiscal year ended June 30, 2004. Fair value was determined
based on recent comparable sale transactions and future cash flow projections.
As a result, the Company recognized impairment losses as disclosed on the
statement of operations.
8. ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
As of June 30,
Restated 2003
2004 See Note 2 (A) (1)
Accounts Payable 2,787,243 3,652,608
Commissions Payable 3,099,904 3,661,410
Accrued Compensation 337,238 769,638
Accrued Bonuses 1,035,844 1,049,007
Accrued Vacation 150,426 391,000
Deferred Revenue 221,536 433,539
Accrued Litigation 943,600 1,741,011
Accrued Audit Fees & Tax Fees 230,500 365,000
Accrued Interest 888,419 795,872
Accrued Other 680,761 1,136,772
Less: Amounts Related to --
Liabilities of Discontinued Operations -- (875,707)
------------ ------------
Total $ 10,375,471 $ 13,120,150
============ ============
Page 55
9. DEBT
Debt consists of the following:
As of June 30,
2004 2003
---- ----
Wachovia Bank $ 3,320,024 $ 5,073,333
Traveler's Insurance Company Facility
($ 4,750,000 and $ 4,750,000 less unamortized debt discount of $185,877
And $394,893 at June 30 2004 and 2003 respectively) 4,564,123 4,355,107
Unsecured Promissory Notes 445,000 1,263,128
Unsecured Promissory Note ($1,000,000 less unamortized debt discount of
$ 250,000 at June 30, 2004) 1,000,000 1,000,000
Note Payable 67,312 73,909
Note Payable -- 165,000
Notes Payable for client settlements, payable over periods of up to 7 years at
varying interest rate to 10% 65,196 443,208
Capitalized Lease Obligations 309,579 642,933
------------ ------------
Total 9,771,233 13,016,618
Less: Liabilities for Discontinued Operations -- (199,378)
Less: Current Portion (9,558,793) (12,166,618)
------------ ------------
Total $ 212,440 $ 650,622
============ ============
The Company is in default on substantially all of its debt.
On December 26, 2001, the Company closed a $7.0 million financing (the "Loan")
with Wachovia. The Loan consisted of a $5.0 million term loan ("Term Loan") and
a $2.0 million revolving letter of credit ("Revolving Credit Loan"). On November
27, 2002, the Company and Wachovia entered into a forbearance agreement (the
"Forbearance Agreement") whereby Wachovia agreed to forbear from acting on
certain defaults of financial covenants by the Company under the Revolving
Credit Loan and under the Term Loan. Wachovia extended the due date of the Loan
to November 1, 2003 (the "Maturity Date"). By an Amendment to Forbearance
Agreement entered into between the Company and Wachovia as of June 18, 2003, the
Maturity Date was extended to July 1, 2004. By an Amendment to Forbearance
Agreement entered into between the Company and Wachovia dated March 4, 2004: the
Maturity Date of the Wachovia Loan was extended to July 1, 2005; certain
$250,000 principal payments due on March 10, 2004, April 10, 2004, May 10, 2004
and June 10, 2004 were deleted; commencing on March 10, 2004, and continuing on
the 10th day of each month thereafter until the new Maturity Date of the Loan,
the Company will make a principal payment to Wachovia in the amount of $31,250
in addition to the regular monthly payments due Wachovia; the Applicable Margin
to the interest rate of the Loan was increased to four percent; and the
Company's reporting requirements to Wachovia were changed. The Company is in
technical default of several other provisions of the Loan, the Forbearance
Agreement and the Amendments to Forbearance Agreement. However, the Company does
not believe that Wachovia will issue a note of default for any of these
technical defaults.
The Company's $5 million credit facility with Travelers closed on November 1,
2000. On September 24, 2002, the Company received a notice from 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. No payments have been made to Travelers since April,
2003 pursuant to the terms of the subordination agreement.
Page 56
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. 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. By June 30, 2004, Rappaport had
received a total of 1,195,298 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.
Debt Maturities
The stated maturities of all long term debt due after June 30, 2004 are as
follows:
Fiscal Year Ended June 30:
2005 $ 9,349,493
2006 18,195
2007 19,486
2008 21,671
2009 19,943
Thereafter 32,867
-----------
$ 9,461,655
===========
Page 57
10. CAPITAL LEASE OBLIGATIONS
The Company is the lessee of certain equipment under capital leases expiring
through 2006. The assets and liabilities under capital leases are carried at the
lower of the present value of minimum lease payments or the fair market value of
the asset. The assets are depreciated over the shorter of their estimated useful
lives or their respective lease terms. Depreciation of assets under capital
leases is included in depreciation expense.
Minimum future lease payments under capital leases as of June 30, 2004 are as
follows:
2005 $ 232,023
2006 63,235
2007 39,290
2008 13,816
2009 7,595
-----------------------------
Total $ 355,959
Less amount representing finance charge 46,380
----------
Present Value of net minimum lease payments $ 309,579
==========
Capital equipment leases have the lease rate factor (finance charge) built into
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, 2004:
2005 $ 2,682,900
2006 1,798,603
2007 738,033
2008 368,317
2009 161,528
Thereafter 390,359
------------
Total $ 6,139,740
============
Page 58
Operating lease commitment amounts included in table above with respect to the
leases assigned to Pinnacle in November 2002 are:
2005 1,040,246
2006 489,844
2007 190,103
2008 58,095
Rent expense from continuing operations for the fiscal years ended June 30,
2004, 2003 and 2002 was $2.0, $2.2 million, and 2.4 million, respectively.
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,
2004 as a reduction to amounts due to such brokers.
Net Capital Requirements. PCS is subject to the SEC's Uniform Net Capital Rule
15c 3-1(PCS), 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. As of June 30, 2004 the
Company was in compliance with these regulations.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, PCS executes, 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 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.
Page 59
Litigation
On February 4, 2004, the Company was served with a Summons and a Shareholder's
Class Action and Derivative Complaint with the following caption: "Gary Kosseff,
Plaintiff, against James Ciocia, Thomas Povinelli, Michael P. Ryan, Kathryn
Travis, Seth A. Akabas, Louis P. Karol, Edward H. Cohen, Steven Gilbert and
Doreen Biebusch, Defendants and Gilman & Ciocia, Inc., Nominal Defendant". The
action was filed in the Court of Chancery of the State of Delaware in and for
New Castle County under Civil Action No. 188-N. The Company believes that the
allegations contained in the lawsuit are without merit and the Company intends
to contest the lawsuit vigorously. The nature of the action is that the Company,
its Board of Directors and its management, breached their fiduciary duty of
loyalty in connection with the sale of the Purchased Offices to Pinnacle. The
action alleges that the sale to Pinnacle was for inadequate consideration and
without a fairness opinion by independent financial advisors, without
independent legal advice and without a thorough evaluation and vote by an
independent committee of the Board of Directors. The action prays for the
following relief: a declaration that the action is maintainable as a class
action and certifying the plaintiff as the representative of the class; a
declaration that the Company, its Board of Directors and its management breached
their fiduciary duty and other duties to the plaintiff and to the other members
of the purported class; a rescission of the Purchase Agreement; unspecified
monetary damages; and an award to the plaintiff of costs and disbursements,
including reasonable legal, expert and accountants fees. On March 15, 2004,
counsel for the Company and for all defendants filed a motion to dismiss the
lawsuit. On June 18, 2004, the Plaintiff filed an Amended Complaint. On July 12,
2004, counsel for the Company and for all defendants filed a motion to dismiss
the Amended Complaint.
The Company is the subject of a formal investigation by the Securities and
Exchange Commission ("SEC"). The investigation concerns, among other things, the
restatement of the Company's financial results for the fiscal year ended June
30, 2001 and the fiscal quarters ended March 31, 2001 and December 31, 2001
(which have been previously disclosed in the Company's amended quarterly and
annual reports for such periods), the Company's delay in filing Form 10-K for
Fiscal 2002 and 2003, the Company's delay in filing its 10-Q for the quarter
ending September 30, 2002 and the Company's past accounting and recordkeeping
practices. The Company had previously received informal, non-public inquiries
from the SEC regarding certain of these matters. The Company and its executives
have complied fully with the SEC's investigation and will continue to comply
fully with the SEC's investigation. The Company does not believe that the
investigation will have a material effect on the Company's Consolidated
Financial Statements.
The Company has been advised that the Staff of the SEC has taken the position
that the Company has not timely filed all required financial statements because
the Company's Form 10-KA for Fiscal 2003 filed in February 2004 included
unaudited financial statements for fiscal years 2002 and 2001. This was due to
the refusal of Grant Thornton, the Company's prior auditors, to consent to the
inclusion in the Form 10-KA for Fiscal 2003 of their 2002 audit report with
respect to the 2002 financial statements, as restated. In addition, Arthur
Andersen, the Company's auditors for 2001, is no longer certified to consent to
changes in its 2001 audit report. The Company retained Radin Glass to audit
Fiscal 2002 to resolve this matter. As a result of the Staff's position, until
the Company has been current in filing all reports for 12 months, the Company is
ineligible to use Forms S-2 and S-3 registration statements to register
securities, and until such audited financial statements are filed, other
registration statements will not be declared effective and the Company will be
unable to effect private placement of its securities under Rules 505 and 506 of
Regulation D except for placements exclusively to accredited investors.
Page 60
The Company and its PCS Subsidiary are defendants and respondents in lawsuits
and NASD arbitrations in the ordinary course of business. On June 30, 2004,
there were 32 pending lawsuits and arbitrations and management accrued $943,600
as a reserve for potential settlements, judgments and awards. Sixteen of these
matters were related to PCS and its registered representatives. PCS has Errors &
Omissions coverage for such matters. In addition, under the PCS 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.
12. EQUITY COMPENSATION PLANS
Stock Option Agreements and Stock Option Plans
The Company has adopted and the stockholders have approved various stock option
plans covering 1,498,697 shares of stock. 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. 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.
There was no charge to earnings during the Fiscal 2004 related to the issuance
of stock options.
Page 61
The table below summarizes plan and non-plan stock option activity:
Gilman + Ciocia, Inc.
Schedule of Stock Option Activity
For the years ended June 30, 2004, 2003 and 2002
Weighted
Average
Number of Exercise
Shares Price
---------- --------
Outstanding, June 30, 2001 4,680,473 $7.58
========== =====
Granted 514,500 $5.83
Exercised (3,500) $2.75
Canceled (371,879) $7.68
---------- -----
Outstanding, June 30, 2002 4,819,594 $7.39
========== =====
Granted* 80,000 $1.04
Exercised -- $ --
Canceled (2,461,666) $7.92
---------- -----
Outstanding, June 30, 2003 2,437,928 $6.63
========== =====
Granted** 20,000 $1.00
Exercised -- $ --
Expired (254,885) $9.19
Canceled (25,477) $5.93
Outstanding, June 30, 2004 2,177,566 $6.28
========== =====
Exercisable June 30, 2002 3,464,489 $7.71
Exercisable June 30, 2003 2,044,178 $7.04
Exercisable June 30, 2004 1,810,066 $6.78
The weighted average fair value of options granted during the years ended June
30, 2004, 2003, and 2002 are $.37, $.57, and $1.17 per option, respectively
* A previously unrecorded Fiscal 2000 option for 10,000 shares is being included
as a new Fiscal 2003 grant in lieu of restating prior years option activity
results.
** Two previously unrecorded Fiscal 2003 options for 10,000 shares each, are
being included as new Fiscal 2004 grants in lieu of restating prior years option
activity results.
Gilman + Ciocia, Inc.
Stock Option Price Schedule
As of June 30, 2004
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-$2.50 160,000 4 $ 1.21 -- $ --
$2.51-$5.00 677,383 2 $ 3.94 607,383 $ 3.94
$5.01-$7.50 638,500 4 $ 6.25 576,000 $ 6.27
$7.51-$10.00 487,183 1 $ 8.09 412,183 $ 8.11
Above $10.00 214,500 4 $ 13.49 214,500 $ 13.49
2,177,566 2 $ 6.28 1,810,066 $ 6.76
=========== ===========
Page 62
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following assumptions:
2004 2003 2002
---- ---- ----
Expected Life (years) 2 2 3
Free Interest Rate 2.26% 1.22% 2.28%
Volatility 318.98 262.25 65.68
Dividend Yield 0% 0% 0%
Stock Subscriptions Receivable and Note Receivable for Shares Sold
For the years ended June 30, 2004, 2003 and 2002, the Company did not recognize
interest income on stock subscriptions receivable.
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 sold 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 was less. Plan Periods were six-month
periods commencing January 1st and July 1st. The 2000 ESPP Plan was 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 on January 2, 2003 and closed on June 30, 2003. There
were two offering periods in Fiscal 2004. The first offering period commenced on
July 1, 2003 and closed on December 31, 2003 and the second commenced on January
2, 2004 and closed on May 1, 2004. In Fiscal 2004, after a review of employee
Page 63
contributions to the 2000 ESPP Plan, it was determined that contributions were
made by employees who left the Company and were ineligible to receive shares.
Accordingly, in Fiscal 2004, cash refunds were made to employees who made
contributions to the 2000 ESPP Plan but were determined not to be entitled to
the shares they subscribed to.
The 2000 ESPP Plan was terminated by the Board of Directors as of May 1, 2004.
The Company is reviewing the ESPP to determine the number of shares to be issued
to participants for Fiscal 2002, 2003 and 2004.
13. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan for the benefit of its eligible employees.
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 during the fiscal years ended June 30, 2004, 2003 and 2002. The Company is in
the process of amending its 5500 filings with the IRS for Fiscal 2000 and 2001.
The 5500 filings for Fiscal 2002 and 2003 are on extension. As of January 1,
2004, the Board of Directors authorized the Company to adopt a new 401(k) plan.
The new 401(k) plan is being administered by Sentinel Benefit and Reliance Trust
is the new Trustee of the plan. The new 401(k) plan was implemented by the
Company in September 2004.
14. NET INCOME (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,
2004 2003 2002
---- ---- ----
Net Income (Loss) $ 5,051,535 $(13,996,916) $(22,358,704)
Basic and diluted weighted average shares $ 9,388,764 $ 9,440,815 $ 8,647,966
Basic and diluted net income (loss) per share $ 0.54 $ (1.48) $ (2.59)
The total number of shares related to the outstanding options and warrants
excluded from the calculation of diluted net loss per share was 2,177,566 for
Fiscal 2004, 2,437,928 for Fiscal 2003 and 4,819,594 for Fiscal 2002,
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.
Page 64
Edward H. Cohen is of counsel to, and a retired partner of, the law firm Katten
Muchin Zavis Rosenman ("KMZR") and also a director of the Company. Since August
2002, 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 KMZR. 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.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
general partners in a limited partnership named Prime Income Partners, L.P.,
which owns the building in Poughkeepsie, New York occupied by the Company's
executive headquarters. During the fiscal year ended June 30, 2004, the Company
paid $326,394 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. Other loans were
made by Prime Partners, Inc. to the Company during Fiscal 2003 and 2004. During
Fiscal 2004 the Company repaid a significant amount of the debt to Prime
Partners, Inc. As of June 30, 2004, the Company owed Prime Partners, Inc.
$276,488. Michael Ryan, the Company's Chief Executive Officer and President, is
one of the major stockholders of Prime Partners, Inc.
On December 23, 2003, the Company entered into a promissory note in the amount
of $185,000 with Ted H. Finkelstein, the Company's General Counsel and Vice
President. The note pays interest at the rate of 10% per annum payable monthly.
$10,000 of the principal was repaid to Mr. Finkelstein in February, 2004. The
$175,000 principal balance of the note is due in Fiscal 2005.
At June 30, 2004 and 2003, the Company owed to related parties $445,000 and
$882,500 respectively.
16. SEGMENTS OF BUSINESS
Management believes the Company operates as one segment.
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,
-----------------------------------
2004 2003 2002
--------- --------- ---------
Current:
Federal $ -- $ -- $(593,000)
State and local $ 16,600 93,000 (39,000)
--------- --------- ---------
Total current tax (benefit) provision $ 16,600 $ 93,000 $(632,000)
Deferred:
Federal $ -- $ -- $ 154,000
State and local $ -- -- 613,000
--------- --------- ---------
Total deferred tax provision (benefit) $ -- $ -- $ 767,000
--------- --------- ---------
Total income tax provision (benefit) $ 16,600 $ 93,000 $ 135,000
========= ========= =========
Page 65
A valuation allowance has been established against the deferred tax assets as of
June 30, 2004 as the Company has suffered large recurring losses from
operations, and management believes that the future tax benefit associated with
the deferred tax asset may not be realized.
The Company's net operating loss carry forwards of $12,800,000 at June 30, 2004
expire in 2012:
The ability to utilize net operating loss carryovers may be restricted based on
Internal Revenue Code Section 382 "changes in ownership."
A reconciliation of the federal statutory rate to the provision for income taxes
is as follows:
FISCAL YEAR ENDED JUNE 30,
2004 2003 2002
Federal income taxes (benefit)
computed at statutory rates ($ 1,628,000) 35.00% $(4,910,000) -35.00% $ (7,538,000) -34.00%
State & local taxes (benefit)
net of federal tax benefit ($ 163,000) 3.50% $ (749,000) -5.30% $ (1,344,000) -6.10%
Amortization of intangible
assets with no benefit $ -- 0.00% $ 1,579,000 11.30% $ 530,000 2.40%
Other $ 25,000 0.50% $ (97,000) 0.04% $ 38,000 7.80%
Valuation Reserve $ 1,743,400 38.00% $ 4,173,000 29.70% $ 8,584,000 38.70%
----------- ----------- ------------
Total income tax(benefit)/ Provision $ 16,600 0.00% $ 93,000 0.74% $ 135,000 0.60%
=========== =========== ============
Note: At June 30, 2004, deferred tax assets were comprised of the following:
Net operating loss carry forward $ 5,120,000
Intangibles 2,600,000
Other net 400,000
-----------
$ 8,120,000
Less: valuation allowance (8,120,000)
Net -0-
===========
Page 66
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Income (Loss)
Fiscal Before Taxes Net (Loss) Per Share Weighted
Year: From Continuing Tax Provision Income From Average
2004 Revenue Operations (Benefit) Continuing Operations Basic Diluted
- ------ ------- --------------- ------------- --------------------- ------- -------
Q1 13,549,252 (327,476) 1,200 (328,676) ($0.04) ($0.04)
Q2 13,273,521 (1,466,533) 121,328 (1,587,861) ($0.17) ($0.16)
Q3 18,367,936 1,666,935 18,428 1,648,507 $0.18 $0.16
Q4 14,720,340 (892,999) (124,340) (768,659) ($0.08) ($0.10)
Income (Loss)
Fiscal Before Taxes Net (Loss) Per Share Weighted
Year: From Continuing Tax Provision Income From Average
2003 Revenue Operations (Benefit) Continuing Operations Basic Diluted
- ------ ------- --------------- ------------- --------------------- ------- -------
Q1 12,726,072 (1,226,582) 43,000 (1,269,582) ($0.13) ($0.13)
Q2 12,953,970 (3,327,004) 15,000 (3,342,004) ($0.35) ($0.35)
Q3 13,791,550 273,988 15,000 258,988 $0.03 $0.03
Q4 (a) 14,706,371 (3,461,577) 20,000 (3,481,577) ($0.37) ($0.37)
Income (Loss)
Fiscal Before Taxes Net (Loss) Per Share Weighted
Year: From Continuing Tax Provision Income From Average
2002 Revenue Operations (Benefit) Continuing Operations Basic Diluted
- ------ ------- --------------- ------------- --------------------- ------- -------
Q1 14,066,338 (3,411,202) (2,056,000) (1,355,202) ($0.16) ($0.12)
Q2 12,778,869 (2,485,358) (1,691,735) (793,623) ($0.08) ($0.07)
Q3 16,340,048 (3,187,462) 1,340,065 (4,527,527) ($0.47) ($0.46)
Q4 12,710,697 (14,762,933) 2,542,716 (17,305,649) ($1.79) ($1.79)
(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.
19. SUBSEQUENT EVENTS -
By Stock Purchase Agreement dated as of January 1, 2004, the Company agreed to
sell to Daniel R. Levy and Joseph H. Clinard all of the authorized, issued and
outstanding capital stock of North Ridge and North Shore. The Company entered
into an Amended Stock Purchase Agreement dated as of August 18, 2004 with Mr.
Levy and Mr. Clinard settling a post closing dispute with Mr. Levy and Mr.
Clinard. Mr. Levy remitted to the Company all payments due under the Promissory
Note and he cured all other defaults under the note. The Company credited Mr.
Levy with the sum of $35,000 for cash agreed to be an asset of North Ridge as of
January 1, 2004.
Page 67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 7, 2003, the Company engaged Radin Glass to serve as the Company's
independent auditors for the year ending June 30, 2003. On June 30, 2004, the
Company engaged Radin Glass to serve as the Company's independent auditors for
the Fiscal year ended June 30, 2004, to re-audit the Company's consolidated
financial statements for the year ended June 30, 2002 and to prepare the
Company's income tax returns for the years ended June 30, 2002 and June 30,
2003.
On August 27, 2002, the Company engaged 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. The Company dismissed Grant Thornton
on November 5, 2003.
The Company's relationship with Andersen terminated on August 27, 2002 with the
engagement of Grant Thornton and the discontinuance 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 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. On February 13, 2004, the Company received a
letter from Grant Thornton advising the Company that it did not consent to the
inclusion of its 2002 Auditors' Report issued for the Company's Form 10-K for
Fiscal 2002 in the Company's Form 10-K/A for Fiscal 2003 filed on February 9,
2004. The letter stated that Grant Thornton was withdrawing its 2002 Auditors'
Report and that its report could no longer be relied on, and that it was
withdrawing its quarterly review reports for each fiscal quarter during which it
served as the Company's auditors.
The audit reports of Radin Glass on the Company's amended consolidated financial
statements as of and for the fiscal year ending June 30, 2003 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
Radin Glass' audit report included in the Company's Annual Report on 10-K and
10-K-A for the fiscal year ended June 30, 2003 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.
Page 68
Item 9(A) CONTROLS AND PROCEDURES
In performing its audit of our Consolidated Financial Statements for Fiscal
2004, our independent auditors, Radin Glass, notified our Board of Directors of
several reportable conditions in internal controls under standards established
by the American Institute of Certified Public Accountants. Reportable conditions
involve matters coming to the attention of our auditors relating to significant
deficiencies in the design or operation of internal controls that, in their
judgment, could adversely affect our ability to record, process, summarize, and
report financial data consistent with the assertions of management in the
consolidated financial statements. Radin Glass stated that while none of the
items identified by them individually are individually a material weakness, the
combined effect of these issues and the inability to produce timely accurate
financial statements is a material weakness.
Although Radin Glass noted significant improvements in the structure of the
accounting department, and designed its audit procedures to address the matters
described below in order to obtain reasonable assurance that the financial
statements are free of material misstatement and to issue an unqualified audit
report, certain of the internal control deficiencies noted by Radin Glass had
been noted in their internal control letter regarding fiscal 2003. The Company
has assigned a high priority to the remediation of the reportable conditions,
has hired a new general counsel, is seeking additional independent directors,
intends to hire additional staff in the finance department and will implement
enhanced procedures to accelerate improvement of the internal controls.
These significant deficiencies in the design and operation of our internal
controls include the needs to hire additional staffing and change the structure
of the finance/accounting department, to provide better coordination and
communication between the legal and finance/accounting departments and to
provide training to existing and new personnel in SEC reporting requirements;
the lack of integration of the general ledger system with other recordkeeping
systems, and the need for formal control systems for journal entries and closing
procedures; the need to document internal controls over financial reporting; the
needs to form an independent audit committee, to form an internal audit
department and to implement budget and reporting procedures; and the need to
provide internal review procedures for schedules, SEC reports and filings prior
to submission to the auditors and/or filing with the SEC.
A material weakness is defined as a reportable condition in which the design or
operation of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements caused by error or fraud in
amounts that would be material in relation to the financial statements being
audited may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. While the Company did
implement specific changes in our internal controls during the fourth fiscal
quarter, such as improvement in recording commissions earned and tax return
billings, and regulatory filings are now being filed within the prescribed due
dates, such improvements were partially offset by declines in other areas.
The Company's senior management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 13a-15 and
15d-15 under the Securities Exchange Act of 1934 (the "Exchange Act") designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officers to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Accounting Officer,
of the disclosure controls and procedures of the Company as defined in Exchange
Act Rule 13(a)-15(e). In designing and evaluating disclosure controls and
procedures, the Company and its management recognize that any disclosure
controls and procedures, no matter how well designed and operated, can only
provide reasonable assurance of achieving the desired control objective. The
Chief Executive Officer and the Chief Accounting Officer have determined that
the Company will further enhance its disclosure controls and procedures and that
except for the matters noted by Radin Glass, and taking into account the steps
taken and to be taken to address the matters described above, such disclosure
controls and procedures will provide a reasonable level of assurance to
adequately and effectively timely alert them to material information required to
be included in the Company's periodic SEC reports.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
CHANGE IN MANAGEMENT
There were no changes in Management during Fiscal 2004.
Page 69
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 48 Chairman of the Board and Director
Michael P. Ryan 46 Chief Executive Officer, President and
Director
Kathryn Travis 56 Secretary and Director
Ted Finkelstein 51 Vice President and Associate General
Counsel
Steven Gilbert 48 Director
Edward H. Cohen 66 Director
Dennis Conroy 33 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. 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. Mr. Finkelstein has over 25 years of varied legal experience including
acting as outside counsel for Prime Capital Services, Inc. for over 15 years.
Mr. Finkelstein was General Counsel and Vice President of the Company from June,
2001 through October 11, 2004. Mr. Finkelstein is currently Vice President and
Associate General Counsel. Christopher Kelly was appointed General Counsel on
October 11, 2004.
STEVEN GILBERT, DIRECTOR. Mr. Gilbert is the Company's national sales manager
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 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.
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 was disbanded on August 18, 2002 and the entire Board
undertook its duties. The Company is interviewing new directors. 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.
Page 70
CODE OF ETHICS
On January 16, 2004, the Company 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 the Company's Annual Report on Form 10-K for
the year ended June 30, 2003.
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
prior to the filing of this Form 10-K except that (i) Ted Finkelstein, Vice
President and Associate General Counsel, failed to timely file a Statement of
Beneficial Ownership on Form 4 with respect to a purchase of 74,895 shares of
stock and (ii) although the Company believes Rappaport Gamma Limited Partners
Investment Trust ("Rappaport Gamma") owns more than 10% of the Company's
outstanding common stock based on the number of shares previously issued to
Rappaport Gamma by the Company, to the Company's knowledge no Section 16 forms
were filed by Rappaport Gamma during the year ended June 30, 2004. The Company
does not know whether or not Rappaport Gamma is subject to Section 16.
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
Salary Bonus Other Annual All Other
Compensation Compensation
Michael Ryan Fiscal 2004 $ 291,077.25 $ -- $ 19,758.51 $ 29,769.09 (1)
Chief Executive Officer Fiscal 2003 $ 195,693.00 $ -- $ -- $ 19,238.00 (2)
and Director Fiscal 2002 $ 430,000.00 $ 490,384.00 (3) $ -- $ 9,600.00 (2)
Kathryn Travis Fiscal 2004 $ 203,999.90 $ -- $ -- $ 8,658.17 (2)
VP and Director Fiscal 2003 $ 138,421.00 $ -- $ -- $ 9,259.00 (2)
Fiscal 2002 $ 281,538.00 $ -- $ -- $ 9,259.00 (2)
Ted Finkelstein Fiscal 2004 $ 160,000.10 $ -- $ -- $ --
VP and General Counsel Fiscal 2003 $ 157,617.00 $ -- $ -- $ --
Fiscal 2002 $ 184,615.00 $ -- $ -- $ --
Dennis Conroy Fiscal 2004 $ 113,846.00 $ -- $ -- $ --
Chief Accounting Officer
(1) Auto Expense and club membership
(2) Auto Expense
(3) Accrued compensation not paid
INSURANCE
On June 30, 2004, the Company maintained $2 million Key Man life insurance
policies on James Ciocia and Michael P. Ryan. These policies, and an additional
$2 million policy owned by the Company on Thomas Povinelli, are pledged to
Wachovia as collateral security for the Company's financing with Wachovia.
DIRECTORS
The Company is currently reviewing its compensation policy with the independent
directors of the Company. Historically, independent directors have not received
compensation, however, each of the Company's Directors is invited at the
Company's expense to its National Sales Convention.
Page 71
OPTION GRANTS
The following table sets forth information regarding options to purchase shares
of Common Stock granted to the Named Executive Officers during Fiscal 2004.
OPTION GRANTS IN FISCAL 2004
INDIVIDUAL GRANTS
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS GRANTED IN 2002 ($/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 2004, (b) the total number of
unexercised options for Common Stock (exercisable and un-exercisable) held at
June 30, 2004, and (C) the value of those options that were in-the-money on June
30, 2004 based on the difference between the closing price of our Common Stock
on June 30, 2004 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
- ---- ----------- -------- ----------- ----------- ----------- -----------
Michael P. Ryan
Chief Executive -- -- 500,000 -- -- --
Officer and
Director
Kathryn Travis
Secretary, Vice -- -- 0 -- -- --
President and
Director
Ted Finkelstein Vice
President and
General Counsel -- -- 10,000 -- -- --
Dennis Conroy
Chief Accounting Officer -- -- 0 -- -- --
STOCK OPTION AND STOCK PURCHASE PLANS
The Company has adopted and the shareholders have approved various stock option
plans covering 1,498,697 shares of stock. The Company maintains records of
option grants by year, exercise price, vesting schedule and grantee. In certain
cases for periods prior to August 2002 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, prior to August 2002, consistently
recorded the plan pursuant to which the option was granted. The Company is
implementing new record keeping procedures regarding options that will ensure
this information is accurately recorded and processed. The material terms of
each option grant vary according to the discretion of the Board of Directors.
On 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 sold 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 was less. Plan Periods were six-month
periods commencing January 1 and July 1. The 2000 ESPP Plan was 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.
Page 72
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 on January 2, 2003 and closed on June 30, 2003. There
were two offering periods in Fiscal 2004. The first offering period commenced on
July 1, 2003 and closed on December 31, 2003 and the second commenced on January
2, 2004 and closed on May 1, 2004. In Fiscal 2004, after a review of employee
contributions to the 2000 ESPP Plan, it was determined that contributions were
made by employees who left the Company and were ineligible to receive shares.
Accordingly, in Fiscal 2004, cash refunds were made to employees who made
contributions to the 2000 ESPP Plan but were determined not to be entitled to
the shares they subscribed to.
The 2000 ESPP Plan was terminated by the Board of Directors as of May 1, 2004.
The Company is reviewing the ESPP to determine the number of Shares to be issued
to participants for 2002, 2003 and 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2004, certain information
regarding the ownership of the Company's Common Stock by (i) each of the
Company's current Directors, (ii) all of the Company's directors and officers as
a group, and all shareholders who own more than 5% of the Company's stock.
Except as indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock. For each individual
or group included in the table, percentage ownership is calculated by dividing
the number of shares beneficially owned by such person or group as described
above by the sum of the 9,388,764 shares of Common Stock outstanding as of June
30, 2004 and the number of shares of Common Stock that such person or group had
the right to acquire within 60 days of June 30, 2004, including, but not limited
to, upon the exercise of options.
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------------------ -------------------- -----
Michael P. Ryan
11 Raymond Avenue
Poughkeepsie, NY 12603 2,643,461 (1) 26.5%
Prime Partners, Inc.
11 Raymond Avenue
Poughkeepsie, NY 12603 2,105,561 (1) 21.1%
Ralph Porpora
11 Raymond Avenue
Poughkeepsie, NY 12603 2,110,734 (2) 21.2%
Rappaport Gamma Limited Partners Investment Trust
13907 Carrolwood Village Run
Tampa, FL 33624 1,195,298 12.0%
Steven Gilbert
2420 Enterprise Road, Suite 100
Clearwater, FL 33763 735,643 (3) 7.4%
James Ciocia
35-50 Francis Lewis Blvd. Suite 205
Flushing, NY 11358 508,824 (4) 5.10%
Kathryn Travis
375 North Broadway
Suite 203
Jericho, NY 11753 168,981 (5) 1.7%
Carole Enisman
11 Raymond Avenue
Poughkeepsie, NY 12603 26,200 (6) *
Edward H. Cohen
c/o Katten Muchin Zavis Rosenman 0 *
575 Madison Avenue New York, NY 10022
Ted Finkelstein
11 Raymond Avenue 84,895 *
Poughkeepsie, NY 12603
Dennis Conroy
11 Raymond Avenue 0 0
Poughkeepsie, NY 12603
10 persons 5,281,114
Page 73
* Less than 1.0%
(1) 6,000 shares are owned by Mr. Ryan personally, 26,200 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 2,105,561 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 a Stock
Purchase Agreement with James Ciocia (the "Ciocia Purchase Agreement")
dated May 1, 2002 and 168,981 shares which Prime Partners, Inc. has the
right to acquire pursuant to a Stock Purchase Agreement with Kathryn
Travis (the "Travis Purchase Agreement") dated May 10, 2002, all at an
exercise price per share equal to the greater of 160% of market price or
$75, Mr. Ryan has full authority to vote these shares pursuant to separate
Voting Trust Agreements). Includes 250,000 shares issuable to Mr. Ryan
upon exercise of stock options at a price of $6.00 per share and 250,000
shares issuable to Mr. Ryan upon exercise of stock options at a price of
$8.00 per share. Mr. Ryan owns 50% percent of the capital stock of, and
serves as an officer and director of, Prime Partners, Inc. Mr. Ryan
disclaims beneficial ownership of the 16,200 shares beneficially owned by
Ms. Enisman, and the 5,700 shares owned by Prudential Serls Prime
Properties.
(2) Includes 2,105,561 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, 5,969 shares, 37,500 shares and
7,370 shares issuable upon exercise of options at $3.50, $4.75, $13.75,
$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 2004.
(4) Includes 1,038 shares issuable upon the exercise of options at a price of
$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 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, 74,895 shares purchased on June 25, 2004 from
the Estate of Steven Grove.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
On December 23, 2003, the Company entered into a promissory note in the amount
of $185,000 with Ted H. Finkelstein, the Company's General Counsel and Vice
President. The note pays interest at the rate of 10% per annum payable monthly.
$10,000 of the principal was repaid to Mr. Finkelstein in February, 2004. The
$175,000 principal balance of the note is due in Fiscal 2005.
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.
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.
Michael Ryan, the Company's Chief Executive Officer and President, is one of the
general partners in a limited partnership called 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, 2004, the Company paid
$326,394 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.
Page 74
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.
During Fiscal 2004, the Company repaid a significant amount of this debt. As of
June 30, 2004 the Company owed Prime Partners, Inc. $278,488. Michael Ryan, the
Company's Chief Executive Officer and President, is one of the major
shareholders of Prime Partners, Inc.
James Ciocia, our Chairman of the Board and a financial planner for the Company,
has a compensation arrangement with the Company in his capacity as a financial
planner under which he receives a commission based on a variable percentage of
his own business production and under which he received an aggregate of $456,382
in fiscal 2004, and under which he will receive commissions in fiscal 2005.
Pursuant to this arrangement, the commission payments made in 2004 included
$31,256 of accrued commissions earned but not paid in prior years, and $425,126
earned and paid in fiscal 2004. In addition during Fiscal 2004 the Company
forgave a loan in the amount of $91,954 that had been made to Mr. Ciocia in a
prior year. Mr. Ciocia will receive a Form W-2 for this amount in calendar 2004.
Steven Gilbert, a director of the Company and national sales manager, has a
compensation arrangement with the Company under which in his capacity as
national sales manager he received a base salary of $240,000 and a draw of
$120,000 against commission overrides during fiscal 2004. In addition, Mr.
Gilbert has a commission arrangement based on a percentage of his own business
production under which he received an aggregate of $338,802. Pursuant to his
arrangement with the Company, the commission payments in 2004 and any draw
deficit were applied to reduce accrued commissions earned but not paid in prior
years. Mr. Gilbert is currently receiving a similar compensation package for
fiscal 2005. Mr. Gilbert also received a car allowance of $10,000 per year.
ITEM 14- PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees billed to Radin Glass & Co,
LLC for professional services rendered to the Company for the audit of the
Company's annual financial statements for the fiscal years ended June 30, 2004
and 2003, for the reviews of the financial statements included in the Company's
Quarterly Reports on Form 10-Q for those fiscal years, and for other services
rendered on behalf of the Company during those fiscal years. All of such fees
were pre-approved by the Company Board of Directors.
Fiscal 2004 Fiscal 2003
Audit Fees (1) $293,000 $90,000
Tax Fees (2) $ 40,000
1. Included $63,000 in fees related to the re-audit of Fiscal 2002.
2. Radin Glass was not engaged to begin the Company's Fiscal 2003 tax
returns until Fiscal 2004.
PART IV -
ITEM 15. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Consolidated Financial Statements at Item
8 on page 35 of this report.
(2) Financial Statement Schedule: See notes to Consolidated Financial Statements
at Item 8 on page 35 of this report.
(3) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by reference:
3.1 Registrant's Articles of Incorporation, as amended, incorporated by
reference to the like numbered exhibit in the Registrant's Registration
Statement on Form SB-2 under the Securities Act of 1933, as amended, File No.
33-70640-NY.
3.2 Registrant's Amended Articles of Incorporation, incorporated by reference to
the exhibit in the Registrant's Proxy Statement on Form14-A under the Securities
Exchange Act of 1934, as amended, filed on June 22, 1999.
3.3 Registrant's By-Laws, incorporated by reference to the like numbered exhibit
in the Registrant's Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-70640-NY.
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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.
Page 76
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.
10.15 Stock Purchase Agreement dated as of January 1, 2004 between Registrant
and Daniel Levy and Joseph Clinard.
14.1 Code of Ethics for Senior Financial Officers and the Principal Executive
Officer of Gilman + Ciocia, Inc. incorporated by reference to Exhibit 14.1 to
the Registrant's report on Form 10-K for the fiscal year ended June 30, 2003.
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.
99.1 Letter from Grant Thornton dated February 13, 2004 (incorporated by
reference to Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004).
(b) Reports on Form 8-K
Current Report on Form 8-K, Items 7 and 12, filed on May 13, 2004.
Page 77
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: October 13, 2004 By /s/ Michael P. Ryan
Chief Executive Officer
Dated: October 13, 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 13th day of October, 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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