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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 March 31, 2005
Commission File Number 000-22996
GILMAN + CIOCIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2587324
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK 12603
(Address of principal executive offices)(Zip code)
(845)486-0900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
As of May 20, 2005, 9,095,473 shares of the issuer's common stock, $0.01 par
value, were outstanding.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of March 31, 2005
and June 30, 2004 3
Consolidated Statements of Operations for the Three Months and
Nine Months Ended March 31, 2005 and March 31, 2004 4
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2005 and March 31, 2004 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 18
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
-2-
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Balance Sheet
March 31, 2005 June 30, 2004
-------------- -------------
(UnAudited) Audited
Assets
Cash & Cash Equivalents $ 885,054 $ 498,545
Marketable Securities 912,353 1,184,907
Trade Accounts Receivable, Net 4,685,372 3,678,204
Receivables from Officers, Shareholders
and Employees, net 123,519 138,564
Due From Office Sales - Current 137,860 287,325
Prepaid Insurance 764,486 365,117
Deferred Expenses 386,191 --
------------ ------------
Total Current Assets 7,894,835 6,152,662
Fixed Assets, Net 1,204,604 1,616,661
Goodwill 3,711,116 3,837,087
Intangible Assets, Net 5,416,507 5,631,123
Due from Office Sales - Non Current 1,092,760 1,181,128
Other Assets 504,294 508,919
------------ ------------
Total Assets $ 19,824,116 $ 18,927,580
============ ============
Liabilities and Shareholders' Equity (Deficit)
Accounts Payable and Accrued Expenses $ 11,373,148 $ 10,153,940
Current Portion of Notes Payable & Capital Leases 8,618,956 9,113,793
Deferred Income 250,000 221,537
Due to Related Parties 959,777 445,000
------------ ------------
Total Current Liabilities 21,201,881 19,934,270
Long Term Portion of Notes Payable and Capital Leases 331,464 212,248
------------ ------------
Total Liabilities $ 21,533,345 $ 20,146,518
Shareholders' Equity (Deficit)
Preferred Stock, $0.001 par value; 100,000 shares authorized; no
shares issued and outstanding at March 31, 2005 and June 30, 2004, respectively $ -- $ --
Common Stock, $0.01 par value 20,000,000 shares authorized; 10,377,276
and 10,219,561 shares issued at March 31,2005 and June 30, 2004, respectively 103,772 102,195
Additional Paid in Capital 29,943,469 29,897,210
Treasury Stock 1,326,838 and 1,326,838 shares of common stock,
at March 31, 2005 and June 30, 2004, respectively, at cost (1,306,288) (1,306,288)
Retained Deficit (30,450,182) (29,912,055)
------------ ------------
Total Shareholders' Equity (Deficit) $ (1,709,229) $ (1,218,938)
------------ ------------
Total Liabilities & Shareholders' Equity (Deficit) $ 19,824,116 $ 18,927,580
============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements
-3-
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended For the Nine Months Ended
March 31 March 31
------------------------------- -------------------------------
2005 2004 2005 2004
(UnAudited) (UnAudited) (UnAudited) (UnAudited)
Revenues:
Financial Planning Services $ 12,264,521 $ 14,090,700 $ 37,339,033 $ 40,044,234
Tax Preparation Fees 3,973,725 4,165,396 4,927,716 5,034,636
------------ ------------ ------------ ------------
Total Revenues 16,238,246 18,256,096 42,266,749 45,078,870
Cost of Sales/ Commissions 8,464,719 9,157,796 24,775,008 25,366,191
------------ ------------ ------------ ------------
Gross Profit: 7,773,527 9,098,300 17,491,741 19,712,679
Operating Expenses:
Salaries 2,797,686 3,070,430 7,853,651 8,966,074
General & Administrative 2,121,023 2,184,517 5,304,920 5,560,858
Advertising 932,911 685,924 1,314,920 876,904
Brokerage Fees & Licenses 258,063 343,777 815,530 1,198,618
Rent 503,175 506,144 1,393,077 1,528,859
Depreciation & Amortization 299,768 343,707 911,793 1,069,898
------------ ------------ ------------ ------------
Total Operating Expenses 6,912,626 7,134,499 17,593,891 19,201,211
------------ ------------ ------------ ------------
Income (Loss) From 860,901 1,963,801 (102,150) 511,468
Continuing Operations Before Other ------------ ------------ ------------ ------------
Income and Expenses
Other Income (Expenses):
Interest and Investment Income 11,565 550 68,720 28,626
Interest Expense (218,784) (372,225) (642,587) (822,280)
Other Income (Expense), Net 64,484 -- 138,090 81,443
------------ ------------ ------------ ------------
Total Other Income (Expense) (142,735) (371,675) (435,777) (712,211)
------------ ------------ ------------ ------------
Income (Loss) From Continuing Operations 718,166 1,592,126 (537,927) (200,743)
Before Income Taxes ------------ ------------ ------------ ------------
Income Taxes (Benefit) -- -- -- --
------------ ------------ ------------ ------------
Income (Loss) From Continuing Operations 718,166 1,592,126 (537,927) (200,743)
------------ ------------ ------------ ------------
Discontinued Operations:
Income (Loss) From Discontinued Operations -- 10,344 -- (61,062)
Gain (Loss) On Disposal Of
Discontinued Operations -- -- -- 5,187,711
Income Taxes (Benefit) -- -- -- (121,359)
------------ ------------ ------------ ------------
Income (Loss) From Discontinued Operations -- 10,344 -- 5,005,290
------------ ------------ ------------ ------------
Net Income (Loss) $ 718,166 $ 1,602,470 $ (537,927) $ 4,804,547
============ ============ ============ ============
Net Income (Loss) per share of common stock:
Basic Net Income (Loss):
Income (Loss) From Continuing Operations $ 0.08 $ 0.18 $ (0.06) $ (0.02)
Income (Loss) From Discontinued Operations $ -- $ -- $ -- $ 0.53
Net Income (Loss) $ 0.08 $ 0.18 $ (0.06) $ 0.51
Diluted Net Income (Loss):
Income (Loss) From Continuing Operations $ 0.08 $ 0.14 $ (0.06) $ (0.02)
Income (Loss) From Discontinued Operations $ -- $ -- $ -- $ 0.49
Net Income (Loss) $ 0.08 $ 0.14 $ (0.06) $ 0.47
Weighted Average Number of Shares Outstanding:
Basic 9,023,877 8,832,724 8,990,055 9,370,918
Diluted 9,023,877 11,345,193 8,990,055 10,202,316
The accompanying notes are an integral part of these Consolidated Financial
Statements
-4-
Gilman & Ciocia, Inc. And Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended For the Nine Months Ended
March 31, 2005 March 31, 2004
------------------------- -------------------------
(UnAudited) (UnAudited)
Cash Flows From Operating Activities:
Net (Loss) / Income: $ (537,927) $ 4,804,547
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 796,619 907,334
Issuance of common stock for debt default penalties and interest 47,837 36,000
Amortization of debt discount 115,174 162,564
(Gain) Loss on sale of discontinued operations -- (5,005,290)
(Gain) Loss on sale of equipment and properties (31,182)
Unrealized (Gain)/Loss on securities held for trading (51,321) (35,437)
Bad Debt Expense 462 541,488
Changes in assets and liabilities:
Accounts receivable, Net (1,007,168) (385,503)
Change in AR from Others 237,833 140,937
Increase in Prepaid Insurance (399,369) (85,129)
Increase in Deferred Expenses (386,191) --
Change in marketable securities 272,554 (809,549)
Receivables from officers, shareholders and employees 15,045 423,451
Other Assets 4,625 250,169
Accounts Payable and accrued expenses 1,219,206 (937,338)
Deferred Income 28,463 119,400
Net change in assets related to discontinued operations -- 50,963
Decrease in Other liabilities -- (11,000)
--------------- ---------------
Net cash provided by (used in) operating activities 324,660 167,607
Cash Flows from investing activities:
Capital Expenditures (259,334) (172,983)
Cash paid for acquisitions, net of cash acquired (111,725) (146,818)
Proceeds from sale of discontinued operations -- 4,614,138
Proceeds from the sale of property and equipment 293,750 --
--------------- ---------------
Net cash Provide by (used in) investing activities (77,309) 4,294,337
Cash Flows from Financing Activities:
Acquisition of treasury stock -- (230,695)
Cancel Note with stock -- 105,000
Proceeds from bank and other loans 514,777 583,486
Payments of bank loans and capital lease obligations (375,619) (4,852,678)
--------------- ---------------
Net cash Provided by (used in) Financing Activities 139,158 (4,394,887)
Net change in cash and cash equivalents 386,509 67,057
Cash and cash equivalents at beginning of period 498,545 955,097
--------------- ---------------
Cash and cash equivalents at end of period $ 885,054 $ 1,022,154
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 131,732 $ 176,657
=============== ===============
Supplemental Disclosure of Non-Cash Transactions:
Equipment acquired under capital leases $ 238,103 $ 135,000
=============== ===============
The accompanying notes are an integral part of these Consolidated Financial
Statements
-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
nine months ended March 31, 2005, approximately 88% of the Company's revenues
were derived from financial planning services. As of March 31, 2005, the Company
had 34 offices operating in five states (New York, New Jersey, Connecticut,
Florida and Colorado). The Company's Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K can be obtained, free of
charge, on the Company's web site at www.gilcio.com.
As a result of a number of defaults under its agreements with Wachovia Bank,
National Association ("Wachovia"), on November 27, 2002 the Company entered into
a debt forbearance agreement with Wachovia and subsequently amended the debt
forbearance agreement as of June 18, 2003, March 4, 2004 and March 1, 2005.
Another of 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 with Wachovia (the "Subordination
Agreement"), which restricts the remedies it can pursue against the Company. The
Company's debt to Rappaport Gamma Limited Partnership (the "Rappaport Loan") was
due on October 30, 2002, but remains unpaid. The Rappaport Loan is subordinated
to the Wachovia loan. The Rappaport Loan was sold to a group of Company
management and employees (the "Purchasing Group") on April 29, 2005. The members
of the Purchasing Group include Prime Partners, Inc., a corporation controlled
by Michael P. Ryan, the President and a director of the Company, James Ciocia,
the Chairman of the Company, Christopher Kelly, the General Counsel of the
Company, Kathryn Travis, the Secretary and a director of the Company, Dennis
Conroy, the Chief Accounting Officer of the Company, Ted Finkelstein, the
Assistant General Counsel of the Company, and certain other Company employees.
The Purchasing Group has agreed to reduce the principal balance of the Rappaport
Loan from $1 million to $750,000 and extend the maturity date to April 29, 2009.
Pursuant to the terms of the Rappaport Loan, the Purchasing Group, as holders of
the Rappaport Loan, are entitled to receive, in the aggregate, 15,000 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 March 31, 2005, the
consolidated statements of operations for the nine months ended March 31, 2005
and 2004, and the consolidated statements of cash flows for the nine months
ended March 31, 2005 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 nine months ended March 31, 2005 are not necessarily indicative of the
results to be expected for any other interim period or any future year. These
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K/A for Fiscal 2004 (the "2004 10-K/A").
* Fiscal years are denominated by the year in which they end. Accordingly,
Fiscal 2004 refers to the year ended June 30, 2004.
-6-
(c) Accounting Policies
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles in the United States of America
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The Company's estimates,
judgments and assumptions are continually evaluated based on available
information and experience. Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those estimates.
Certain of the Company's accounting policies require higher degrees of judgment
than others in their application.
Impairment of intangible assets
Impairment of intangible assets results in a charge to operations whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of an asset to be held and used is
measured by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The
measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows. The
Company tests goodwill for impairment annually or more frequently whenever
events occur or circumstances change, which would more likely than not reduce
the fair value of a reporting unit below its carrying amount. The measurement of
fair value, in lieu of a public market for such assets or a willing unrelated
buyer, relies on management's reasonable estimate of what a willing buyer would
pay for such assets. Management's estimate is based on its knowledge of the
industry, what similar assets have been valued at in sales transactions and
current market conditions.
Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting services, and asset management fees upon completion of the services.
Financial planning services include securities and other transactions. The
related commission revenue and expenses are recognized on a trade date basis.
Net Income(Loss)Per Share
In accordance with SFAS No. 128, "Earnings per Share", basic net income (loss)
per share is computed using the weighted-average number of common shares
outstanding during each period. Diluted net income (loss) per share gives effect
to all potentially dilutive securities that were outstanding during each period.
The computation for March 31, 2005 did not include outstanding options and
warrants because to do so would have an antidilutive effect for the periods
presented.
Stock Based Compensation
At March 31, 2005, the Company had various stock-based employee compensation
plans. Prior to 2000, the Company accounted for plans under the recognition and
measurement provisions of 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 immediately to five years. Therefore, the
cost related to stock-based employee compensation included in the determination
of net income for 2003, 2004 and 2005 is less than that which would have been
recognized if the fair value based method had been applied to all awards since
the original effective date of FASB Statement No. 123. The following table
illustrates the effect on net income and earnings per share if the fair value
based method had been applied to all outstanding and unvested awards in each
period.
-7-
For the Three Months Ended For the Nine Months Ended
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net Income (Loss), as reported $ 718,166 $ 1,602,470 $ (537,927) $ 4,804,547
Add: Stock-based employee
compensation expenses included in
reported net income (loss), net of
related tax effects -- -- -- --
Deduct: Total stock-based
compensation expense determined
under fair value based method for
all awards, net of related taxes 10,779 20,101 44,928 76,104
------------- ------------- ------------- -------------
Proforma net income (loss) $ 707,387 $ 1,582,369 $ (582,855) $ 4,728,443
Basic and diluted earnings (loss) per share:
As reported - Basic .08 .18 (.06) .51
Proforma - Basic .08 .18 (.06) .50
As reported - Diluted .08 .14 (.06) .47
Proforma - Diluted .08 .14 (.06) .46
The effects of applying FASB Statement No. 123 in the proforma net income (loss)
disclosures above are not likely to be representative of the effects on proforma
disclosures of future years.
Reclassifications
For comparability, certain prior year amounts have been reclassified to conform
with the 2005 presentation.
Other significant accounting policies
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. These policies require
difficult judgments on complex matters that are often subject to multiple
sources of authoritative guidance. Certain of these matters are among topics
currently under reexamination by accounting standards setters and regulators.
Although no specific conclusions reached by these standard setters appear likely
to cause a material change in the Company's accounting policies, outcomes cannot
be predicted with confidence. Also see Note 1 to Consolidated Financial
Statements included in the 2004 10-K/A, which discusses accounting policies that
must be selected by management when there are acceptable alternatives.
(d) Liquidity and cash flow
During the nine months ended March 31, 2005, the Company incurred a net loss of
$0.5 million and at March 31, 2005 had a working capital deficit position of
$13.3 million. At March 31, 2005 the Company had $0.9 million of cash and cash
equivalents and $4.7 million of trade accounts receivables, net, to fund
short-term working capital requirements.
The Company believes that it has completed the necessary steps to meet its cash
flow requirements throughout Fiscal 2005 and 2006, though due to the seasonality
of the Company's business the Company may at times employ short term financing.
As of March 31, 2005, Prime Partners, Inc. ("Prime Partners"), of which Michael
P. Ryan, the Company's President, is a director, the President and a major
shareholder, provided short-term loans to the Company in the aggregate amount of
$0.7 million for working capital purposes. These loans pay 10% interest per
annum.
2. RECLASSIFICATION FOR DISCONTINUED OPERATIONS
During Fiscal 2003 and Fiscal 2004 the Company sold two subsidiaries and 64 of
its offices, including the sale of 47 offices to Pinnacle Taxx Advisors LLC
("Pinnacle"). In accordance with FASB Statement No. 144 assets and liabilities
associated with these offices have been reclassified and are included on the
accompanying balance sheets as assets of discontinued operations, and the
results of these operations have been reclassified and are separately presented
for all reporting periods as discontinued operations in the accompanying
statements of operations.
-8-
3. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, FASB Interpretation No. 47 "FIN 47" was issued, which clarifies
certain terminology as used in FASB Statement No. 143, Accounting for Asset
Retirement Obligations. In addition, it clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. Early adoption of FIN 47 is encouraged.
Management believes FIN 47 will have no impact on the financial statements of
the Company once adopted.
FASB 153 - Exchanges of Nonmonetary Assets
In December 2004, the FASB issued FASB Statement No. 153. This Statement
addresses the measurement of exchanges of nonmonetary assets. The guidance in
APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this Statement is issued. Management believes
the adoption of this Statement will have no impact on the financial statements
of the Company.
FASB 123 (revised 2004) - Share-Based Payments
In December 2004, the FASB issued a revision to FASB Statement No. 123,
Accounting for Stock Based Compensation. This Statement supercedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
Statement 123 as originally issued and in EITF Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." This Statement does not address
the accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership
Plans.
A nonpublic entity will measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of those instruments, except in certain circumstances.
A public entity will initially measure the cost of employee services received in
exchange for an award of equity instruments based on its current fair value; the
fair value of that award will be re-measured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period. A nonpublic
entity may elect to measure its equity awards at their intrinsic value through
the date of settlement.
The grant-date fair value of employee share options and similar instruments will
be estimated using the option-pricing models adjusted for the unique
characteristics of those instruments (unless observable market prices for the
same or similar instruments are available).
Excess tax benefits, as defined by this Statement, will be recognized as an
addition to paid-in-capital. Cash retained as a result of those excess tax
benefits will be presented in the statement of cash flows as financing cash
inflows. The write-off of deferred tax assets relating to unrealized tax
benefits associated with recognized compensation cost will be recognized as
income tax expense unless there are excess tax benefits from previous awards
remaining in paid-in capital to which it can be offset.
-9-
The notes to the financial statements of both public and nonpublic entities will
disclose information to assist users of financial information to understand the
nature of share-based payment transactions and the effects of those transactions
on the financial statements.
The effective date for public entities that do not file as small business
issuers will be as of the beginning of the first annual reporting period that
begins after June 15, 2005. For public entities that file as small business
issuers and nonpublic entities the effective date will be as of the beginning of
the first annual reporting period that begins after December 15, 2005.
Management intends to comply with this Statement at the scheduled effective date
for the relevant financial statements of the Company.
4. CONTINGENCIES
Litigation
See Item 1. Legal Proceedings of Part II herein.
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 nine months ended March 31, 2004
were as follows:
Nine Months Ended
March 31, 2004
-----------------
Revenues:
Financial planning services $ 3,604,228
Tax preparation fees 16,616
-----------
Total revenues 3,620,844
Cost of Sales: 2,803,690
-----------
Gross Profit 817,154
Operating Expenses:
Salaries and benefits 350,978
General and administrative 363,878
Advertising 6,505
Brokerage fees and licenses 26,301
Rent 124,991
Depreciation and amortization 3,298
-----------
Total operating expenses $ 875,951
Income (loss) from
continuing operations before other
income and expenses $ (58,797)
Other income (expense) $ (2,265)
-----------
Gain (loss) from continuing operations
before income taxes $ (61,062)
-----------
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. Under the Forbearance Agreement and several
amendments thereto, Wachovia deleted several large pre-maturity principal
payments, increased the "Applicable Margin" to 4%, changed the Company's
reporting requirements under the Loan and extended the due date of the Loan (the
"Maturity Date") several times. Pursuant to Amendment No. 3 to the Forbearance
Agreement ("Amendment No. 3"), dated as of March 1, 2005, the amortization
schedule was extended by approximately 16 months and the Maturity Date was
extended to March 10, 2008. Under Amendment No. 3, the Company will pay Wachovia
principal on the Loan of $66,205.42 monthly, plus interest. The Company is in
technical default of several other provisions of the Loan, the Forbearance
Agreement and the amendments to Forbearance Agreement. However, the Company does
not believe that Wachovia will issue a note of default for any of these
technical defaults.
-10-
The Company's $5.0 million credit facility with Travelers closed on November 1,
2000. On September 24, 2002, the Company received a notice from Travelers
alleging that the Company was in default under its debt facility with Travelers
due to nonpayment of a $0.1 million penalty for failure to meet sales production
requirements as specified in the debt facility. The Company responded with a
letter denying that the Company was in default. Although the Traveler's notice
stated that all unpaid interest and principal under the debt facility were
immediately due and payable and that Travelers reserved its rights and remedies
under the debt facility, it also stated that Travelers intended to comply with
the terms of the Subordination Agreement between Travelers and Wachovia. The
Subordination Agreement greatly restricts the remedies that Travelers could
pursue against the Company. No further notices have been received from
Travelers. No payments have been made to Travelers since April, 2003. Pursuant
to the terms of the Subordination Agreement and the Forbearance Agreement, the
Company is not permitted to make payments to Travelers.
On October 30, 2001, the Company borrowed $1.0 million from Rappaport pursuant
to a written note without collateral and without stated interest. The Rappaport
Loan was due and payable on October 30, 2002. Additionally, the Rappaport Loan
provided that: Rappaport receive 100,000 shares of Rule 144 restricted shares of
common stock of the Company upon the funding of the Rappaport Loan, subject to
adjustment so that the value of the 100,000 shares was $300,000 when the Rule
144 restrictions were removed; there was a penalty of 50,000 shares to be issued
to Rappaport if the Rappaport Loan was not paid when due and an additional
penalty of 10,000 shares per month thereafter until the Rappaport Loan was paid
in full. On December 26, 2001, Rappaport agreed to subordinate the Rappaport
Loan to the $7.0 million Wachovia Loan. In consideration of the subordination,
the Rappaport Loan was modified by increasing the 10,000 shares penalty to
15,000 shares per month and by agreeing to issue 50,000 additional shares to
Rappaport if the Rappaport Loan was not paid in full by March 31, 2002, subject
to adjustment so that the value of the shares issued was $150,000 when the Rule
144 restrictions were removed. By March 31, 2005, Rappaport had received a total
of 1,330,298 shares for all interest and penalties. The Rappaport Loan, together
with 785,298 shares of Company common stock held by Rappaport, were sold to a
group of Company management and employees on April 29, 2005. Pursuant to the
terms of the Rappaport Loan, this Purchasing Group, as holders of the Rappaport
Loan, are entitled to receive, in the aggregate, 15,000 shares of the Company's
common stock monthly while the debt remains unpaid. See also Note 1 to Notes to
Consolidated Financial Statements.
If the Company does not comply with the financial covenants and other
obligations in its loan agreements relating to the Wachovia, Travelers or
Rappaport loans, or its agreements with other lenders, and such lenders elected
to pursue their available remedies, the Company's operations and liquidity would
be materially adversely affected and the Company could be forced to cease
operations. The Company has retained a financial advisor to assist the Company
in further discussions with its lenders. The financial advisor was involved in
the Company's discussions with Wachovia that resulted in the Amendment No. 3
described above. There can be no guarantee, however, that the lenders will agree
to terms in the future that are more favorable to the Company than the current
arrangements with the lenders.
7. STOCK BASED COMPENSATION
The Company has established various stock based compensation plans for its
officers, directors, key employees and consultants. See the 2004 10-K/A for a
description of the Company's stock-based compensation plans.
Stock option activity during the nine months ended March 31, 2005, was as
follows:
Outstanding June 30, 2004 2,177,566
Grants 0
Canceled 3,231
Expired 464,385
Exercised 0
---------
Outstanding - March 31, 2005 1,709,950
Exercisable - March 31, 2005 1,354,950
-11-
During the nine months ended March 31, 2005, the Company issued no shares of
stock in connection with earnout agreements associated with the acquisition of
client lists.
8. SEGMENTS OF BUSINESS
As a result of the Company's recent restructuring, management believes the
Company operates as one segment.
9. RELATED PARTY TRANSACTIONS
As of March 31, 2005, Prime Partners, of which Michael Ryan, the Company's
President is a major shareholder, provided short term loans to the Company in
the aggregate amount of $0.7 million for working capital purposes. These loans
pay 10% interest per annum.
See Note 1 to Notes to Consolidated Financial Statements for a description of
the purchase of the Rappaport Loan by a group of Company management and
employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Form 10-Q and the exhibits hereto may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). Such statements are based upon current
information, expectations, estimates and projections regarding the Company, the
industries and markets in which the Company operates, and management's
assumptions and beliefs relating thereto. Words such as "will," "plan,"
"expect," "remain," "intend," "estimate," "approximate," and variations thereof
and similar expressions are intended to identify such forward-looking
statements. These statements speak only as of the date on which they are made,
are not guarantees of future performance, and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results could materially differ from what is expressed, implied or
forecast in such forward-looking statements. Such differences could be caused by
a number of factors including, but not limited to, the uncertainty of laws,
legislation, regulations, supervision and licensing by federal, state and local
authorities and their impact on the lines of business in which the Company and
its subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; changes in competition and the effects of
such changes; the inability to implement the Company's strategies; changes in
management and management strategies; the Company's inability to successfully
design, create, modify and operate its computer systems and networks; litigation
involving the Company and risks described from time to time in reports and
registration statements filed by the Company and its subsidiaries with the SEC.
Readers should take these factors into account in evaluating any such
forward-looking statements. The Company undertakes no obligation to update
publicly or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The reader should, however, consult
further disclosures the Company may make in future filings of its Annual Report
on Form 10-K, Quarterly Reports on form 10-Q and Current Reports on Form 8-K.
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.
The Company's financial planning clients generally are introduced to the Company
through the Company's tax return 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
rentention and growth.
All of the Company's financial planners are employees or independent contractors
of the Company and registered representatives of Prime Capital Services,
Inc.("PCS"), a wholly owned subsidiary of the Company. PCS conducts a securities
brokerage business providing regulatory oversight and products and sales support
to its registered representatives, who provide investment products and services
to their clients. PCS earns a share of commissions from the services that the
financial planners provide to their clients in transactions for securities,
insurance and related products. PCS is a registered securities broker-dealer
with the SEC and a member of the National Association of Securities Dealers,
Inc.
-12-
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, as well as 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 nine months ended March 31,
2005, 88% of the Company's revenues were earned from all financial planning and
12% were earned from tax preparation services.
During the three months ended March 31, 2005, the Company had income from
continuing operations before other income and expenses of $0.9 million as
compared to $2.0 million during the three months ended March 31, 2004. Loss from
continuing operations before other income and expenses was $0.1 million in the
nine months ended March 31, 2005 compared with $0.5 million for the nine months
ended March 31, 2004.
During the three months ended March 31, 2005, the Company had net income of $0.7
million, and during the nine months ended March 31, 2005, the Company incurred a
net loss of $0.5 million. At March 31, 2005 the Company had a working capital
deficit of $13.2 million. At March 31, 2005 the Company had $0.9 million of cash
and cash equivalents and $4.7 million of trade accounts receivables, net, to
fund short-term working capital requirements.
The Company believes that it has completed the necessary steps to meet its cash
flow requirements for the fiscal years ending June 30, 2005 and 2006, though due
to the seasonality of the Company's business the Company may at times employ
short-term financing. See Note 1(d) of Notes to Consolidated Financial
Statements included in the 2004 10-K/A for a discussion of the Company's
liquidity and cash flow and Note 7 of Notes to Consolidated Financial Statements
included in the 2004 10-K/A for a discussion of the Company's debt.
If the Company does not comply with the financial covenants and other
obligations in its loan agreements relating to the Wachovia, Travelers or
Rappaport loans, and such lenders elected to pursue their available remedies,
the Company's operations and liquidity would be materially adversely affected
and the Company could be forced to cease operations. The Company has retained a
financial advisor to assist the Company in further discussions with its lenders.
The financial advisor was involved in the Company's discussions with Wachovia
that resulted in the Amendment No. 3 described above. There can be no guarantee,
however, that the lenders will agree to terms in the future that are more
favorable to the Company than the current arrangements with the lenders.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO
THE THREE AND NINE MONTHS ENDED MARCH 31, 2004.
Except as noted, the numbers and explanations presented below represent results
from continuing operations only.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2004
The Company's revenues for the three months ended March 31, 2005 were $16.2
million compared to $18.3 million for the three months ended March 31, 2004, a
decrease of $2.0 million or 11.1%. Of this total decrease, $1.8 million was
attributable to a decrease in revenues from the Company's financial planning
business.
The Company's total revenues for the three months ended March 31, 2005 consisted
of $12.3 million for financial planning services and $4.0 million for tax
preparation services. Financial planning services represented 75% and tax
preparation services represented 25% of the Company's total revenues during the
three months ended March 31, 2005. The Company's total revenues for the three
months ended March 31, 2004 consisted of $14.1 million for financial planning
services and $4.2 million for tax preparation services. Financial planning
services represented 77% and tax preparation fees represented 23% of the
Company's total revenues during the three months ended March 31, 2004.
-13-
The Company attributes the decline in financial planning revenue principally to
its continued focus on reducing the percentage of sales from variable annuities
while increasing sales of other financial products that generate recurring
income.
For the three months ended March 31, 2005, revenues from variable annuity sales
were $5.4 million compared with $7.1 million in the same quarter last year. This
represents a 24% drop in variable annuity revenue.
For the three months ended March 31, 2005, revenues from recurring revenue
sources (managed money and trails) were $3.6 million compared with $3.4 million
for the three months ended March 31, 2004, a 6% increase.
The Company's commission expense for the three months ended March 31, 2005 was
$8.5 million, a decrease of $0.7 million or 7.6% from $9.2 million for the
quarter ended March 31, 2004. This decrease is attributable to three factors: a
decrease in financial planning revenues, a higher percentage of revenue from the
Company's independent representatives (i.e., brokers who are not employees of
the Company but independent contractors)(normal for the March 31 quarter) and
decreased non-commissionable revenue.
The Company's total operating expenses for the three months ended March 31, 2005
were $6.9 million or 42.6% of revenues, a decrease of $0.2 million or 3.1%,
compared to $7.1 million or 39.1% of revenues for the three months ended March
31, 2004. The decrease in operating expenses was attributable to decreases in
general and administrative expenses, salaries, rent, brokerage fees, licenses
and depreciation and amortization, partially offset by an increase in
advertising.
General and administrative expenses decreased slightly by 2.9% in the three
months ended March 31, 2005 compared with the same period last year. This
decrease is primarily attributable to decreases in bad debt expense and office
and computer supplies expense, partially offset by increases in professional
fees, postage related to marketing and general office expenses.
Advertising expenses increased $0.2 million in the three months ended March 31,
2005 to $0.9 million up from $0.7 million for the three months ended March 31,
2004. This increase is primarily attributable to the Company's continued efforts
to build brand equity and awareness.
The Company's income from continuing operations before other income and expenses
for the three months ended March 31, 2005 was $0.9 million as compared to $2.0
million for the three months ended March 31, 2004, a decrease of $1.1 million.
This decrease was primarily attributable to decreased revenues from financial
planning services, driven largely by the Company's continuing focus on reducing
the percentage of its revenue generated from the sale of variable annuities.
The Company's net income from continuing operations before income taxes for the
three months ended March 31, 2005 was a $0.7 million compared to $1.6 million
for the three months ended March 31, 2004. This decrease was primarily
attributable to a decline in financial planning revenue.
The Company had no income from discontinued operations for the three months
ended March 31, 2005, compared to $0.01 million for the three months ended March
31, 2004.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE NINE
MONTHS ENDED MARCH 31, 2004
The Company's total revenues for the nine months ended March 31, 2005, were
$42.3 million compared to $45.1 million for the nine months ended March 31,
2004, a decrease of $2.8 million or 6.2%. This decrease was primarily
attributable to a decline in the Company's revenue from financial planning
services.
The Company's total revenues for the nine months ended March 31, 2005 consisted
of $37.3 million from financial planning services and $4.9 million from tax
preparation services. Financial planning services represented 88% and tax
preparation services represented 12% of the Company's total revenues during the
nine months ended March 31, 2005. The Company's total revenues for the nine
months ended March 31, 2004 consisted of $40.0 million for financial planning
services and $5.0 million from tax preparation services. Financial planning
services represented 89% and tax preparation services represented 11% of the
Company's total revenues during the nine months ended March 31, 2004.
-14-
The Company attributes the decline in financial planning revenue principally to
its continued focus on reducing the percentage of sales from variable annuities
while increasing sales of other financial products that generate recurring
income.
For the nine months ended March 31, 2005, revenues from variable annuity sales
were $17.2 million compared with $20.5 million in the same period last year.
This represents a 16% drop in variable annuity revenue.
For the three months ended March 31, 2005, revenues from recurring revenue
sources (managed money and trails) were $10.7 million compared with $9.3 million
for the three months ended March 31, 2004, a 14% increase.
The Company's commission expense for the nine months ended March 31, 2005 was
$24.8 million, a decrease of $0.6 million from $25.4 million for the quarter
ended March 31, 2004. This decrease is attributable to lower revenue from
financial planning services.
The Company's operating expenses for the nine months ended March 31, 2005 were
$17.6 million or 41.6% of revenues, a decrease of $1.6 million or 8.3%, compared
to $19.2 million or 42.6% of revenues for the nine months ended March 31, 2004.
The decreases in operating expenses were attributable to decreases in general
and administrative expenses, salaries, rent, brokerage fees and licenses and
depreciation and amortization, partially offset by an increase in advertising
expense.
General and administrative expenses decreased $0.3 million or 4.6% in the nine
months ended March 31, 2005 to $5.3 million from $5.6 million during the nine
months ended March 31, 2004. This decrease is primarily attributable to
decreases in bad debt expense, office supplies and computer supplies expense,
partially offset by increases in professional fees, postage related to marketing
and general office expenses.
Advertising expenses increased $0.4 million in the nine months ended March 31,
2005 to $1.3 million up from $0.9 million during the nine months ended March 31,
2004. This increase is primarily attributable to the Company's continued efforts
to build brand equity and awareness.
Rent expense decreased $0.1 million or 8.9% in the nine months ended March 31,
2005 to $1.4 million from $1.5 million during the nine months ended March 31,
2004. This decrease is primarily attributable to the termination of leases
associated with closed or merged offices.
Depreciation and amortization expense decreased $0.2 million or 14.8% in the
nine months ended March 31, 2005 to $0.9 million, down from $1.1 million during
the nine months ended March 31, 2004. 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 nine months ended March 31, 2005 was $0.1 million compared with income
of $0.5 million for the nine months ended March 31, 2004, a decrease of $0.6
million. This decrease was mostly attributable to a decline in financial
planning revenues.
The Company's net loss from continuing operations before income taxes for the
nine months ended March 31, 2005 was $0.5 million compared to a loss of $0.2
million for the nine months ended March 31, 2004. This increased loss was
primarily attributable to reduced income from operations of $0.6 million, offset
by a decrease of $0.2 million in interest expense and increases of $0.1 million
in interest and investment income and other income, net.
The Company had no income from discontinued operations for the nine months ended
March 31, 2005 compared to $5.0 million for the nine months ended March 31,
2004.
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
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.
-15-
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 $1.1 million and commission liabilities
have been reduced by $0.9 million. Shareholder deficit increased by $0.2
million. Revenues for the year ended June 30, 2003 increased by $0.06 million
and commission expense for the year ended June 30, 2003 increased by $0.03
million. Losses for the year ended June 30, 2003 decreased by $0.03 million.
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 March 31, 2005 the Company had $0.9 million in cash and cash
equivalents and $0.9 million in marketable securities. PCS is subject to the
SEC's Uniform Net Capital Rule 15c 3-1, which requires that PCS maintain minimum
regulatory net capital of $100,000 and that the ratio of aggregate indebtedness
to net capital, both as defined, shall not exceed the greater of 15 to one. At
March 31, 2005, the Company was in compliance with this regulation.
During the nine months ended March 31, 2005, the Company incurred a net loss of
$0.5 million and at March 31, 2005 had a working capital deficit position of
$13.3 million. At March 31, 2005 the Company had $0.9 million of cash and cash
equivalents and $4.7 million of trade accounts receivables, net, 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 operating activities totaled $0.3 million
and $0.2 million for the nine months ended March, 2005 and 2004, respectively.
Net cash provided by operating activities increased in the first nine months of
2005 compared with the first nine months of 2004 mostly due to improvements in
working capital requirements in 2005.
Net cash used in investing activities totaled $0.08 million for the nine months
ended March 31, 2005, as compared to net cash provided by investing activities
of $4.3 million for the nine months ended March 31, 2004. This year over year
decrease is primarily due to the sale of discontinued operations in 2004, as
well as increased capital expenditures and contingent payments related to prior
acquisitions, partially offset by the proceeds from the sale of a building.
Net cash provided by financing activities totaled $0.1 million for the nine
months ended March 31, 2005, as compared to net cash used of $4.4 million for
the nine months ended March 31, 2004. This year over year increase in net cash
provided is primarily due to lower payments of bank loans in 2005 compared to
2004.
Prime Partners has made various loans to the Company at an interest rate of 10%.
On March 31, 2005 the Company owed Prime Partners $0.7 million. Michael Ryan,
the Company's President, is a director, the President and one of the major
shareholders of Prime Partners.
The Company believes that it has completed the necessary steps to meet its cash
flow requirements for the years ending June 30, 2005 and 2006, though due to the
seasonality of the Company's business the Company may at times employ short term
financing. See Note 1(d) of Notes to Consolidated Financial Statements included
in the 2004 10-K/A for a discussion of the Company's liquidity and cash flow and
Note 7 of Notes to Consolidated Financial Statements included in the 2004 10-K/A
for a discussion of the Company's debt.
If the Company does not comply with the financial covenants and other
obligations in its loan agreements relating to the Wachovia, Travelers or
Rappaport loans, and such lenders elected to pursue their available remedies,
the Company's operations and liquidity would be materially adversely affected
and the Company could be forced to cease operations. The Company has retained a
financial advisor to assist the Company in further discussions with its lenders.
The financial advisor was involved in the Company's discussions with Wachovia
that resulted in the Amendment No. 3 described above. There can be no guarantee,
however, that the lenders will agree to terms in the future that are more
favorable to the Company than the current arrangements with the lenders.
-16-
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to March 31, 2005 and thereafter. The amounts represent the
maximum future cash contractual obligations.
Contractual Obligations and Commercial Commitments
Payment Due by Period
2006 to 2008 to After
Contractual Obligations Total 2005 2007 2009 2010
-------------------------------------------------------------------------------
Debt $ 9,541,599 $ 7,043,630 $ 1,828,612 $ 637,463 $ 31,894
Operating Leases 5,566,035 665,294 3,093,775 1,193,956 613,010
Capital Leases 366,856 65,715 220,531 74,860 5,750
-------------------------------------------------------------------------------
Total contractual cash obligations $15,474,490 $ 7,774,639 $ 5,142,918 $ 1,906,279 $ 650,654
===============================================================================
Pursuant to Amendment No. 3 with Wachovia, the amortization schedule for the
Wachovia Loan was extended by approximately 16 months and the Maturity Date was
extended to March 10, 2008. Under Amendment No. 3, the Company will pay Wachovia
principal on the Loan of $66,205.42 monthly, plus interest.
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 $0.2 million, $0.3 million, and $0.1 million for the fiscal
years ending June 30, 2005, 2006, and 2007, respectively. See Note 5 of Notes to
the Consolidated Financial Statements in the 2004 10-K/A for a discussion of the
sale to Pinnacle.
The Company is also contractually obligated to certain employees and executives
pursuant to commission agreements and compensation agreements.
MARKET FOR COMPANY'S COMMON EQUITY
The shares of the Company's common stock were delisted from the NASDAQ National
Market in August 2002 and are now traded on what is commonly referred to as the
"pink sheets". As a result, an investor may find it more difficult to dispose of
or obtain accurate quotations as to the market value of the securities. In
addition, the Company is now subject to Rule 15c2-11 promulgated by the SEC. If
the Company fails to meet criteria set forth in such Rule (for example, by
failing to file periodic reports as required by the Exchange Act), various
practice requirements are imposed on broker-dealers who sell securities governed
by the Rule to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
Rule may have a material adverse effect on the ability of broker-dealers to sell
the Company's securities, which may materially affect the ability of
shareholders to sell the securities in the secondary market.
The delisting could make trading the Company's shares more difficult for
investors, potentially leading to further declines in the share price. It would
also make it more difficult for the Company to raise additional capital. Due to
the delisting, the Company would also incur additional costs under state
blue-sky laws if the Company were to sell equity.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's results of
operations in recent periods.
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.
-17-
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 and accurate
financial statements is a material weakness.
Although Radin Glass noted significant improvements in the structure of the
accounting department, and designed its audit procedures to address the matters
described below in order to obtain reasonable assurance that the financial
statements are free of material misstatement and to issue an unqualified audit
report, certain of the internal control deficiencies noted by Radin Glass had
been noted in their internal control letter regarding the Company's Consolidated
Financial Statements for Fiscal 2003.
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.
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, has hired additional staff in the finance department, including a
Controller, and will implement enhanced procedures to accelerate improvement of
the internal controls.
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 its internal controls during the fourth quarter of
Fiscal 2004, such as improvement in recording commissions earned and tax return
billings, and regulatory filings are now being filed within the prescribed due
dates, such improvements were partially offset by declines in other areas.
The Company's senior management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 13a-15 and
15d-15 under the Exchange Act) designed to ensure that information required to
be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including its principal executive officer or officers and
principal financial officers, to allow timely decisions regarding required
disclosure.
The Company has carried out an evaluation under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Accounting Officer, of the disclosure controls and procedures of the
Company as defined in Exchange Act Rule 13(a)-15(e). In designing and evaluating
disclosure controls and procedures, the Company and its management recognize
that any disclosure controls and procedures, no matter how well designed and
operated, can only provide reasonable assurance of achieving the desired control
objective. The Chief Executive Officer and the Chief Accounting Officer have
determined that the Company will further enhance its disclosure controls and
procedures and that, except for the matters noted by Radin Glass, and taking
into account the steps taken and to be taken to address the matters described
above, such disclosure controls and procedures will provide a reasonable level
of assurance that management will be adequately, effectively and timely alerted
to material information required to be included in the Company's periodic SEC
reports.
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Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"),
and newly enacted SEC regulations have created additional compliance
requirements for companies such as ours. We are committed to maintaining high
standards of internal controls over financial reporting, corporate governance
and public disclosure. As a result, we intend to invest appropriate resources to
comply with evolving standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities. In
particular, a great deal of management time and attention will be required to
comply on a timely basis with the internal control requirements of Section 404
of Sarbanes-Oxley, and without significant additional staff or resources it will
be difficult to achieve timely compliance.
Except as described above, no change occurred in the Company's internal controls
concerning financial reporting during the quarter ended March 31, 2005 that has
materially affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation
The Company and PCS are defendants and respondents in lawsuits and NASD
arbitrations in the ordinary course of business. On March 31, 2005, there were
38 pending lawsuits and arbitrations, of which 21 were against PCS and/or its
registered representatives. Management accrued $778,612 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. On March 8, 2005, oral argument was heard on the motion to
dismiss, and the Court Chancery is currently considering the motion.
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 Form 10-Q for the quarter ended September 30,
2002 and the Company's past accounting and recordkeeping practices. The Company
had previously received informal, non-public inquiries from the SEC regarding
certain of these matters. The Company and its executives have complied fully
with the SEC's investigation and will continue to comply fully. The Company does
not believe that the investigation will have a material effect on its
consolidated financial position.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 30, 2005, the Company issued 45,000 shares of common stock to Rappaport
pursuant to Section 4(2) of the Securities Act. The shares were issued as part
of a penalty for nonpayment on the Rappaport Loan, and the Company received no
proceeds in connection therewith.
During the quarter ended March 31, 2005, no purchases were made by or on behalf
of the Company or any "affiliated purchaser" (as described in Rule 10b-18(a)(3)
of the Securities Exchange Act of 1934) of any of the Company's registered
equity securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 6 to Notes to Consolidated Financial Statements herein and Note 9 of
Notes to Consolidated Financial Statements in the 2004 10-K/A.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its last meeting of shareholders on December 14, 2001.
ITEM 5. OTHER INFORMATION
On or about October 21, 2004, the Company's broker-dealer subsidiary, PCS,
received a letter from the Boston District Office of the NASD (the "Office")
with respect to the Office's 2002 and 2003 examinations of PCS. The letter
stated that with respect to the periods examined the Office had found that PCS
had failed to fully comply with certain NASD Conduct Rules. PCS has conducted a
review of the letter and its findings, and submitted a response to the Office.
The Office has subsequently advised PCS that it proposes a settlement in the
matter in the amount of a $200,000 monetary penalty, plus reimbursement to
certain PCS customers in an amount that cannot at this time be ascertained by
PCS, but which amount PCS believes will not be material. PCS anticipates that a
portion of any amounts it pays out in reimbursements will be recovered from
certain of its registered representatives. PCS does not concur with certain
findings of the Office and will continue to discuss the matter with the Office
to reach a final solution.
On May 20, 2005, the Board of Directors approved agreements with Steven J.
Gilbert, a director of the Company, and Christopher Kelly, General Counsel of
the Company. Mr. Gilbert's agreement relates to his work as an employee of the
Company. See Exhibits 10.1 and 10.2 herewith.
Item 6. EXHIBITS
(a) Exhibits:
10.1 Agreement with Christopher Kelly
10.2 Agreement with Steven J. Gilbert
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Accounting Officer.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GILMAN + CIOCIA, INC.
Dated: May 23, 2005 By: /s/ Michael P. Ryan
Chief Executive Officer
Dated: May 23, 2005 By: /s/ Dennis Conroy
Chief Accounting Officer
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