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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
Commission File Number 000-22996
GILMAN + CIOCIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2587324
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK 12603
(Address of principal executive offices)(Zip code)
(845)486-0900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |_| No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
As of November 3, 2004, 8,984,434 shares of the issuer's common stock, $0.01 par
value, were outstanding.
Page 1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of September 30, 2004
and June 30, 2004 3
Consolidated Statement of Operations for the Three Months Ended
September 30, 2004 and September 30, 2003 4
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2004 and September 30, 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION 19
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES AND CERTIFICATIONS 21
Page 2
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Balance Sheets
UnAudited Audited
September 30, 2004 June 30, 2004
Assets
Cash & Cash Equivalents 675,838 498,545
Marketable Securities 600,400 1,184,907
Trade Accounts Receivable, Net 3,311,067 3,678,204
Receivables from Officers, Shareholders
and employees, net 156,614 138,564
Assets of Discontinued Operations 3,568 3,568
Due From Office Sales - Current 219,537 287,325
Prepaid Expenses and Other Current Assets 147,725 365,117
-----------------------------
Total Current Assets 5,114,749 6,156,230
Fixed Assets, Net 1,217,269 1,616,661
Goodwill 3,805,594 3,837,087
Intangible Assets, Net 5,516,485 5,631,123
Due from Office Sales - Non Current 1,149,981 1,181,128
Other Assets 492,304 505,351
-----------------------------
Total Assets $ 17,296,382 $ 18,927,579
-----------------------------
Liabilities and Shareholders' Equity (Deficit)
Accounts Payable and Accrued Expenses 10,111,575 10,375,471
Current Portion of Notes Payable & Cap. Leases 8,736,093 9,113,793
Due to Related Parties 654,149 445,000
-----------------------------
Total Current Liabilities 19,501,817 19,934,264
Long term portion of notes payable and cap leases 213,861 212,440
-----------------------------
Total Liabilities $ 19,715,678 $ 20,146,704
-----------------------------
Shareholders' Equity (Deficit)
Preferred Stock, $0.001 par value; 100,000 shares authorized; no
shares issued and outstanding at September 30, 2004, and 2003 respectively
Common Stock, $0.01 par value 20,000,000 shares authorized; 10,287,276
and 10,084,561shares issued at September 30, 2004, and June 30, 2004 respectively 102,872 102,195
Additional Paid in Capital 29,920,070 29,897,210
Treasury Stock 1,326,838 and 1,326,838 shares of common stock,
respectively, at cost (1,306,288) (1,306,288)
Retained Deficit (31,135,950) (29,912,242)
-----------------------------
Total Shareholders' Equity (Deficit) $ (2,419,296) $ (1,219,125)
-----------------------------
Total Liabilities & Shareholders' Equity (Deficit) $ 17,296,382 $ 18,927,579
=============================
Page 3
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended September 30,
UnAudited UnAudited
2004 2003
Revenues:
Financial Planning Services $ 12,140,501 $ 13,083,769
Tax Preparation Fees 517,062 465,483
-----------------------------
Total Revenues 12,657,563 13,549,252
-----------------------------
Cost of Sales/ Commissions 8,103,347 7,884,412
-----------------------------
Gross Profit: 4,554,216 5,664,840
-----------------------------
Operating Expenses:
Salaries 2,497,828 2,858,758
General & Administrative 1,838,732 1,672,962
Advertising 258,662 9,891
Brokerage Fees & Licenses 315,924 327,690
Rent 463,746 537,791
Depreciation & Amortization 310,623 355,451
-----------------------------
Total Operating Expenses 5,685,515 5,762,543
-----------------------------
Income (loss) from (1,131,299) (97,703)
continuing operations before other -----------------------------
income and expenses
Other Income (Expenses):
Interest and investment income 51,183 18,068
Interest expense (205,949) (247,841)
Other Income (Expense), Net 62,357 1,193
-----------------------------
Total Other Income (Expense) (92,409) (228,580)
-----------------------------
Loss from continuing operations (1,223,708) (326,283)
before income taxes -----------------------------
Income taxes (benefit) -- 1,200
-----------------------------
Loss from continuing operations (1,223,708) (327,483)
-----------------------------
Discontinued Operations:
Income (loss) from discontinued operations -- (276,561)
-----------------------------
Gain (loss) on disposal of -- 796,965
discontinued operations -----------------------------
Income taxes (benefit) -- --
Income (loss) from discontinued operations -- 520,404
-----------------------------
Net Income (loss) $ (1,223,708) $ 192,921
=============================
Basic per share data:
(Loss) from continuing operations $ (0.14) $ (0.03)
Gain (Loss) from discountinued operations $ -- $ 0.05
-----------------------------
Net Income (Loss) per share, basic $ (0.14) $ 0.02
=============================
Weighted Average shares, basic 8,810,275 9,791,177
=============================
Diluted per share data:
(Loss) from continuing operations $ (0.14) $ (0.03)
Gain (loss) from discontinued operations $ -- $ 0.05
-----------------------------
$ (0.14) $ 0.02
=============================
Weighted Average shares, diluted 8,810,275 10,679,730
=============================
Page 4
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended September 30,
UnAudited UnAudited
2004 2003
---- ----
Cash Flows From Operating Activities:
Net (Loss) / Income $(1,223,708) 192,920
Adjustments to reconcile net loss to net casy used in --
operating activities: --
--
Depreciation and amortization 268,154 364,243
Issuance of common stock for debt default penalties and interest 23,537 15,750
Amortization of debt discount 42,469 57,988
(Gain) Loss on sale of discontinued operations (798,158)
(Gain) Loss on sale of equipment and properties (31,182) --
Due From Office Sales 67,788
Changes in assets and liabilities:
Accounts receivable, Net 367,137 51,488
Prepaid and other current assets 217,390 215,538
Change in marketable securities 584,509 (91,783)
Receivables from officers, shareholders and employees 3,512 21,035
Other Assets 22,631 (273)
Accounts Payable and accrued expenses (263,896) (487,203)
Decrease in Other liabilities -- (4,750)
----------- -----------
Net cash provided by operating activities 78,341 (463,205)
Cash Flows from investing activities:
Capital Expenditures (19,181) (8,380)
Cash paid for acquisitions, net of cash acquired (8,487) (23,423)
Proceeds from the sale of discountinued operations 832,260
Proceeds from the sale of property and equipment 293,750 --
----------- -----------
Net cash used in investing activities 266,082 800,457
Cash Flows from Financing Activities:
Proceeds from bank and other loans 345,972
Payments of bank loans and capital lease obligations (167,130) (719,239)
----------- -----------
Net cash Provided by Financing Activities: (167,130) (373,267)
Net change in cash and cash equivalents 177,293 (36,015)
Cash and cash equivalents at beginning of period 498,545 955,097
Cash and cash equivalents at end of period $ 675,838 $ 919,082
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the period for:
Interest $ 205,949 $ 247,841
----------- -----------
Income Taxes $ -- $ --
=========== ===========
Supplemental Disclosure of Non-Cash Transactions:
Issuance of common stock for debt default penalties and interest 23,537 15,750
Issuance of common stock for Acquisitions 5,760 --
Page 5
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
(a) Description of the Company and Overview
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, the
"Company") is a corporation that was organized in 1981 under the laws of the
State of New York and reincorporated under the laws of the State of Delaware in
1993. The Company provides financial planning services, including securities
brokerage, insurance and mortgage agency services, and federal, state and local
tax preparation services to individuals, predominantly in the middle and upper
income tax brackets. In Fiscal 2004*, approximately 89% of the Company's
revenues were derived from commissions on financial planning services and
approximately 11% were derived from fees for tax preparation services. For the
three months ended September 30, 2004, 96% of the Company's revenues were earned
from all financial planning and related services with 90% from mutual funds,
annuities and securities transactions, and 10% from insurance, mortgage
brokerage and other related services. As of September 30, 2004, the Company had
36 offices operating in 6 states (New York, New Jersey, Connecticut, Florida,
Maryland and Colorado). The Company's Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K can be obtained, free of
charge, on the Company's web site at www.gilcio.com.
As a result of a number of defaults under its agreements with Wachovia Bank,
National Association ("Wachovia") on November 27, 2002, the Company entered into
a debt forbearance agreement with Wachovia and subsequently amended the debt
forbearance agreement on June 18, 2003 and on March 4, 2004. Another of its
lenders, Travelers Insurance Company ("Travelers") has claimed several defaults
under its agreement, but acknowledged that it was subject to the terms of a
subordination agreement which restricts the remedies it can pursue against the
Company. The Company's debt to Rappaport Gamma, Ltd. ("Rappaport") was due on
October 30, 2002, but remains unpaid. This loan is also subordinated to the
Wachovia loan. That lender is entitled to receive shares of the Company's common
stock monthly while the debt remains unpaid. As a result of these defaults, the
Company's debt as to those lenders is classified as current liabilities on its
financial statements.
(b) Basis of Presentation
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. The consolidated balance sheets as of September 30, 2004, the
consolidated statement of operations for the three months ended September 30,
2004 and 2003, the consolidated statements of cash flows for the three months
ended September 30, 2004 and the consolidated statement of stockholders' equity
for the three months ended September 30, 2004 are unaudited. The consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) that are, in the opinion of management, necessary for a
fair presentation of the Company's financial position and results of operations.
The operating results for the three months ended September 30, 2004 are not
necessarily indicative of the results to be expected for any other interim
period or any future year. These consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended June 30,
2004. On February 13, 2004, the Company received a letter from Grant Thornton,
its previous auditors, advising the Company that it did not consent to the
inclusion of its 2002 Auditors' Report issued for the Company's Form 10K for
Fiscal 2002 in the Company's Form 10-K 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.
* Fiscal years are denominated by the year in which they end. Accordingly,
Fiscal 2004 refers to the year ended June 30, 2004.
Page 6
(c) Accounting Policies
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The Company's estimates,
judgments and assumptions are continually evaluated based on available
information and experience. Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those estimates.
Certain of the Company's accounting policies require higher degrees of judgment
than others in their application.
Impairment of intangible assets
Impairment of intangible assets results in a charge to operations whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of an asset to be held and used is
measured by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The
measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows. The
Company tests goodwill for impairment annually or more frequently whenever
events occur or circumstances change, which would more likely than not reduce
the fair value of a reporting unit below its carrying amount. The measurement of
fair value in lieu of a public market for such assets or a willing unrelated
buyer relies on management's reasonable estimate of what a willing buyer would
pay for such assets. Management's estimate is based on its knowledge of the
industry, what similar assets have been valued at in sales transactions and
current market conditions.
Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting services, 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.
Net Income (Loss) Per Share
In accordance with SFAS No. 128, "Earnings per Share", basic net income (loss)
per share is computed using the weighted-average number of common shares
outstanding during each period. Diluted net income (loss) per share gives effect
to all potentially dilutive securities that were outstanding during each period.
The computation for September 30, 2004 did not include these outstanding options
and warrants because to do so would have an antidilutive effect for the periods
presented.
Stock Based Compensation
At September 30, 2004, the Company had one stock-based employee compensation
plan. Prior to 2000, the Company accounted for plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Effective July 1, 2000, the Company
adopted the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-based Compensation, prospectively to all employee awards
granted, modified, or settled after January 1, 2002. Awards under the Company's
plan vests over periods ranging from three to five years. Therefore, the cost
related to stock-based employee compensation included in the determination of
net income for 2003 and 2004 is less than that which would have been recognized
if the fair value based method had been applied to all awards since the original
effective date of Statement 123. The following table illustrates the effect on
net income and earnings per share if the fair value based method had been
applied to all outstanding and unvested awards in each period.
Page 7
For the Three Months Ended
September September
30, 2004 30, 2003
Net Income (Loss), as reported $ (1,223,708) $ 192,921
Add: Stock-based employee
compensation expenses included
in reported net loss, net of related
tax effects
Deduct: Total stock-based
compensation expense determined
under fair value based method for
all awards, net of related taxes $ -- $ --
-------------------------------
Proforma net income (loss) $ (1,223,708) $ 192,921
Basic and diluted earnings (loss) per share:
As reported - Basic (0.14) 0.02
Proforma - Basic (0.14) 0.02
As reported - Diluted (0.14) 0.02
Proforma - Diluted (0.14) 0.02
The effects of applying SFAS 123 in the pro forma net loss disclosures above are
not likely to be representative of the effects on pro forma disclosures of
future years.
Other significant accounting policies
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. These policies require
difficult judgments on complex matters that are often subject to multiple
sources of authoritative guidance. Certain of these matters are among topics
currently under reexamination by accounting standards setters and regulators.
Although no specific conclusions reached by these standard setters appear likely
to cause a material change in the Company's accounting policies, outcomes cannot
be predicted with confidence. Also see Note 1 to Consolidated Financial
Statements included in the Company's Annual Form 10-K for fiscal 2004 (the "2004
10-K") which discusses accounting policies that must be selected by management
when there are acceptable alternatives.
(d) Liquidity and cash flow
During the three months ended September 30, 2004, the Company incurred a net
loss of $($1,223,708) and at September 30, 2004 had a working capital deficit
position of $(14,387,068). At September 30, 2004 the Company had $675,838 of
cash and cash equivalents and $3,311,067 of trade accounts receivables to fund
short-term working capital requirements.
The Company believes that it has been able to complete the necessary steps in
order to meet its cash flow requirements throughout Fiscal 2005 and 2006, though
due to the seasonality of the Company's business the Company may at times employ
short term financing.
2. RECLASSIFICATION FOR DISCONTINUED OPERATIONS
During Fiscal 2003 and Fiscal 2004 the Company sold 64 of its offices, including
the sale of 47 offices to Pinnacle Taxx Advisors LLC ("Pinnacle") and two
subsidiaries. In accordance with SFAS 144 assets and liabilities associated with
these offices have been reclassified and are included on the accompanying
balance sheets as assets and liabilities held for sale, and the results of these
Page 8
operations have been reclassified and are separately presented for all reporting
periods as discontinued operations in the accompanying statements of operations.
3. RECENT ACCOUNTING PRONOUNCEMENTS
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 has not had a material impact on our results of
operations, financial position or disclosures.
4. CONTINGENCIES
Litigation
See Item 1 Legal Proceedings of Part II herein.
Page 9
5. DISCONTINUED OPERATIONS
Approximate direct operating revenues and operating expenses of the offices sold
to Pinnacle and other parties included as discontinued operations on the
accompanying statements of operations for the three months ended September 30,
2004 and September 30, 2003 were as follows:
For the Three Months Ended
September 30,
2004 2003
---- ----
Revenues:
Financial Planning Services -- $ 1,785,819
Tax Preparation Fees -- 12,074
----- -----------
Total Revenue -- 1,797,893
----- -----------
Operating Expenses:
Salaries and commissions -- $ 1,772,761
General and Administrative -- 216,401
Advertising -- 9,462
Rent -- 71,725
Depreciation and amortization -- 3,340
Brokerage Fees -- 788
----- -----------
Total operating
expenses -- 2,074,477
----- -----------
----- -----------
Gain/(loss) from discontinued operations -- (276,584)
----- -----------
Other Income (Expense) -- 23
Net (loss) $ -- $ (276,561)
===== ===========
Page 10
6. DEBT
The Company is in default on substantially all of its debt.
On December 26, 2001, the Company closed a $7.0 million financing (the "Loan")
with Wachovia. The Loan consisted of a $5.0 million term loan ("Term Loan") and
a $2.0 million revolving letter of credit ("Revolving Credit Loan"). On November
27, 2002, the Company and Wachovia entered into a forbearance agreement (the
"Forbearance Agreement") whereby Wachovia agreed to forbear from acting on
certain defaults of financial covenants by the Company under the Revolving
Credit Loan and under the Term Loan. Wachovia extended the due date of the Loan
to November 1, 2003 (the "Maturity Date") and a result of several amendments,
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.
On October 30, 2001, the Company borrowed $1,000,000 from Rappaport pursuant to
a written note without collateral and without stated interest (the "Rappaport
Loan"). The Rappaport Loan was due and payable on October 30, 2002.
Additionally, the Rappaport Loan provided that: Rappaport receive 100,000 shares
of Rule 144 restricted shares of common stock of the Company upon the funding of
the Loan, subject to adjustment so that the value of the 100,000 shares was
$300,000 when the Rule 144 restrictions were removed; there was a penalty of
50,000 shares to be issued to Rappaport if the Rappaport Loan was not paid when
due and an additional penalty of 10,000 shares per month thereafter until the
Rappaport Loan was paid in full. On December 26, 2001, Rappaport subordinated
the Rappaport Loan to the $7,000,000 being loaned to the Company by Wachovia. In
consideration of the subordination, the Rappaport Loan was modified by
increasing the 10,000 shares penalty to 15,000 shares per month and by agreeing
to issue 50,000 additional shares to Rappaport if the Rappaport Loan was not
paid in full by March 31, 2002, subject to adjustment so that the value of the
shares issued was $150,000 when the Rule 144 restrictions were removed. By
September 30, 2004, Rappaport had received a total of 1,240,298 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 agreements with Wachovia, Travelers or Rappaport, or its
agreements with other lenders, and such lenders elected to pursue their
available remedies, the Company's operations and liquidity would be materially
adversely affected and the Company could be forced to cease operations.
Page 11
7. STOCK - BASED COMPENSATION
The Company has established various stock - based compensation plans for its
officers, directors, key employees and consultants. See the 2004 10-K for a
description of the Company's stock-based compensation plans.
Stock option activity during the three months ended September 30, 2004 was as
follows:
Outstanding June 30, 2004 2,177,566
Grants 0
Canceled 0
Expired 0
Exercised 0
---------
Outstanding - September 30, 2004 2,177,566
Exercisable - September 30, 2004 1,822,566
8. SEGMENTS OF BUSINESS
As a result of the Company's recent restructuring, management believes the
Company operates as one segment.
9. RELATED PARTY TRANSACTIONS
In September 2004, Prime Partners, Inc. of New York, of which Michael Ryan, the
Company's Chief Executive Officer is a major shareholder, and James Ciocia, a
Director of the Company, provided short term loans to the Company in the
aggregate amount of $375,000 for working capital purposes. These loans pay 10%
interest per annum.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Form 10-Q and the exhibits hereto may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). Such statements are based upon current
information, expectations, estimates and projections regarding Gilman + Ciocia,
Inc. (the "Company"), the industries and markets in which the Company operates,
and management's assumptions and beliefs relating thereto. Words such as "will,"
"plan," "expect," "remain," "intend," "estimate," "approximate," and variations
thereof and similar expressions are intended to identify such forward-looking
statements. These statements speak only as of the date on which they are made,
are not guarantees of future performance, and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results could materially differ from what is expressed, implied or
forecast in such forward-looking statements. Such differences could be caused by
a number of factors including, but not limited to, the uncertainty of laws,
legislation, regulations, supervision and licensing by federal, state and local
authorities and their impact on the lines of business in which the Company and
its subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; changes in competition and the effects of
such changes; the inability to implement the Company's strategies; changes in
management and management strategies; the Company's inability to successfully
design, create, modify and operate its computer systems and networks; litigation
involving the Company and risks described from time to time in reports and
registration statements filed by the Company and its subsidiaries with the
Securities and Exchange Commission (the "SEC"). Readers should take these
factors into account in evaluating any such forward-looking statements. The
Company undertakes no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
The Company, together with its wholly owned subsidiaries, provides federal,
state and local tax preparation services to individuals, predominantly in the
middle and upper income tax brackets and financial planning services, including
securities brokerage, insurance and mortgage agency services.
Page 12
The Company's financial planning clients generally are introduced to the Company
through the Company's tax preparation services. The Company believes that its
tax return preparation business is inextricably intertwined with, and is a
necessary adjunct to, its financial planning activities. Future profitability
will come from the two channels leveraging off each other, improving client base
growth and retention.
All of the Company's financial planners are employees or independent contractors
of the Company and registered representatives of Prime Capital Services, Inc.
("PCS"), a wholly owned subsidiary of the Company. PCS conducts a securities
brokerage business providing regulatory oversight and products and sales support
to its registered representatives, who provide investment products and services
to their clients. PCS earns a share of commissions from the services that the
financial planners provide to their clients in transactions for securities,
insurance and related products. PCS is a registered securities broker-dealer
with the SEC and a member of the National Association of Securities Dealers,
Inc.
A majority of the Company's financial planners are also tax preparers. The
Company's tax preparation business is conducted predominantly in the months of
February, March and April. During the tax season, the Company significantly
increases the number of employees involved in tax preparation. During the 2004
tax season, the Company prepared approximately 29,000 United States tax returns.
Almost all of the financial planners are also authorized agents of insurance
underwriters. The Company is also a licensed mortgage broker. As a result, the
Company also earns revenues from commissions for acting as an insurance agent
and a mortgage broker. The Company has the capability of processing insurance
business through Prime Financial Services, Inc., its wholly owned subsidiary,
which is a licensed insurance broker, and through other licensed insurance
brokers.
In Fiscal 2004, approximately 89% of the Company's revenues were derived from
commissions on financial planning services and approximately 11% were derived
from fees for tax preparation services. For the three months ended September 30,
2004, 96% of the Company's revenues were earned from all financial planning and
related services (with 90% from mutual funds, annuities and securities
transactions and 10% from insurance, mortgage brokerage and other related
services), and 4% were earned from tax preparation services.
During the three months ended September 30, 2004, the Company incurred a net
loss of $($1,223,708) and at September 30, 2004 had a working capital deficit of
$(14,387,068). At September 30, 2004 the Company had $675,838 of cash and cash
equivalents and $3,311,067 of trade accounts receivables, net, to fund
short-term working capital requirements.
The Company believes that it has completed the necessary steps to meet its cash
flow requirements for the years ending June 30, 2005 and 2006. See Note 1(d) of
Notes to Consolidated Financial Statements included in the 2004 10-K for a
complete discussion of the Company's liquidity and cash flow and Note 7 of Notes
to Consolidated Financial Statements included in the 2004 10-K for a complete
discussion of the Company's debt.
If the Company does not comply with the financial covenants and other
obligations in its loan agreements with Wachovia, Travelers or Rappaport, and
such lenders elected to pursue their available remedies, the Company's
operations and liquidity would be materially adversely affected and the Company
could be forced to cease operations.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2003.
Except as noted, the numbers and explanations presented below represent results
from continuing operations only.
The Company's revenues for the three months ended September 30, 2004 were
$12,657,000 compared to $13,549,000 for the three months ended September 30,
2003, a decrease of $891,000 or 6.6%. Of the total decrease, $943,000 was
attributable to a decrease in the Company's financial planning business
partially offset by an increase in the Company's tax preparation fees of
$51,000. Approximately 50% of the Company owned offices are located in Florida.
During the quarter ended September 30, 2004, sales in these offices were
substantially affected by the extraordinary hurricane activity.
The Company's total revenues for the three months ended September 30, 2004
consisted of $12,140,000 for financial planning services and $517,000 for tax
Page 13
preparation fees. Financial planning services represented 96% and tax
preparation fees represented 4% of the Company's total revenues during the three
months ended September 30, 2004. The Company's total revenues for the three
months ended September 30, 2003 consisted of $13,083,000 for financial planning
services and $465,000 for tax preparation fees. Financial planning services
represented 97% and tax preparation fees represented 3% of the Company's total
revenues during the three months ended September 30, 2003.
The Company's commission expense for the three months ended September 30, 2004
was $8,103,000, an increase of $218,000 or 2.8% from $7,884,000 for the quarter
ended September 30, 2003. This increase is attributable to a higher percentage
of the Company's revenue being derived from its independent sales force.
The Company's operating expenses for the three months ended September 30, 2004
were $5,685,000 or 44.9% of revenues, a decrease of $77,000 or 1.3%, compared to
$5,762,000 or 42.5% of revenues for the three months ended September 30, 2003.
The dollar decrease in operating expenses was attributable to an increase in
advertising of $248,000 and general and administrative expenses of $165,000,
offset by decreases of $360,000 in salaries, $74,000 in rent, $11,000 in
brokerage fees and licenses and $44,000 in depreciation and amortization.
General and administrative expenses increased $165,000 or 9.9% in the three
months ended September 30, 2004 to $1,798,000 from $1,672,000 during the three
months ended September 30, 2003. This increase is primarily attributable to an
increase in professional fees and insurance expense offset by reduced computer
and telephone expenses.
Advertising expenses increased $248,000 in the three months ended September 30,
2004 to $258,000 from $9,000 during the three months ended September 30, 2003.
This increase is primarily attributable to the increase in print ad campaigns to
build brand equity and awareness.
Brokerage fees and licenses expenses decreased $11,000 or 3.6% in the three
months ended September 30, 2004 to $315,000 from $327,000 during the three
months ended September 30, 2003. This decrease is primarily attributable to
decreased revenues.
Rent expense decreased $74,000 or 13.7% in the three months ended September 30,
2004 to $463,000 from $537,000 during the three months ended September 30, 2003.
This decrease is primarily attributable to the termination of leases associated
with closed or merged offices.
Depreciation and amortization expense decreased $44,000 or 12.6% in the three
months ended September 30, 2004 to $310,000 from $355,000 during the three
months ended September 30, 2003. This decrease is primarily attributable to
lower fixed assets and intangible balances as a result of reduced capital
spending and assets reaching full depreciable lives.
The Company's loss from continuing operations before other income and expense
for the three months ended September 30, 2004 was $(1,131,000) as compared to
$(97,000) for the three months ended September 30, 2003, an increased loss of
$1,033,000. This increased loss was attributable to reduced revenues from
financial planning services and higher commission, general and administrative
and advertising expense as described above.
The Company's net loss from continuing operations before income taxes for the
three months ended September 30, 2004 was $(1,223,000) compared to a loss of
$(326,000) for the three months ended September 30, 2003. This increased loss
was attributable to the increased losses from operations of $1,033,000
highlighted above, and offset by a decrease of $41,000 in interest expense and
increases of $33,000 and $61,000, respectively, in interest and investment
income and other income, net.
The Company had a gain from discontinued operations for the three months ended
September 30, 2004 of $0 compared to $520,000 for the three months ended
September 30, 2003.
RESTATEMENTS
The financial statements for the three years ended June 30, 2003 have been
restated to correct a timing error in the recording of receivables and the
related accrual for commission liabilities relating to asset management
services. In January 2004, subsequent to the filing of the Form 10-K for the
year ended June 30, 2003, management discovered and informed the auditors that
revenues and related commission expenses for asset management services, billed
and incurred in the quarter ended September 30, 2003 for services to be rendered
in that quarter, had been recorded as of June 30, 2003. Further, it was
ascertained that this error in revenue and expense recognition had been
occurring since the 1999 acquisition of Asset and Financial Planning Ltd. and
Page 14
had gone undetected for four years. The receivables and commissions originally
prematurely recorded at each quarter end were received and paid by the Company
during the subsequent quarter.
The financial statements for the three years ended June 30, 2003 have been
restated to correct this error. As a result of the restatement, receivables as
of June 30, 2003 have been reduced by $1,114,725 and commission liabilities have
been reduced by $923,658. Shareholder deficit increased by $191,067. Revenues
for the year ended June 30, 2003 increased by $60,009 and commission expense for
the years ended June 30, 2003 increased by $28,765. Losses for the year ended
June 30, 2003 decreased by $31,334.
As the error applied to both the beginning and ending balances of each quarter,
the effect on any individual quarter filing on Form 10-Q was immaterial.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues have been, and are expected to continue to be,
significantly seasonal. As a result, the Company must generate sufficient cash
during the tax season to fund any operating cash flow deficits in the first half
of the following fiscal year. Operations during the non-tax season are primarily
focused on financial planning services along with some ongoing accounting and
corporate tax revenue. Since its inception, the Company has utilized funds from
operations and borrowings to support operations and finance working capital
requirements. As of September 30, 2004 the Company had $675,838 in cash and cash
equivalents and $600,400 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 one or $100,000
and $25,000, respectively. At September 30, 2004, the Company was in compliance
with this regulation.
During the three months ended September 30, 2004, the Company incurred a net
loss of $($1,223,708) and at September 30, 2004 had a working capital deficit
position of $(14,387,068). At September 30, 2004 the Company had $675,838 of
cash and cash equivalents and $3,311,067 of trade accounts receivables to fund
short-term working capital requirements.
The Company believes that it has been able to complete the necessary steps in
order to meet its cash flow requirements throughout Fiscal 2005 and 2006, though
due to the seasonality of the Company's business the Company may at times employ
short term financing.
The Company's cash flow provided by or used in operating activities totaled
$78,000 and $(463,000) for the three months ended September, 2004 and 2003,
respectively. The increase in cash flows used in operating activities is due to
decreased net income, decreased marketable securities and other current assets,
offset by a decrease in gain on sale. For the three months ended September 30,
2003, the Company recognized gain on the sale of offices to Pinnacle and others.
Net cash provided by investing activities totaled $266,000 for the three months
ended September 30, 2004, as compared to $800,000 for the three months ended
September 30, 2003. September 30, 2004 net cash included the proceeds from a
real property sale of $293,000. The September 30, 2003 net cash of $800,000 is
primarily due to the sale of discontinued operations.
Net cash used in financing activities totaled $167,000 for the three months
ended September 30, 2004, as compared to $373,000 for the three months ended
September 30, 2003. The decrease in cash used in financing activities of
$206,000 is attributable to a decrease in proceeds from bank and other loans,
and the decrease in payouts of bank and capital lease obligations of $552,000.
Prime Partners, Inc. of New York (previously known as Prime Financial Services,
Inc., New York) ("Prime Partners") has made various loans to the Company at an
interest rate of 10%. On September 30, 2004 the Company owed Prime Partners
$376,149. Michael Ryan, the Company's Chief Executive Officer and President, is
one of the major shareholders of Prime Partners.
The Company believes that it has completed the necessary steps to meet its cash
flow requirements for the years ending June 30, 2005 and 2006. See Note 1(d) of
Notes to Consolidated Financial Statements included in the 2004 10-K for a
complete discussion of the Company's liquidity and cash flow and Note 7 of Notes
to Consolidated Financial Statements included in the 2004 10-K for a complete
discussion of the Company's debt.
If the Company does not comply with the financial covenants and other
obligations in its loan agreements with Wachovia, Travelers or Rappaport, and
such lenders elected to pursue their available remedies, the Company's
operations and liquidity would be materially adversely affected and the Company
could be forced to cease operations
Page 15
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to September 30, 2004 and thereafter. The amounts represent the
maximum future cash contractual obligations.
Contractual Obligation and Commercial Commitments
2006 to 2008 to After
Contractual Obligations Total 2005 2007 2009 2010
----------- ----------- ---------- -------- --------
Debt $ 9,358,115 $ 9,248,595 $ 38,326 $ 41,932 $ 29,262
Operating Leases 5,705,400 2,583,608 2,208,477 563,338 349,977
Capital Leases 246,133 152,237 79,819 14,077 --
----------- ----------- ---------- -------- --------
Total contractual cash obligations $15,309,648 $11,984,440 $2,326,623 $619,347 $379,239
=========== =========== ========== ======== ========
In connection with the sale of offices to Pinnacle, all operating leases
associated with the sold offices were assigned to Pinnacle, but the Company
remains liable on the leases. Aggregate operating lease commitment amounts
included in the table above with respect to the leases assigned to Pinnacle in
November 2002 are $943,415, $395,113, $152,789, and $27,102 for the fiscal years
ending June 30, 2005, 2006, 2007 and 2008, respectively. See Note 5 of Notes to
the Consolidated Financial Statements in the 2004 10-K for a complete discussion
of the sale to Pinnacle.
The Company is also contractually obligated to certain employees and executives
pursuant to commission agreements and compensation agreements.
MARKET FOR COMPANY'S COMMON EQUITY
The shares of the Company's common stock were delisted from the NASDAQ National
Market in August 2002 and are now traded on what is commonly referred to as the
"pink sheets". As a result, an investor may find it more difficult to dispose of
or obtain accurate quotations as to the market value of the securities. In
addition, the Company is now subject to Rule 15c2-11 promulgated by the SEC. If
the Company fails to meet criteria set forth in such Rule (for example, by
failing to file periodic reports as required by the Exchange Act), various
practice requirements are imposed on broker-dealers who sell securities governed
by the Rule to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
Rule may have a materially adverse effect on the ability of broker-dealers to
sell the Company's securities, which may materially affect the ability of
shareholders to sell the securities in the secondary market.
The delisting could make trading the Company's shares more difficult for
investors, potentially leading to further declines in the share price. It would
also make it more difficult for the Company to raise additional capital. The
Company will also incur additional costs under state blue-sky laws if we sell
equity due to our delisting.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 2004 and 2003, inflation has not
had a significant effect on the Company's results of operations.
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 16
Certain of the Company's accounting policies require higher degrees of judgment
than others in their application.
Impairment of intangible assets results in a charge to operations whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of an asset to be held and used is
measured by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The
measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows. The
Company tests goodwill for impairment annually or more frequently whenever
events occur or circumstances change, which would more likely than not reduce
the fair value of a reporting unit below its carrying amount. The measurement of
fair value in lieu of a public market for such assets or a willing unrelated
buyer relies on management's reasonable estimate of what a willing buyer would
pay for such assets. Management's estimate is based on its knowledge of the
industry, what similar assets have been valued at in sales transactions and
current market conditions.
The Company recognizes all revenues associated with income tax preparation,
accounting services and asset management fees upon completion of the services.
Financial planning services include securities and other transactions. The
related commission revenue and expenses are recognized on a trade date basis.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. These policies require
difficult judgments on complex matters that are often subject to multiple
sources of authoritative guidance. Certain of these matters are among topics
currently under reexamination by accounting standards setters and regulators.
Although no specific conclusions reached by these standard setters appear likely
to cause a material change in the Company's accounting policies, outcomes cannot
be predicted with confidence.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To date, the Company's exposure to market risk has been limited and it is not
currently hedging any market risk, although it may do so in the future. The
Company does not hold or issue any derivative financial instruments for trading
or other speculative purposes. The Company is exposed to market risk associated
with changes in the fair market value of the marketable securities that it
holds. The Company's revenue and profitability may be adversely affected by
declines in the volume of securities transactions and in market liquidity, which
generally result in lower revenues from trading activities and commissions.
Lower securities price levels may also result in a reduced volume of
transactions, as well as losses from declines in the market value of securities
held by the Company in trading and investment. Sudden sharp declines in market
values of securities and the failure of issuers and counterparts to perform
their obligations can result in illiquid markets in which the Company may incur
losses in its principal trading activities.
The Company's obligations under its Wachovia and Travelers credit facilities
bear interest at floating rates and therefore, the Company is impacted by
changes in prevailing interest rates.
ITEM 4. CONTROLS AND PROCEDURES.
In performing its audit of our Consolidated Financial Statements for Fiscal
2004, our independent auditors, Radin Glass, notified our Board of Directors of
several reportable conditions in internal controls under standards established
by the American Institute of Certified Public Accountants. Reportable conditions
involve matters coming to the attention of our auditors relating to significant
deficiencies in the design or operation of internal controls that, in their
judgment, could adversely affect our ability to record, process, summarize, and
report financial data consistent with the assertions of management in the
consolidated financial statements. Radin Glass stated that while none of the
items identified by them individually are individually a material weakness, the
combined effect of these issues and the inability to produce timely accurate
financial statements is a material weakness.
Page 17
Although Radin Glass noted significant improvements in the structure of the
accounting department, and designed its audit procedures to address the matters
described below in order to obtain reasonable assurance that the financial
statements are free of material misstatement and to issue an unqualified audit
report, certain of the internal control deficiencies noted by Radin Glass had
been noted in their internal control letter regarding fiscal 2003. The Company
has assigned a high priority to the remediation of the reportable conditions,
has hired a new general counsel, is seeking additional independent directors,
intends to hire additional staff in the finance department and will implement
enhanced procedures to accelerate improvement of the internal controls.
These significant deficiencies in the design and operation of our internal
controls include the needs to hire additional staffing and change the structure
of the finance/accounting department, to provide better coordination and
communication between the legal and finance/accounting departments and to
provide training to existing and new personnel in SEC reporting requirements;
the lack of integration of the general ledger system with other recordkeeping
systems, and the need for formal control systems for journal entries and closing
procedures; the need to document internal controls over financial reporting; the
needs to form an independent audit committee, to form an internal audit
department and to implement budget and reporting procedures; and the need to
provide internal review procedures for schedules, SEC reports and filings prior
to submission to the auditors and/or filing with the SEC.
A material weakness is defined as a reportable condition in which the design or
operation of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements caused by error or fraud in
amounts that would be material in relation to the financial statements being
audited may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. While the Company did
implement specific changes in our internal controls during the fourth quarter of
Fiscal 2004, such as improvement in recording commissions earned and tax return
billings, and regulatory filings are now being filed within the prescribed due
dates, such improvements were partially offset by declines in other areas.
The Company's senior management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 13a-15 and
15d-15 under the Exchange Act designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including its principal executive officer or officers and
principal financial officers to allow timely decisions regarding required
disclosure.
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.
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"),
and newly enacted SEC regulations have created additional compliance
requirements for companies such as ours. We are committed to maintaining high
standards of internal controls over financial reporting, corporate governance
and public disclosure. As a result, we intend to invest appropriate resources to
comply with evolving standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities. In
particular, a great deal of management time and attention will be required to
comply on a timely basis with the internal control requirements of Section 404
of Sarbanes-Oxley, and without significant additional staff or resources it will
be difficult to achieve timely compliance.
Page 18
Except as described above, no change occurred in the Company's internal controls
concerning financial reporting during the quarter ended September 30, 2004 that
has materially affected or is reasonably likely to materially affect the
Company's internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Litigation
The Company and PCS are defendants and respondents in lawsuits and NASD
arbitrations in the ordinary course of business. On September 30, 2004, there
were 35 pending lawsuits and arbitrations, of which 20 were against PCS and/or
its registered representatives. Management accrued $894,222 as a reserve for
potential settlements, judgments and awards. PCS has errors & omissions coverage
that will cover a portion of such matters. In addition, under the PCS registered
representatives contract, each registered representative is responsible for
covering costs in connection with these claims. The Company does not believe
that these lawsuits and arbitrations will have a material effect on its
consolidated financial position.
On February 4, 2004, the Company was served with a Summons and a Shareholder's
Class Action and Derivative Complaint with the following caption: "Gary Kosseff,
Plaintiff, against James Ciocia, Thomas Povinelli, Michael P. Ryan, Kathryn
Travis, Seth A. Akabas, Louis P. Karol, Edward H. Cohen, Steven Gilbert and
Doreen Biebusch, Defendants and Gilman & Ciocia, Inc., Nominal Defendant". The
action was filed in the Court of Chancery of the State of Delaware in and for
New Castle County under Civil Action No. 188-N. The Company believes that the
allegations contained in the lawsuit are without merit and the Company intends
to contest the lawsuit vigorously. The nature of the action is that the Company,
its Board of Directors and its management, breached their fiduciary duty of
loyalty in connection with the sale of the offices to Pinnacle. The action
alleges that the sale to Pinnacle was for inadequate consideration and without a
fairness opinion by independent financial advisors, without independent legal
advice and without a thorough evaluation and vote by an independent committee of
the Board of Directors. The action prays for the following relief: a declaration
that the Company, its Board of Directors and its management breached their
fiduciary duty and other duties to the plaintiff and to the other members of the
purported class; a rescission of the Asset Purchase Agreement; unspecified
monetary damages; and an award to the plaintiff of costs and disbursements,
including reasonable legal, expert and accountants fees. On March 15, 2004,
counsel for the Company and for all defendants filed a motion to dismiss the
lawsuit. On June 18, 2004, counsel for the plaintiff filed an Amended Complaint.
On July 12, 2004, counsel for the Company and for all defendants filed a motion
to dismiss the Amended Complaint. On October 27, 2004, counsel for the plaintiff
filed a memorandum of law in opposition to defendant's motion to dismiss the
Amended Complaint.
SEC Investigation
The Company is the subject of a formal investigation by the SEC. The
investigation concerns, among other things, the restatement of the Company's
financial results for the fiscal year ended June 30, 2001 and the fiscal
quarters ended March 31, 2001 and December 31, 2001 (which have been previously
disclosed in the Company's amended quarterly and annual reports for such
periods), the Company's delay in filing its Form 10-K for Fiscal 2002 and 2003,
the Company's delay in filing its 10-Q for the quarter ended September 30, 2002
and the Company's past accounting and recordkeeping practices. The Company had
previously received informal, non-public inquiries from the SEC regarding
certain of these matters. The Company and its executives have complied fully
with the SEC's investigation and will continue to comply fully. The Company does
not believe that the investigation will have a material effect on its
consolidated financial position.
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 10KA for fiscal 2003 filed in February 2004 included
unaudited financial statements for fiscal years 2002 and 2001 and the Company's
Form 10-K for fiscal 2004 filed in October 2004 included unaudited financial
statements for fiscal year 2002. This was due to the refusal of Grant Thornton,
the Company's prior auditors, to consent to the inclusion in the Form 10KA for
fiscal 2003 and the Form 10-K for fiscal 2004 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
Page 19
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 placements of its securities under Rules 505 and 506 of
Regulation D except for placements exclusively to accredited investors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 19, 2004, the Company issued 45,000 shares of common stock to
Rappaport Gamma LP ("Rappaport") pursuant to Section 4(2) of the Securities Act.
The shares were issued as part of a penalty for nonpayment on a loan by
Rappaport to the Company, and the Company received no proceeds in connection
therewith.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 9 of Notes to Consolidated Financial Statements in the 2004 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its last meeting of shareholders on December 14, 2001.
ITEM 5. OTHER INFORMATION
On or about October 21, 2004, the Company's broker-dealer subsidiary, PCS,
received a letter from the Boston District Office of the NASD (the "Office")
with respect to the Office's 2002 and 2003 examinations of PCS. The letter
stated that with respect to the periods examined the Office had found that PCS
had failed to fully comply with certain NASD Conduct Rules. PCS is in the
process of conducting a review of the letter and its findings. PCS cannot
predict at this time what actions, if any, the Office may take in connection
with the letter, though such actions could include a variety of penalties,
including monetary penalties.
Item 6. EXHIBITS
(a) Exhibits:
10.1 Employment Agreement of Ted H. Finkelstein dated October 11, 2004.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Accounting Officer.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley of Act of 2002.
32.2 Certification of Chief Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley of Act of 2002.
(b) Reports on Form 8-K
None
Page 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GILMAN + CIOCIA, INC.
Dated: November 15, 2004 By /s/ Michael P. Ryan
Chief Executive Officer
Dated: November 15, 2004 By /s/ Dennis Conroy
Chief Accounting Officer
Page 21