GILMAN & CIOCIA INC - 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 December 31, 2006
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________
Commission File Number 000-22996
GILMAN + CIOCIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2587324
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK 12603
(Address of principal executive offices)(Zip code)
(845) 486-0900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |_| Non-accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes |_| No |X|
As of February 7, 2007, 9,639,591 shares of the issuer's common stock, $0.01 par
value, were outstanding.
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GILMAN & CIOCIA INC - 10-Q
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of December 31, 2006 and
June 30, 2006........................................................ 3
Consolidated Statements of Operations for the Three Months and Six
Months Ended December 31, 2006 and December 31, 2005 ............... 4
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2006 and December 31, 2005................ 5
Supplemental Disclosures to Consolidated Statements of Cash Flows... 6
Notes to Consolidated Financial Statements.......................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 28
Item 4. Controls and Procedures ............................................ 29
PART II - OTHER INFORMATION
Item 1A. Risk Factors ..................................................... 30
Item 3. Defaults Upon Senior Securities ................................... 38
Item 6. Exhibits .......................................................... 38
SIGNATURES.................................................................. 39
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Unaudited Audited
December 31, June 30,
2006 2006
-------------------------------
Assets
Cash & Cash Equivalents $ 537,934 $ 1,123,988
Marketable Securities 144,134 245,841
Trade Accounts Receivable (less allowance of $208,042 at December 31, 2006
and $200,991 at June 30, 2006) 3,535,899 3,590,194
Receivables from Employees (less allowance of $944,642 at December 31, 2006
and $880,504 at June 30, 2006) 566,509 549,058
Due From Office Sales (less allowance of $6,985 at December 31, 2006 and less
discount of $5,423 and $6,725 at December 31, 2006 and June 30, 2006,
respectively) 123,442 188,590
Prepaid Expenses and Other Current Assets 240,179 707,290
-------------------------------
Total Current Assets 5,148,097 6,404,961
Property and Equipment (less accumulated depreciation of $5,908,853
at December 31, 2006 and $5,660,050 at June 30, 2006) 1,074,679 1,272,728
Goodwill 3,843,994 3,843,828
Intangible Assets (less accumulated amortization of $5,408,006 at
December 31, 2006 and $5,184,185 at June 30, 2006) 4,391,498 4,612,722
Due from Office Sales - Non Current 34,075 94,419
Other Assets 376,360 407,634
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Total Assets $ 14,868,703 $ 16,636,292
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Liabilities and Shareholders' Equity (Deficit)
Accounts Payable and Accrued Expenses $ 10,105,741 $ 10,959,906
Current Portion of Notes Payable and Capital Leases 6,185,864 6,715,076
Deferred Income 141,496 387,433
Due to Related Parties 3,634,817 2,938,557
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Total Current Liabilities 20,067,918 21,000,972
Long Term Portion of Notes Payable and Capital Leases 262,645 372,337
Deferred Income - Non Current and Other -- 442,565
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Total Liabilities 20,330,563 21,815,874
Shareholders' Equity (Deficit)
Preferred Stock, $0.001 par value; 100,000 shares authorized; none issued -- --
Common Stock, $0.01 par value 20,000,000 shares authorized; 10,726,740
and 10,627,740 shares issued at December 31, 2006 and June 30, 2006,
Respectively 107,266 106,276
Additional Paid in Capital 29,504,997 29,487,206
Common Stock held in Treasury at cost, 1,117,149 at December 31, 2006 and
June 30, 2006 (480,113) (480,113)
Accumulated Deficit (34,594,010) (34,292,951)
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Total Shareholders' (Deficit) (5,461,860) (5,179,582)
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Total Liabilities & Shareholders' (Deficit) $ 14,868,703 $ 16,636,292
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See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended For the Six Months Ended
December 31, December 31,
2006 2005 2006 2005
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Revenues
Financial Planning Services $ 11,729,468 $ 11,226,446 $ 22,820,155 $ 23,254,049
Tax Preparation Fees 301,421 320,987 709,941 783,814
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Total Revenues 12,030,889 11,547,433 23,530,096 24,037,863
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Operating Expenses
Commissions 7,727,266 6,721,132 14,738,654 14,480,105
Salaries 1,900,786 2,006,005 3,936,657 4,319,776
General & Administrative 1,223,355 1,686,816 2,561,512 3,546,362
Advertising 249,988 342,687 599,597 665,475
Brokerage Fees & Licenses 362,601 303,993 705,942 750,938
Rent 484,867 576,686 1,014,262 1,085,337
Depreciation & Amortization 236,032 256,073 472,623 520,004
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Total Operating Expenses 12,184,895 11,893,392 24,029,247 25,367,997
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Loss from Operations
Before Other Income and Expenses (154,006) (345,959) (499,151) (1,330,134)
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Other Income/(Expenses)
Interest and Investment Income 13,787 16,594 28,040 36,982
Interest Expense (223,873) (244,239) (447,512) (450,932)
Other Income, Net 65,980 6,773 617,565 21,911
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Total Other Income/(Expense) (144,106) (220,872) 198,093 (392,039)
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Loss from Operations
Before Income Taxes (298,112) (566,831) (301,058) (1,722,173)
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Income Taxes/(Benefit) -- -- -- --
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Net Loss $ (298,112) $ (566,831) $ (301,058) $ (1,722,173)
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Weighted Average Number of Common
Shares Outstanding
Basic Shares 9,591,624 9,143,984 9,568,531 9,143,621
Diluted Shares 9,591,624 9,143,984 9,568,531 9,143,621
Basic Net Loss Per Share:
Loss from Operations
Before Income Taxes $ (0.03) $ (0.06) $ (0.03) $ (0.19)
Net Loss $ (0.03) $ (0.06) $ (0.03) $ (0.19)
Diluted Net Loss Per Share:
Loss from Operations
Before Income Taxes $ (0.03) $ (0.06) $ (0.03) $ (0.19)
Net Loss $ (0.03) $ (0.06) $ (0.03) $ (0.19)
See Notes to the Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six Months Ended
December 31,
2006 2005
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Cash Flows from Operating Activities:
Net Loss: $ (301,058) $(1,722,173)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 472,623 520,004
Issuance of common stock for debt default penalties, interest and other 18,780 20,469
Amortization of debt discount -- 40,613
Gain on sale of discontinued operations (65,000) (15,114)
Allowance for doubtful accounts (196,656) (907,039)
Changes in assets and liabilities:
Accounts receivable 47,244 706,474
Prepaid and other current assets 479,541 339,407
Change in marketable securities 101,707 202,225
Other assets 18,845 (49,770)
Accounts payable and accrued expenses (854,165) (267,470)
Deferred income (688,502) 417,736
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Net cash used in operating activities: $ (966,641) $ (714,638)
Cash Flows from Investing Activities:
Capital expenditures (50,754) (455,914)
Cash paid for acquisitions, net of cash acquired and debt incurred (2,763) (34,914)
Receivables from employees (81,586) 139,472
Due from office sales 138,343 262,834
Proceeds from the sale of office 16,250 161,179
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Net cash provided by investing activities: $ 19,490 $ 72,657
Cash Flows from Financing Activities:
Proceeds from bank and other loans 61,227 182,764
Proceeds from related parties 1,000,000 1,639,820
Payments of bank loans and capital lease obligations (700,130) (747,551)
Payments to related parties -- (523,304)
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Net cash provided by financing activities: $ 361,097 $ 551,729
Net change in cash and cash equivalents $ (586,054) $ (90,252)
Cash and cash equivalents at beginning of period $ 1,123,988 $ 667,054
Cash and cash equivalents at end of period $ 537,934 $ 576,802
See Notes to the Consolidated Financial Statements and Supplemental Disclosures
to Consolidated Statements of Cash Flows
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Supplemental Disclosures to Consolidated Statements of Cash Flows
(unaudited)
For the Six Months Ended
December 31,
2006 2005
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Cash Flow Information
Cash payments during the year for:
Interest $ 126,355 $ 129,212
Supplemental Disclosure of Non-Cash Transactions
Common stock issued in connection with
acquisitions/other $ 1,530 $ (4,129)
Issuance of common stock for debt default
penalties and interest $ 17,250 $ 24,600
Debt reduction related to assignment of office sale
promissory notes to related party (See Note 9) $ 303,740 $ --
Equipment acquired under capital leases $ 13,686 $ 157,085
OTHER
In August 2006, Prime Capital Services, Inc. ("PCS") renewed its clearing
agreement with National Financial Services. This agreement supersedes the
agreement entered into by the parties during fiscal 2006, the terms of which
called for the Company to record deferred income of $0.6 million. Under the
terms of the new agreement, the deferred income was recognized in other income
in August 2006.
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GILMAN + CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
Description of the Company and Overview
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, the
"Company") is a corporation that was organized in 1981 under the laws of the
State of New York and reincorporated under the laws of the State of Delaware in
1993. The Company provides federal, state and local tax preparation services to
individuals, predominantly in the middle and upper income tax brackets, and
financial planning services, including securities, insurance and mortgage
brokerage services. In fiscal 2006, approximately 90.0% of the Company's
revenues were derived from commissions on financial planning services and
approximately 10.0% were derived from fees for tax preparation services. As of
December 31, 2006, the Company had 28 offices operating in four states (New
York, New Jersey, Florida and Pennsylvania). 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.
During fiscal 2006 the Company was in default of certain covenants under its
$7.0 million term loan revolving letter of credit financing with Wachovia Bank,
National Association ("Wachovia") and of its $5.0 million distribution financing
with Travelers Insurance Company ("Travelers").
As a result of a number of defaults under its agreements with Wachovia, on
November 27, 2002, the Company entered into a debt forbearance agreement with
Wachovia and subsequently amended the debt forbearance agreement as of June 18,
2003, March 4, 2004, March 1, 2005 and April 1, 2006. Travelers has claimed
several defaults under its distribution financing agreement, but has
acknowledged that it is subject to the terms of a subordination agreement with
Wachovia (the "Subordination Agreement"), which restricts the remedies it can
pursue against the Company. The Company's debt to Rappaport Gamma Limited
Partnership (the "Rappaport Loan") was due on October 30, 2002. The Rappaport
Loan is subordinated to the Wachovia loan. The Rappaport Loan was sold to a
group of Company management and employees (the "Purchasing Group") on April 29,
2005. The members of the Purchasing Group include Prime Partners, Inc. ("Prime
Partners"), a corporation controlled by Michael Ryan, a director, an officer and
a significant shareholder of the Company, James Ciocia, the Chairman of the
Company, Christopher Kelly, former 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, Vice President and General
Counsel of the Company as of February 1, 2007, and certain other Company
employees. The Purchasing Group agreed to reduce the principal balance of the
Rappaport Loan from $1.0 million to $0.8 million and extended the maturity date
to April 29, 2009. Pursuant to the terms of the Rappaport Loan, members of the
Purchasing Group, as holder of the Rappaport Loan, are entitled to receive, in
the aggregate, as interest, 180,000 shares of the Company's common stock
annually while the debt remains unpaid. As a result of these defaults, the
Company's debt as to those lenders has been classified as current liabilities on
its financial statements. Upon the purchase of the Rappaport Loan by the
Purchasing Group, however, the Rappaport Loan was reclassified as a related
party transaction. See Note 7 to Notes to Consolidated Financial Statements for
a discussion of the Company's debt.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. The Consolidated Balance Sheet as of December 31, 2006, the
Consolidated Statements of Operations for the three and six months ended
December 31, 2006 and 2005 and the Consolidated Statements of Cash Flows for the
six months ended December 31, 2006 and 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 three and six months ended December 31, 2006 are
not necessarily indicative of the results to be expected for any other interim
period or any future year. These Consolidated Financial Statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2006.
Fiscal years are denominated by the year in which they end. Accordingly, fiscal
2006 refers to the year ended June 30, 2006.
The Consolidated Financial Statements include the accounts of the Company and
all majority owned subsidiaries from their respective dates of acquisition. All
significant inter-company transactions and balances have been eliminated. Where
appropriate, prior years financial statements reflect reclassifications to
conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Furthermore, the Company,
including its wholly owned subsidiary Prime Capital Services, Inc. ("PCS"), has
been named as a defendant in various customer arbitrations. These claims result
from the actions of brokers affiliated with PCS. Under the PCS registered
representatives contract, each registered representative has indemnified the
Company for these claims. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 5 "Accounting for Contingencies," the Company has
established liabilities for potential losses from such arbitrations and other
legal actions, investigations and proceedings. In establishing these
liabilities, the Company's management uses its judgment to determine the
probability that losses have been incurred and a reasonable estimate of the
amount of losses. In making these decisions, management bases judgments on its
knowledge of the situations, consultations with legal counsel and the Company's
historical experience in resolving similar matters. In many such arbitrations
and other legal actions, investigations and proceedings, it is not possible to
determine whether a liability has been incurred or to estimate the amount of
that liability until the matter is close to resolution. However, accruals are
reviewed regularly and are adjusted to reflect the Company's estimates of the
impact of developments, rulings, advice of counsel and any other information
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pertinent to a particular matter. Because of the inherent difficulty in
predicting the ultimate outcome of such matters, the Company cannot predict with
certainty the eventual loss or range of loss related to such matters. If
management's judgments prove to be incorrect, the Company's liability for losses
and contingencies may not accurately reflect actual losses that result from
these actions, which could materially affect results in the period other
expenses are ultimately determined. As of December 31, 2006, the Company has
accrued approximately $0.7 million for these matters. A majority of these claims
are covered by the Company's errors and omissions insurance policy. While the
Company will vigorously defend itself in these matters, and will assert
insurance coverage and indemnification, there can be no assurance that these
matters will not have a material adverse impact on its financial position.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include
investments in money market funds and are stated at cost, which approximates
market value. Cash at times may exceed FDIC insurable limits.
Impairment of Intangible Assets
Impairment of intangible assets results in a charge to operations whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of an asset to be held and used is
measured by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The
measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows. The
Company tests goodwill for impairment annually or more frequently whenever
events occur or circumstances change, which would more likely than not reduce
the fair value of a reporting unit below its carrying amount. The measurement of
fair value, in lieu of a public market for such assets or a willing unrelated
buyer, relies on management's reasonable estimate of what a willing buyer would
pay for such assets. Management's estimate is based on its knowledge of the
industry, what similar assets have been valued at in sales transactions and
current market conditions.
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.
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Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, notes receivable, and accounts payable,
approximated fair value as of December 31, 2006, because of the relatively
short-term maturity of these instruments and their market interest rates. Since
the long-term debt is in default, it is not possible to estimate its value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of trade receivables. The majority of the Company's trade
receivables are commissions earned from providing financial planning services
that include securities, insurance and mortgage brokerage services. As a result
of the diversity of services, markets and the wide variety of customers, the
Company does not consider itself to have any significant concentration of credit
risk.
Segment Disclosure
Management believes the Company operates as one segment.
Other Significant Accounting Policies
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. These policies require
difficult judgments on complex matters that are often subject to multiple
sources of authoritative guidance. Certain of these matters are among topics
currently under reexamination by accounting standards setters and regulators.
Although no specific conclusions reached by these standard setters appear likely
to cause a material change in the Company's accounting policies, outcomes cannot
be predicted with confidence. Refer to Note 2 to Consolidated Financial
Statements included in the Company's fiscal 2006 10-K, which discusses
accounting policies that must be selected by management when there are
acceptable alternatives.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board issued SFAS 157
"Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is a relevant measurement attribute. Accordingly,
this Statement does not require any new fair value measurements. However, for
some entities, the application of this Statement will change current practices.
This Statement is effective for financial statements for fiscal years beginning
after November 15, 2007. Earlier application is permitted provided that the
reporting entity has not yet issued financial statements for that fiscal year.
Management believes this Statement will not have a material impact on the
Company's financial statements once adopted.
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4. COMMITMENTS AND CONTINGENCIES
Commitments
In August 2006, PCS renewed its clearing agreement with National Financial
Services. This agreement supersedes the agreement entered into by the parties
during fiscal 2006, the terms of which called for the Company to record deferred
income of $0.6 million. Under the terms of the new agreement, the deferred
income was recognized in other income in August 2006.
Litigation
On February 4, 2004, the Company was served with a Summons and a Shareholder's
Class Action and Derivative Complaint with the following caption: "Gary Kosseff,
Plaintiff, against James Ciocia, Thomas Povinelli, Michael 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 and in New Castle
County under Civil Action No. 188-N. The nature of the action is that the
Company, its Board of Directors and its management breached their fiduciary duty
of loyalty in connection with the sale of 47 Company offices to Pinnacle Taxx
Advisors, LLC ("Pinnacle Purchased Offices"). Refer to Note 4 to Consolidated
Financial Statements included in the Company's fiscal 2006 10-K, which discusses
the sale of the Pinnacle Purchased Offices. 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 19, 2004, the plaintiff filed an Amended Complaint. On July 12, 2004,
counsel for the Company and for all defendants filed a motion to dismiss the
Amended Complaint. On March 8, 2005, oral argument was heard on the motion to
dismiss, and on July 29, 2005 the case Master delivered his draft report denying
the motion. The parties filed exceptions to the report and on August 3, 2006,
the Master delivered his final report denying the motion to dismiss. The parties
are proceeding with discovery and the case is scheduled for trial on June 4,
2007. While the Company will vigorously defend itself in this matter, there can
be no assurance that this lawsuit will not have a material adverse impact on its
financial position.
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by the Company's registered representatives
during the period January 1, 2002 through August 1, 2005. On June 22, 2006, the
SEC entered a formal order of investigation. The Company is cooperating fully
with the SEC in connection with this inquiry. At this early stage of the formal
investigation, the Company cannot predict whether an enforcement action will
result from the SEC's investigation.
The Company and PCS are defendants and respondents in lawsuits and NASD
arbitrations in the ordinary course of business. On December 31, 2006, there
were 33 pending lawsuits and arbitrations, of which 23 were against PCS and/or
its registered representatives. In accordance with SFAS No. 5 "Accounting for
Contingencies," the Company has established liabilities for potential losses
from such complaints, legal actions, investigations and proceedings. In
establishing these liabilities, the Company's management uses its judgment to
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determine the probability that losses have been incurred and a reasonable
estimate of the amount of the losses. In making these decisions, management
bases its judgments on its knowledge of the situation, consultations with legal
counsel and the Company's historical experience in resolving similar matters. In
many lawsuits, arbitrations and regulatory proceedings, it is not possible to
determine whether a liability has been incurred or to estimate the amount of
that liability until the matter is close to resolution. However, accruals are
reviewed regularly and are adjusted to reflect the Company's estimates of the
impact of developments, rulings, advice of counsel and any other information
pertinent to a particular matter. Because of the inherent difficulty in
predicting the ultimate outcome of legal and regulatory actions, the Company
cannot predict with certainty the eventual loss or range of loss related to such
matters. If management's judgments prove to be incorrect, the Company's
liability for losses and contingencies may not accurately reflect actual losses
that result from these actions, which could materially affect results in the
period other expenses are ultimately determined. The Company increased its legal
accrual by $0.1 million during the quarter ended December 31, 2006 based on new
developments on several cases. As of December 31, 2006 management had accrued
$0.7 million as a reserve for potential settlements, judgments and awards. PCS
has errors and omissions insurance coverage that it expects will cover a portion
of such matters. In addition, under the PCS registered representatives contract,
each registered representative is responsible for covering costs in connection
with these claims. While the Company will vigorously defend itself in these
matters, and will assert insurance coverage and indemnification claims, in each
case to the maximum extent possible, there can be no assurance that these
lawsuits and arbitrations will not have a material adverse impact on its
financial position.
5. LIQUIDITY AND CASH FLOW
During the six months ended December 31, 2006, the Company incurred a net loss
of $0.3 million and at December 31, 2006 had a working capital deficit position
of $14.9 million. At December 31, 2006 the Company had $0.5 million of cash and
cash equivalents and $3.5 million of trade account receivables, net, to fund
short-term working capital requirements.
The Company anticipates meeting its cash flow requirements throughout fiscal
2007 and 2008 by, among other things, significantly reducing operating expenses
and, due to the seasonality of the Company's business, at times employing
short-term financing from Prime Partners, Inc. There can be no assurance that
Prime Partners will extend further loans to the Company. In the absence of loans
from Prime Partners, the Company may not have access to sufficient funds to meet
its working capital needs. For the six months ended December 31, 2006, Prime
Partners, Inc. ("Prime Partners"), of which Michael P. Ryan, the Company's
President, is a director, an Officer and a significant shareholder, provided
short-term loans to the Company in the aggregate amount of $1.5 million for
working capital purposes. As of December 31, 2006, the Company owed Prime
Partners $2.8 million. These loans accrue 10% interest per annum and are payable
on April 15, 2007.
6. BUSINESS COMBINATIONS AND SOLD OFFICES
The Company has financed the sale of three offices with the receipt of notes to
be paid over various terms up to 60 months. These notes have guarantees from the
respective office purchaser and certain default provisions. All of these notes
are non-interest bearing and have been recorded with an 8% discount.
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GILMAN & CIOCIA INC - 10-Q
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On December 31, 2006, the Company assigned to Prime Partners a promissory note
to the Company related to the sale of the Company's Colorado Springs, Colorado
business as consideration for the reduction of $0.3 million against the $3.1
million of outstanding principal owed to Prime Partners. The balance of the note
on December 31, 2006 was $0.3 million.
On December 15, 2006, the Company assigned to Prime Partners a promissory note
to the Company related to the sale of the Company's Westport, Connecticut
business as consideration for the reduction of $49,075 against the $3.1 million
of outstanding principal owed to Prime Partners. The balance of the note on
December 15, 2006 was $49,075.
On November 30, 2006 the Company sold its tax preparation and financial planning
office located in Westport, Connecticut for $65,000. The Company received
$16,250 at the closing and a promissory note for $48,750.
On May 22, 2006, the Company assigned to Prime Partners a promissory note to the
Company related to the sale of two of its subsidiaries as consideration for the
reduction of $0.7 million against the then $2.0 million of outstanding principal
owed to Prime Partners. The balance of the note on May 22, 2006 was $0.7
million.
The scheduled payments for the balance of the term of the remaining notes are as
follows:
For the Years Ended June 30:
2007 $ 75,279
2008 85,072
2009 10,565
--------
Total $170,916
Less Allowance 13,399
--------
Total $157,517
========
7. DEBT
The Company is in default on substantially all of its debt.
On December 26, 2001, the Company closed a $7.0 million financing agreement (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 modified several large pre-maturity
principal payments, increased the "Applicable Margin" to 4.0%, changed the
Company's reporting requirements under the Loan and extended the due date of the
Loan (the "Maturity Date") several times. On April 1, 2006, the Company and
Wachovia entered into Amendment No. 4 to the Forbearance Agreement dated as of
November 27, 2002. Pursuant to Amendment No. 4 to the Forbearance Agreement: the
Maturity Date was extended from March 10, 2008 to October 10, 2008; commencing
on April 10, 2006, the monthly principal payment on the Revolving Credit Loan
was reduced from $30,830 to $25,000; commencing on April 10, 2006, the monthly
principal payment on the Term Loan was reduced from $35,375 to $25,000; Wachovia
- --------------------------------------------------------------------------------
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delivered to the Company an $862,000 promissory note to the Company dated
January 29, 2004, and it cancelled its collateral interest in the promissory
note; and Wachovia waived an extra principal payment due on or before April 1,
2006 in the sum of $74,205.42. The Company subsequently transferred the
promissory note as consideration for the reduction of $0.7 million against the
$2.0 million of outstanding principal as of May 22, 2006 owed to Prime Partners.
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 based on the Company's historical experience with
Wachovia.
The Company's $5.0 million distribution financing agreement with Travelers
closed on November 1, 2000. On September 24, 2002, the Company received a notice
from Travelers alleging that the Company was in default under its distribution
financing agreement with Travelers due to nonpayment of a $0.1 million penalty
for failure to meet sales production requirements as specified in the
distribution financing agreement. The Company responded with a letter denying
that the Company was in default. Although the Traveler's notice stated that all
unpaid interest and principal under the distribution financing agreement were
immediately due and payable and that Travelers reserved its rights and remedies
under the distribution financing agreement, it also stated that Travelers
intended to comply with the terms of the Subordination Agreement between
Travelers and Wachovia. The Subordination Agreement greatly restricts the
remedies that Travelers may 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.
The Rappaport Loan, together with 785,298 shares of Company common stock held by
Rappaport, were sold to a group of Company management and employees on April 29,
2005 for the amount of $0.8 million. The $0.3 million debt reduction, agreed to
by the Purchasing Group, was recorded to paid-in-capital, as the Purchasing
Group is a related party. Pursuant to the terms of the Rappaport Loan, members
of this Purchasing Group, as holder of the Rappaport Loan, are entitled to
receive, in the aggregate, as interest, 180,000 shares of the Company's common
stock annually while the debt remains unpaid.
Since the Company is not in compliance with the financial covenants and other
obligations in its agreements relating to the Wachovia and Travelers loans, or
its agreements with other lenders, and if such lenders elect 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. There
can be no guarantee that the lenders will agree to terms in the future that are
more favorable to the Company than the current arrangements with the lenders.
8. STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued SFAS 123-R.
SFAS 123-R is a revision of SFAS No. 123, as amended, Accounting for Stock-Based
Compensation ("SFAS 123"), and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees ("APB 25"). SFAS 123-R
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements. SFAS 123-R establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all companies to apply a fair-value-based measurement method in
accounting for generally all share-based payment transactions with employees.
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On July 1, 2005 (the first day of its 2006 fiscal year), the Company adopted
SFAS 123-R. The Company adopted SFAS 123-R using a modified prospective
application, as permitted under SFAS 123-R. Accordingly, prior period amounts
have not been restated. Under this application, the Company is required to
record compensation expense for all awards granted after the date of adoption
and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. Per the provisions of SFAS 123-R, the
Company has adopted the policy to recognize compensation expense on a
straight-line attribution method.
Changes in the Company's stock option activity during the six months ended
December 31, 2006 were as follows:
Outstanding, June 30, 2006 1,108,500
Granted --
Exercised --
Expired (250,000)
Canceled --
---------
Outstanding, December 31, 2006 858,500
Exercisable December 31, 2006 858,500
9. RELATED PARTY TRANSACTIONS
A trust, of which Ted H. Finkelstein, the Company's Vice President and General
Counsel as of February 1, 2007, is the trustee ("the Trust"), made a short-term
loan to Prime Partners for $0.3 million on July 18, 2006, which accrues interest
at 10% per annum. On October 16, 2006, the Trust made an additional short-term
loan to Prime Partners for $0.2 million, which accrues interest at 10% per
annum. As of February 1, 2007, Prime Partners owed the Trust $0.5 million which
is payable on April 15, 2007. As security for the total loan in the amount of
$0.5 million, Prime Partners gave the Trust a security interest in the note
related to the sale of two of its subsidiaries that the Company assigned to
Prime Partners on May 22, 2006 which is payable on April 15, 2007.
10. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan for the benefit of its eligible employees.
The Company makes annual matching contributions to the plan at its discretion.
The aggregate cost of contributions made by the Company to the 401(k) plan was
zero during the fiscal years ended June 30, 2006 and 2005. The Company submitted
its 5500 filing for fiscal year 2005 in September 2006 and audits for the fiscal
periods ended 2002, 2003, 2004 and 2005 are completed. A hearing was held with
the United States Department of Labor regarding fines for late 5500 filings for
fiscal years 2002, 2003, and 2004. On December 12, 2006, the United States
Department of Labor approved a Consent Findings and Order between the Company
and the Employee Benefits Security Administration dated December 6, 2006. The
Consent Findings and Order advised that the Company had previously failed to
file annual reports under the Employee Retirement Income Security Act of 1974
(ERISA), but that the Company had subsequently achieved substantial compliance
with ERISA and prevailing regulations. In November 2006 the Company paid a
penalty of $36,000 for its previous failure to file and the matter is now
settled and closed.
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11. ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, June 30,
2006 2006
----------------------------
Accounts payable $ 1,939,988 $ 2,370,279
Commission payable 3,789,024 3,626,163
Accrued compensation 276,436 269,235
Accrued bonus 58,371 59,000
Accrued related party compensation and bonus 374,214 572,916
Accrued related party other 250,000 250,000
Accrued vacation 80,457 188,121
Accrued settlement fees 557,556 954,748
Accrued audit fees & tax fees 123,750 185,000
Accrued interest 2,119,046 1,811,672
Accrued other 536,899 672,772
----------------------------
Total Revenue $10,105,741 $10,959,906
============================
12. SUBSEQUENT EVENTS
On January 4, 2007, Prime Partners loaned the Company an additional $0.1 million
and the Company repaid the $0.1 million on January 12, 2007. As of January 22,
2007 the Company owed Prime Partners $2.8 million. These loans pay 10% interest
per annum and are payable on April 15, 2007.
On January 1, 2007, the Company entered into four asset purchase agreements to
purchase tax preparation and accounting businesses. The purchase price is equal
to a percentage of gross revenue generated from the preparation of tax returns
of the clients and from accounting services rendered to clients during the
period January 1, 2007 through December 31, 2007. In addition the Company paid
the sellers at closing $10,000 for tangible personal property and down payments
of $114,500. In March 2007 the Company will pay the sellers an additional
installment payment of $114,500 and the balance of the purchase price will be
paid in January 2008, based on the gross revenue generated.
On February 1, 2007 Ted H. Finkelstein was appointed Vice President and General
Counsel by the Board of Directors, replacing Daniel Wieneke who resigned as
Senior Vice President and General Counsel of the Company on December 8, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Form 10-Q and the exhibits hereto may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). Such statements, including statements
regarding the implementation and impact of accounting treatments, working
capital needs and sources, the Company's expectations regarding payment of
purchase price in connection with acquisitions, the effects of defaults under
the Company's loan arrangements, the Company's expectations regarding its
potential insurance coverage and indemnification claims, the Company's
expectations regarding actions of its lenders, expectations regarding the sale
of Company assets, expenses, estimates of timing for and contributions to future
profitability, if any, the effects of the Company's delisting from Nasdaq,
resources necessary to comply with Sarbanes-Oxley Section 404, effects of the
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Securities and Exchange Commission's ("SEC") investigation of the Company, the
effects and outcome of litigation against the Company and against its directors
and officers, trends and changes in the Company's product mix and its emphasis
on certain products, the Company's revenues and the seasonal nature of its
revenues, the Company's expectations regarding its ability to control expenses
and its efforts to build brand awareness, and the Company's activities to limit
market risk 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 forecasted in such forward-looking statements.
Such differences could be caused by a number of factors including, but not
limited to, the uncertainty of laws, legislation, regulations, supervision and
licensing by federal, state and local authorities and their impact on the lines
of business in which the Company and its subsidiaries are involved; unforeseen
compliance costs; changes in economic, political or regulatory environments; the
impact on the Company if one or more of the Company's lenders elects to pursue
its available remedies as a result of the Company's default under applicable
loan documents with such lender; changes in competition and the effects of such
changes; the departure of key Company personnel; 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, arbitration and investigations
involving the Company and its directors and officers; decreased liquidity and
share price and difficulty raising capital resulting from our delisting from
Nasdaq and other factors; the impact of our delisting from Nasdaq on our
business generally and on our share price and the trading market in our
securities; internal control deficiencies and the Company's potential inability
to remedy them; and other risks including those described in Item 1A."Risk
Factors" of this quarterly report on Form 10-Q. 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.
Where appropriate, prior years financial statements reflect reclassifications to
conform to the current year presentation.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes thereto set forth in Item 1.
"Financial Statements".
OVERVIEW
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, the
"Company") is a corporation that was organized in 1981 under the laws of the
State of New York and reincorporated under the laws of the State of Delaware in
1993. The Company provides federal, state and local tax preparation services to
individuals, predominantly in the middle and upper income tax brackets, and
financial planning services, including securities, insurance and mortgage
brokerage services. In fiscal 2006, approximately 90.0% of the Company's
revenues were derived from commissions on financial planning services and
approximately 10.0% were derived from fees for tax preparation services. As of
December 31, 2006, the Company had 28 offices operating in four states (New
York, New Jersey, Florida and Pennsylvania).
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The Company provides financial planning services through both its 28 Company
owned offices and through approximately 70 independently owned and operated
financial planning offices. The Company office financial planning clients
generally are introduced to the Company through the Company's tax return
preparation services and educational workshops. The Company believes that its
tax return preparation business is inextricably intertwined with its financial
planning activities in the Company offices. Future profitability will depend, in
part, on the two channels leveraging off each other since many of the same
processes, procedures and systems support sales from both channels.
All of the Company's financial planners are employees or independent contractors
of the Company and registered representatives of Prime Capital Services, Inc.
("PCS"), a wholly owned subsidiary of the Company. PCS conducts a securities
brokerage business providing regulatory oversight and products and sales support
to its registered representatives, who provide investment products and services
to their clients. PCS earns a share of commissions from the services that the
financial planners provide to their clients in transactions for securities,
insurance and related products. PCS is a registered securities broker-dealer
with the Securities and Exchange Commission ("SEC") and a member of the National
Association of Securities Dealers, Inc. ("NASD"). The Company also has a wholly
owned subsidiary, Asset & Financial Planning, Ltd. ("AFP"), which is registered
with the SEC as an investment advisor. Almost all of the Company's financial
planners are also authorized agents of insurance underwriters. The Company is a
licensed mortgage broker in the State of New York. GC Capital Corporation, a
wholly owned subsidiary of the Company, is also a licensed mortgage broker in
the State of Florida. The Company has the capability of processing insurance
business through PCS and Prime Financial Services, Inc. ("PFS"), wholly owned
subsidiaries, which are licensed insurance brokers, as well as through other
licensed insurance brokers. As a result, the Company also earns revenues from
commissions for acting as an insurance broker and a mortgage broker.
A majority of the financial planners located in Company offices are also tax
preparers. The Company's tax preparation business is conducted predominantly in
February, March and April. During the tax season, the Company significantly
increases the number of employees involved in tax preparation. During the 2006
tax season, the Company prepared approximately 22,200 United States tax returns.
During the three months ended December 31, 2006, the Company had a net loss of
$0.3 compared to a net loss of $0.6 million during the three months ended
December 31, 2005. This decrease in net loss is mostly attributable to increased
financial planning revenue, the gain from the sale of its Westport, Connecticut
business and the Company's efforts to reduce most of its operating expenses, all
partially offset by increased commission expense.
At December 31, 2006 the Company had a working capital deficit of $14.9 million.
At December 31, 2006 the Company had $0.5 million of cash and cash equivalents
and $3.5 million of trade accounts receivables, net, to fund short-term working
capital requirements.
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The Company anticipates meeting its cash flow requirements throughout fiscal
2007 and 2008 by, among other things, significantly reducing operating expenses
and, due to the seasonality of the Company's business, at times employing
short-term financing from Prime Partners, Inc. There can be no assurance that
Prime Partners will extend further loans to the Company. In the absence of loans
from Prime Partners, the Company may not have access to sufficient funds to meet
its working capital needs. See Note 7 to Notes to Consolidated Financial
Statement for a discussion of the Company's debt.
Since the Company is not in compliance with the financial covenants and other
obligations in its agreements relating to the Wachovia and Travelers loans, or
its agreements with other lenders, and if such lenders elect 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. There
can be no guarantee that the lenders will agree to terms in the future that are
more favorable to the Company than the current arrangements with the lenders.
The Company continues to redefine its product mix, placing a smaller emphasis on
the sale of annuities, while putting a greater emphasis on the sale of other
financial products that generate recurring income. The Company expects that this
trend will continue in future quarters. The Company is attempting to increase
revenue by, among other things, implementing its recently established
representative recruiting program. The financial impact of new recruits could
take several months for revenue on new accounts to become recognizable. If this
program is not successful in generating additional revenue, the anticipated
decreases in the sales of annuities, which typically generate higher upfront
commissions, may result in continued downward pressure on total revenues in
future quarters until the Company starts to more significantly benefit from the
affect of the greater sale of products that generate recurring income. The
Company expects that it will continue to control levels of salary and general
and administrative expenses, while increasing spending on marketing efforts to
build brand awareness and attract new clients. The Company cannot predict
whether its marketing efforts will have the desired effects.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 2005
The following table presents revenue by product line and brokerage revenue by
product type:
For the Three Months Ended
December 31
Consolidated Revenue Detail % Change
2006 2005 06-05
-----------------------------------------
Revenue by Product Line
Brokerage Commissions $ 8,712,096 $ 8,438,170 3.2%
Insurance Commissions 258,712 205,242 26.1%
Advisory Fees 2,454,031 2,241,299 9.5%
Tax Preparation Fees 301,421 320,987 -6.1%
Lending Services 135,813 174,694 -22.3%
Marketing Revenue 168,816 167,041 1.1%
-----------------------------------------
Total Revenue $12,030,889 $11,547,433 4.2%
=========================================
Brokerage Revenue by Product Type
Mutual Funds $ 1,460,824 $ 1,283,340 13.8%
Equities, Bonds & UIT 342,007 289,321 18.2%
Annuities 4,764,774 4,588,704 3.8%
Trails 1,739,593 1,864,231 -6.7%
All other products 404,898 412,574 -1.9%
-----------------------------------------
Brokerage Revenue $ 8,712,096 $ 8,438,170 3.2%
=========================================
The Company's total revenues for the three months ended December 31, 2006 were
$12.0 million compared to $11.5 million for the three months ended December 31,
2005, an increase of $0.5 million or 4.2%. The Company's total revenues for the
three months ended December 31, 2006 consisted of $11.7 million for financial
planning services and $0.3 million for tax preparation services. Financial
planning services represented approximately 97.0% and tax preparation services
represented approximately 3.0% of the Company's total revenues during the three
months ended December 31, 2006. The Company's total revenues for the three
months ended December 31, 2005 consisted of $11.2 million for financial planning
services and $0.3 million for tax preparation services. Financial planning
services represented approximately 97.0% and tax preparation fees represented
approximately 3.0% of the Company's total revenues during the three months ended
December 31, 2005.
Financial planning revenue increased $0.5 million, or 4.5%, for the three months
ended December 31, 2006 compared with the same period last year. The increase in
revenue was mostly due to increases in mutual funds, advisory fees and increased
annuities mostly due to the realization of actual revenue less than estimates
for the three months ended December 31, 2005. The Company's continued efforts to
diversify its revenue to more recurring revenue streams are reflected in the
increase of advisory fees by $0.2 million for the three months ended December
31, 2006.
For the three months ended December 31, 2006, revenues from recurring revenue
sources (advisory and trails) increased to $4.2 million, up $0.1 million from
$4.1 million for the three months ended December 31, 2005, representing a 2.1%
increase in recurring revenue. The increase in recurring revenues is the result
of higher assets under management and assets under custody, partially offset
from the realization of actual trail revenues higher than estimates made at
September 30, 2005.
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As indicated in the following table, as of December 31, 2006, assets under AFP
management increased $85.3 million, to $645.5 million, up from $560.2 million as
of December 31, 2005. This increase is attributable to increases in assets under
management, as well as market fluctuations. As of December 31, 2006, total
Company assets under custody were $4.6 billion, up $185.0 million from the
fiscal year ended June 30, 2006 and up $385.7 million from December 31, 2005 one
year ago.
The following table presents the market values of assets under AFP management:
Market Value as of December 31,
2006 2005 % Increase
--------------------------------------------
Annuities 349,081,168 340,330,252 2.6%
Brokerage 296,369,482 219,871,338 34.8%
--------------------------------------------
Total Assets Under Management $645,450,650 $560,201,590 15.2%
============================================
The following table presents the market values of total Company assets under
custody:
Total Company
Market Value as of Assets Under Custody
------------------ --------------------
12/31/2006 $4,648,292,500
9/30/2006 $4,543,796,200
6/30/2006 $4,463,247,700
3/31/2006 $4,446,357,600
12/31/2005 $4,262,634,300
The Company's total operating expenses for the three months ended December 31,
2006 were $12.2 million, up $0.3 million or 2.5%, compared to $11.9 million for
the three months ended December 31, 2005. This increase is mostly due to
increased commission expense and brokerage fees and licenses, partially offset
by lower salaries, general administrative expenses, advertising, and rent.
For the three months ended December 31, 2006, commission expense was $7.7
million compared to $6.7 million for the three months ended December 31, 2005.
This increase is mostly attributable to an increase in revenues and the
realization of actual commission expense more than estimates made at September
30, 2005.
Salaries decreased by $0.1 million, or 5.2% in the three months ended December
31, 2006 compared with the same period last year. This decrease is attributable
to staff reductions in the fourth quarter of fiscal 2006.
General and administrative expenses decreased $0.5 million or 27.5% in the three
months ended December 31, 2006 compared with the same period last year. This
decrease is primarily attributable to decreases in general office expense as a
result of office closings and consolidations, tighter cost controls, reduced
client settlement expense, as well as reduced bad debt expense resulting from
the reversal of the established allowance related to certain gross receivables
transferred to Prime Partners, Inc. at face value to reduce the outstanding
principle owed to Prime Partners, Inc.
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Advertising expense was $0.2 million for the three months ended December 31,
2006, compared with $0.3 million for the same period last year. This decrease is
mostly due to the Company's efforts to find less expensive advertising channels,
but still maintain brand awareness.
Brokerage fees and licenses was $0.4 million for the three months ended December
31, 2006, compared with $0.3 million for the same period last year. This
increase is mostly due to increased financial planning revenue for the three
months ended December 31, 2006.
Rent was $0.5 million for the three months ended December 31, 2006, compared
with $0.6 million for the same period last year. This decrease in rent is due to
the closing and consolidation of Company offices during the first and second
quarter of fiscal 2007.
The Company's loss from continuing operations before other income and expenses
for the three months ended December 31, 2006 was $0.2 million compared with $0.3
million for the three months ended December 31, 2005, a decreased loss of $0.2
million. This decrease in losses is mostly attributable to increased financial
planning revenue, reduced salaries, general administrative expenses, advertising
and rent, partially offset by increased commission expense.
Other income, net was $0.1 million for the three months ended December 31, 2006,
compared with $6,773 for the same period last year. This increase in other
income is due to the gain on the sale of the Company's Westport, Connecticut
business during the three months ended December 31, 2006.
The Company's net loss for the three months ended December 31, 2006 is $0.3
million compared with $0.6 million for the three months ended December 31, 2005.
This decrease is mostly attributable to increased financial planning revenue,
the gain from the sale of its Westport, Connecticut business and the Company's
efforts to reduce its operating expenses, partially offset by increased
commission expense.
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RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 2006 COMPARED TO SIX
MONTHS ENDED DECEMBER 31, 2005
The following table presents revenue by product line and brokerage revenue by
product type:
For the Six Months Ended
December 31
Consolidated Revenue Detail % Change
2006 2005 06-05
-----------------------------------------
Revenue by Product Line
Brokerage Commissions $16,392,512 $16,940,635 -3.2%
Insurance Commissions 597,441 956,791 -37.6%
Advisory Fees 4,965,647 4,441,290 11.8%
Tax Preparation Fees 709,941 783,814 -9.4%
Lending Services 313,032 379,016 -17.4%
Marketing Revenue 551,523 536,317 2.8%
-----------------------------------------
Total Revenue $23,530,096 $24,037,863 -2.1%
=========================================
Brokerage Revenue by Product Type
Mutual Funds $ 2,235,658 $ 2,535,957 -11.8%
Equities, Bonds & UIT 594,386 618,450 -3.9%
Annuities 9,276,629 9,585,135 -3.2%
Trails 3,581,366 3,316,057 8.0%
All other products 704,473 885,036 -20.4%
-----------------------------------------
Brokerage Revenue $16,392,512 $16,940,635 -3.2%
=========================================
The Company's total revenues for the six months ended December 31, 2006 were
$23.5 million compared to $24.0 million for the six months ended December 31,
2005, a decrease of $0.5 million or 2.1%. The Company's total revenues for the
six months ended December 31, 2006 consisted of $22.8 million for financial
planning services and $0.7 million for tax preparation services. Financial
planning services represented approximately 97.0% and tax preparation services
represented approximately 3.0% of the Company's total revenues during the six
months ended December 31, 2006. The Company's total revenues for the six months
ended December 31, 2005 consisted of $23.3 million for financial planning
services and $0.8 million for tax preparation services. Financial planning
services represented approximately 97.0% and tax preparation fees represented
approximately 3.0% of the Company's total revenues during the six months ended
December 31, 2005.
Financial planning revenue declined $0.4 million, or 1.9%, for the six months
ended December 31, 2006 compared with the same period last year. The decline in
revenue affected almost every major product category of the Company, including
mutual funds, annuities and insurance commissions. The decline in revenue is
mostly attributable to sales representative attrition, partially offset by an
increase in production from existing representatives. The Company's continued
efforts to diversify its revenue to more recurring revenue streams are reflected
in the increase of advisory fees and trails by $0.5 million and $0.3 million,
respectively.
For the six months ended December 31, 2006, the Company's tax preparation
revenue was $0.7 million compared to $0.8 million for the six months ended
December 31, 2005. This decline in revenue is attributable to the Company's sale
of its Colorado office during the first quarter of fiscal 2006 and tax preparer
attrition in several of its offices during the six months ended December 31,
2006.
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For the six months ended December 31, 2006, revenues from recurring revenue
sources (advisory and trails) increased to $8.5 million, up $0.8 million from
$7.8 million for the six months ended December 31, 2005, representing a 10.2%
increase in recurring revenue. For the six months ended December 31, 2006,
recurring revenue was 36.3% of the Company's total revenue compared to 32.3% for
the six months ended December 31, 2005. The increase in recurring revenues is
the result of higher assets under management and assets under custody.
The Company's total operating expenses for the six months ended December 31,
2006 were $24.0 million, down $1.3 million, or 5.3%, compared to $25.4 million
for the six months ended December 31, 2005. This decrease is mostly attributable
to lower salaries, general administrative expenses, advertising, brokerage fees
and licenses, and rent, partially offset by higher commission expense.
For the six months ended December 31, 2006, commission expense was $14.7 million
compared to $14.5 million for the six months ended December 31, 2005. This
increase is mostly attributable to the realization of actual commission expense
more than estimates made at June 30, 2005.
Salaries decreased by $0.4 million, or 8.9% in the six months ended December 31,
2006 compared with the same period last year. This decrease is attributable to
staff reductions in the fourth quarter of fiscal 2006.
General and administrative expenses decreased $1.0 million or 27.8% in the six
months ended December 31, 2006 compared with the same period last year. This
decrease is primarily attributable to decreases in general office expense and
professional fees, as well as bad debt expense resulting from the reversal of
the established allowance related to certain gross receivables transferred to
Prime Partners, Inc. and to certain receivables where collectibility is more
favorable.
Advertising expense was $0.6 million for the six months ended December 31, 2006
compared with $0.7 million for the same period last year. This decrease is
mostly due to the Company's efforts to find less expensive advertising channels,
but still maintain brand awareness.
Brokerage fees and licenses were $0.7 million for the six months ended December
31, 2006 compared with $0.8 million for the same period last year. The decrease
was mostly due to the decline in financial planning revenue.
Rent was $1.0 million for the six months ended December 31, 2006, compared with
$1.1 million for the same period last year. This decrease in rent is due to the
closing and consolidation of Company offices during the first and second
quarters of fiscal 2007.
The Company's loss from continuing operations before other income and expenses
for the six months ended December 31, 2006 was $0.5 million compared with a loss
of $1.3 million for the six months ended December 31, 2005, a decreased loss of
$0.8 million. This decrease in losses is mostly attributable to reduced
operating expenses, including reduced salaries and general administrative
expenses, partially offset by declines in financial planning revenue and higher
commission expense mostly attributable to the realization of actual commission
expense more than estimates made at June 30, 2005.
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Other income, net was $0.6 million for the six months ended December 31, 2006,
compared with $21,911 for the same period last year. This increase in other
income is due to the recognition of deferred income related to the Company's
renewed clearing agreement and the gain on the sale of the Company's Westport,
Connecticut business during the six months ended December 31, 2006.
The Company's net loss for the six months ended December 31, 2006 is $0.3
million compared with $1.7 million for the six months ended December 31, 2005.
This decrease in loss is mostly attributable to the Company's efforts to reduce
its operating expenses and its recognition of deferred income of $0.6 million
related to its renewed clearing agreement and its gain on the sale of its
Westport, Connecticut business, partially offset by reduced financial planning
revenue and higher commission expense mostly attributable to the realization of
actual commission expense more than estimates made at June 30, 2005.
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LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 2006 and during fiscal 2006, the Company
was in default of certain covenants under (i) its $7.0 million term
loan/revolving letter of credit financing with Wachovia Bank, National
Association ("Wachovia"), and (ii) its $5.0 million distribution financing with
Travelers Insurance Company ("Travelers").
As a result of a number of defaults under its agreements with Wachovia, on
November 27, 2002, the Company entered into a debt forbearance agreement with
Wachovia and subsequently amended the debt forbearance agreement as of June 18,
2003, March 4, 2004, March 1, 2005 and April 1, 2006. Travelers has claimed
several defaults under its distribution financing agreement, but has
acknowledged that it is subject to the terms of a subordination agreement with
Wachovia (the "Subordination Agreement"), which restricts the remedies it can
pursue against the Company. The Company's debt to Rappaport Gamma Limited
Partnership (the "Rappaport Loan") was due on October 30, 2002. The Rappaport
Loan is subordinated to the Wachovia loan. The Rappaport Loan was sold to a
group of Company management and employees (the "Purchasing Group") on April 29,
2005. The members of the Purchasing Group include Prime Partners, Inc. ("Prime
Partners"), a corporation controlled by Michael Ryan, a director, an officer and
a significant shareholder of the Company, James Ciocia, the Chairman of the
Company, Christopher Kelly, former 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, Vice President and General
Counsel of the Company as of February 1, 2007, and certain other Company
employees. The Purchasing Group agreed to reduce the principal balance of the
Rappaport Loan from $1.0 million to $0.8 million and extended the maturity date
to April 29, 2009. Pursuant to the terms of the Rappaport Loan, members of the
Purchasing Group, as holder of the Rappaport Loan, are entitled to receive, in
the aggregate, as interest, 180,000 shares of the Company's common stock
annually while the debt remains unpaid. As a result of these defaults, the
Company's debt as to those lenders has been classified as current liabilities on
its financial statements. Upon the purchase of the Rappaport Loan by the
Purchasing Group, however, the Rappaport Loan was reclassified as a related
party transaction. See Note 7 to Notes to Consolidated Financial Statement for a
discussion of the Company's debt.
As a result of these defaults, the Company's debt as to these lenders has been
classified as current liabilities on its financial statements. Upon the purchase
of the Rappaport Loan by the Purchasing Group, however, the Rappaport Loan was
reclassified as a related transaction.
During the six months ended December 31, 2006, the Company incurred a net loss
of $0.3 and at December 31, 2006 had a working capital deficit position of $14.9
million. At December 31, 2006 the Company had $0.5 million of cash and cash
equivalents, $0.1 million in marketable securities and $3.5 million of trade
account receivables, net, to fund short-term working capital requirements. PCS
is subject to the SEC's Uniform Net Capital Rule 15c3-1, which requires that PCS
maintain minimum regulatory net capital of $100,000 and, in addition, that the
ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to one. At December 31, 2006 the Company was in compliance with this
regulation.
The Company has shown losses for a variety of reasons including legacy issues
that include high cost structures for the home and field offices, the costs of
abandoned leases and significant litigation. The Company has also suffered
increased regulatory costs, and downward pressure on commission levels. The
Company has previously attempted to address its financial condition by among
other things, selling assets to raise cash, cutting operating expenses,
retaining existing registered representatives and borrowing from Prime Partners,
Inc. ("Prime Partners"), of which Michael P. Ryan, the Company's President, is a
director, an Officer and a significant shareholder.
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As a result of the Company's renegotiations with Wachovia, which resulted in the
execution of Amendment No. 4 to the Forbearance Agreement as of April 1, 2006,
notwithstanding the defaults with Wachovia, the Company's debt service
requirements have been significantly reduced below those of the quarter ended
December 31, 2005.
Additionally, during the third and fourth quarters of the Company's fiscal year,
significantly more cash is typically generated from its tax preparation business
than during the first and second quarters of the Company's fiscal year.
The Company is currently attempting to (i) increase revenues through a recently
initiated registered representative recruiting program, (ii) increase its
reserves and (iii) initiate discussions with its lenders to renegotiate its
financing arrangements.
Other initiatives the Company is pursuing include (i) consolidating offices to
preserve the Company's revenue stream and to further reduce overhead expenses,
(ii) negotiating with the top producers in the independent representative
channel to move them to the Company representative channel, and (iii) lowering
compensation levels for lower producing Company representatives.
Furthermore, the Company has demonstrated an ability to raise capital from
insiders and key producers when necessary through the Rappaport transaction, as
described above. The Company has also continued to raise capital through Prime
Partners.
There can be no guarantee, however, that the Company will be able to
successfully implement its strategy, and in particular, there can be no
guarantee that the Company's lenders will agree to terms in the future that are
more favorable to the Company than the current arrangements with the lenders.
Further, there can be no guarantee that the Company will be able to sell
additional assets, raise capital, or be able to generate further cost savings
without adversely impacting revenue and profitability.
The Company anticipates meeting its cash flow requirements throughout fiscal
2007 and 2008 by, among other things, significantly reducing operating expenses
and, due to the seasonality of the Company's business, at time employing
short-term financing from Prime Partners, Inc. There can be no assurance that
Prime Partners will extend further loans to the Company. In the absence of loans
from Prime Partners, the Company may not have access to sufficient funds to meet
its working capital needs. For the six months ended December 31, 2006, Prime
Partners, of which Michael P. Ryan, the Company's President, is a director, an
Officer and a significant shareholder, provided short-term loans to the Company
in the aggregate amount of $1.5 million for working capital purposes. These
loans pay 10% interest per annum. As of December 31, 2006, the Company owed
Prime Partners $2.8 million.
The Company's net cash used in operating activities was $1.0 million for the six
months ended December 31, 2006, compared with net cash used in operating
activities of $0.7 million for the six months ended December 31, 2005. The
increase of $0.3 million in net cash used in operating activities was primarily
attributable to increased cash outflows to pay down accounts payable and accrued
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expenses, partially offset by significant improvements in earnings compared with
the same period last year. The first and second quarters of the Company's fiscal
year are typically its weakest quarters for generating cash flow from operations
and the third quarter of its fiscal year is typically its strongest. During the
first and second quarter, the Company borrowed additional funds from Prime
Partners to meet operating cash shortfalls.
Net cash provided by investing activities was $19,490 for the six months ended
December 31, 2006 compared with net cash provided by investing activities of
$72,657 for the six months ended December 31, 2005. The decrease in net cash
provided by investing activities was mostly attributable to increased
receivables from employees for the six months ended December 31, 2006 related to
forgiveable loans as a result of the Company's recruiting efforts as well as
lower cash receipts from office sales during the six months ended December 31,
2006.
Net cash provided by financing activities was $0.4 million for the six months
ended December 31, 2006 compared with net cash provided by financing activities
of $0.6 million for the six months ended December 31, 2005. The decrease in cash
provided is due primarily to decreased borrowings from Prime Partners due to
improvements in operating cash shortfalls and by reduced payments on bank loans
and capital leases.
Non-cash items affecting both investing and financing activities included the
transfer of notes receivables related to the sale of two offices during the six
month period ended December 31, 2006 to Prime Partners to reduce the Company's
debt to Prime Partners in the amount of $0.3 million.
MARKET FOR COMPANY'S COMMON EQUITY
The shares of the Company's common stock were delisted from The Nasdaq Stock
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 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.
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
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or other speculative purposes. The Company is exposed to market risk associated
with changes in the fair market value of the marketable securities that it
holds. The Company's revenue and profitability may be adversely affected by
declines in the volume of securities transactions and in market liquidity, which
generally result in lower revenues from trading activities and commissions.
Lower securities price levels may also result in a reduced volume of
transactions, as well as losses from declines in the market value of securities
held by the Company in trading and investment positions. Sudden sharp declines
in market values of securities and the failure of issuers and counterparts to
perform their obligations can result in illiquid markets in which the Company
may incur losses in its principal trading activities.
The Company's obligations under its Wachovia and Travelers credit facilities
bear interest at floating rates and therefore, the Company is impacted by
changes in prevailing interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In performing its audit of our Consolidated Financial Statements for fiscal
2006, our independent auditors, Sherb & Co., LLP ("Sherb"), notified our Board
of Directors of a material weakness in internal controls under standards
established by the American Institute of Certified Public Accountants.
Reportable conditions and material weaknesses 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.
Sherb designed its audit procedures to address the matter described below in
order to obtain reasonable assurance that the financial statements are free of
material misstatement and to issue an unqualified audit report.
A material weakness is a control deficiency or combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of June 30, 2006, the Company did not maintain effective
controls over the completeness and accuracy of its legal and litigation
reserves. Specifically, the Company did not have effective controls over
estimating and monitoring the legal and litigation reserves recorded as a
liability. This control deficiency resulted in a material amount of audit
adjustments being recorded as a result of the fiscal 2006 annual audit.
Management believes that such control deficiency represents a material weakness
in internal control over financial reporting that results in a reasonable
likelihood that a material misstatement in our financial statements will not be
prevented or detected by our employees in the normal course of performing their
assigned functions.
The Company continues its efforts to remediate these conditions and has and will
continue to implement enhanced procedures to accelerate improvement of its
internal controls.
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 Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officers, to allow timely decisions regarding
required disclosure.
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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) as of the end of the period
covered by this report. 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. Due to
the material weakness in internal control over financial reporting previously
noted and insufficient passage of time to test the enacted changes to determine
if such changes are effective as at and prior to June 30, 2006, management
concludes that the Company's disclosure controls and procedures are ineffective.
Changes in Internal Controls
There were no changes in internal controls over financial reporting during the
quarter ended December 31, 2006 that have materially affected or that are likely
to materially affect the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
Significant deficiencies in internal controls over financial reporting raise
doubts about the Company's ability to comply with financial reporting laws and
regulations and to publish accurate financial statements
The Company has been advised by Sherb & Co., LLP, its auditors, of the existence
of a reportable condition involving significant deficiencies in the design and
operation of the Company's internal controls over financial reporting that could
adversely affect the Company's ability to record, process, summarize and report
financial data consistent with the assertions of management in the financial
statements. Specifically, the Company did not have effective controls over
estimating and monitoring the legal and litigation reserves recorded as a
liability. 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. The presence of a
material weakness in our controls and procedures means there is a more than
remote likelihood that a material misstatement in our annual or interim
financial results will not be prevented or detected, which could result in
material harm to our business and financial position.
The Company's substantial debt and decreased access to capital could result in
insufficient funds to meet its working capital requirements
The Company is currently and has been operating with low levels of capital
during recent periods. While the Company itself is not subject to any minimum
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capital requirement, it requires working capital to pay salaries, pay vendors,
including landlords, and otherwise operate its business. At December 31, 2006
the Company had a working capital deficit of $14.9 million and the Company has
regularly been forced to borrow from Prime Partners, a corporation controlled by
Michael Ryan, a director, an officer and a significant shareholder of the
Company, to pay its obligations. In fiscal 2006, Prime Partners extended
short-term loans to the Company in the aggregate amount of $3.1 million for
working capital purposes. At December 31, 2006, the Company owed Prime Partners
$2.8 million. On January 4, 2007, Prime Partners loaned the Company an
additional $0.1 million, which was repaid on January 12, 2007. As of February 8,
2007 the Company owed Prime Partners $2.8 million.
Changing laws and regulations have resulted in increased compliance costs for
the Company, which could affect its operating results
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, and newly enacted
SEC regulations have created additional compliance requirements for companies in
a similar industry as the Company. The Company is committed to maintaining high
standards of internal controls over financial reporting, corporate governance
and public disclosure. As a result, the Company intends to invest appropriate
resources to comply with evolving standards, and this investment may result in
increased general and administrative expenses and a diversion of management time
and attention from revenue-generating activities to compliance activities. See
Item 4."Controls and Procedures."
The expense and diversion of management attention which result from litigation
could have an adverse effect on the Company's operating results and could harm
its ability to effectively manage its business
If the Company were to be found liable to clients for misconduct alleged in
civil proceedings, the Company's operations may be adversely affected. Many
aspects of the Company's business involve substantial risks of liability. There
has been an increase in litigation and arbitration within the Company's
securities industry in recent years, including class action suits seeking
substantial damages. Broker-dealers such as PCS are subject to claims by
dissatisfied clients, including claims alleging they were damaged by improper
sales practices such as unauthorized trading, churning, sale of unsuitable
securities, use of false or misleading statements in the sale of securities,
mismanagement and breach of fiduciary duty. Broker-dealers may be liable for the
unauthorized acts of their retail brokers and independent contractors if they
fail to adequately supervise their conduct. PCS is currently a
defendant/respondent in numerous such proceedings. PCS maintains securities
broker-dealer's professional liability insurance to insure against this risk,
but the insurance policy contains a deductible (presently $50,000) and a
cumulative cap on coverage (presently $3,000,000). In addition, certain
activities engaged in by brokers may not be covered by such insurance. The
adverse resolution of any legal proceedings involving the Company could have a
material adverse effect on its business, financial condition, and results of
operations or cash flows.
The outcome of the SEC investigation could have a material affect on the
Company's operating results
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by the Company's registered representatives
during the period January 1, 2002 through August 1, 2005. On June 22, 2006, the
SEC entered a formal order of investigation. The Company cannot predict whether
or not the investigation will result in an enforcement action. Further, if there
were an enforcement action, the Company cannot predict whether or not its
operating results would be affected.
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The delisting of Company shares could make trading the Company's shares more
difficult for investors, potentially leading to further declines in the share
price
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.
The Company's operations may be adversely affected if it is not able to expand
its financial planning business by hiring additional financial planners and
opening new offices
If the financial planners that the Company presently employs or recruits do not
perform successfully, the Company's operations may be adversely affected. The
Company plans to continue to expand in the area of financial planning, by
expanding the business of presently employed financial planners and by
recruiting additional financial planners. The Company's revenue growth will in
large part depend upon the expansion of existing business and the successful
integration and profitability of the recruited financial planners. The Company's
growth will also depend on the successful operation of independent financial
planners who are recruited to join the Company. The financial planning channel
of the Company's business has generated an increasing portion of the Company's
revenues during the past few years, and if such channel does not continue to be
successful, the Company's revenue may not increase.
The Consolidated Financial Statements do not include any adjustments that might
result due to these events or from the uncertainties of a shift in the Company's
business
The Company may choose to open new offices. When the Company opens a new office,
the Company incurs significant expenses to build out the office and to purchase
furniture, equipment and supplies. The Company has found that a new office
usually suffers a loss in its first year of operation, shows no material profit
or loss in its second year of operation and does not attain profitability, if
ever, until its third year of operation. Therefore, the Company's operating
results could be materially adversely affected in any year that the Company
opens a significant number of new offices. If the financial markets deteriorate,
the Company's financial planning channel will suffer decreased revenues. The
Company's revenue and profitability may be adversely affected by declines in the
volume of securities transactions and in market liquidity, which generally
result in lower revenues from trading activities and commissions. Lower
securities price levels may also result in a reduced volume of transactions as
well as losses from declines in the market value of securities held in trading,
investment and underwriting positions. In periods of low volume, the fixed
nature of certain expenses, including salaries and benefits, computer hardware
and software costs, communications expenses and office leases, will adversely
affect profitability. Sudden sharp declines in market values of securities and
the failure of issuers and counterparts to perform their obligations can result
in illiquid markets in which the Company may incur losses in its principal
trading and market making activities.
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Dependence on technology software and systems and the Company's inability to
provide assurance that their fail-safe systems will be effective could adversely
affect the Company's operations
As an information-financial services company with a subsidiary broker-dealer,
the Company is greatly dependent on technology software and systems and on the
Internet to maintain customer records, effect securities transactions and
prepare and file tax returns. In the event that there is an interruption to the
systems due to internal systems failure or from an external threat, including
terrorist attacks, fire and extreme weather conditions, the Company's ability to
prepare and file tax returns and to process financial transactions could be
affected. The Company has offsite backup, redundant and remote failsafe systems
in place to safeguard against these threats but there can be no assurance that
such systems will be effective to prevent malfunction and adverse effects on
operation.
The Company's industries are highly competitive; if it fails to remain
competitive, the Company may lose customers and its results of operations would
be adversely affected
The financial planning and tax planning industries are highly competitive. If
the Company's competitors create new products or technologies, or are able to
take away its customers, the Company's results of operations may be adversely
affected. The Company's competitors include companies specializing in income tax
preparation as well as companies that provide general financial services. The
Company's principal competitors are H&R Block and Jackson Hewitt in the tax
preparation field and many well-known national brokerage and insurance firms in
the financial services field, including Merrill Lynch and Citigroup. Many of
these competitors have larger market shares and significantly greater financial
and other resources than the Company. The Company may not be able to compete
successfully with such competitors. Competition could cause the Company to lose
existing clients, slow the growth rate of new clients and increase advertising
expenditures, all of which could have a material adverse effect on the Company's
business or operating results.
Additionally, federal and state governments may in the future become direct
competitors to the Company's tax offerings. Were federal and state governments
to provide their own software and electronic filing services to taxpayers at no
charge it could have a material adverse effect on business, financial condition
and results of operations. The federal government has recently proposed
legislation that could further this initiative.
Competition from departing employees and the Company's ability to enforce
contractual non-competition and non-solicitation provisions could adversely
affect the Company's operating results
If a large number of the Company's departing employees and financial planners
were to enter into competition with the Company, the Company's operations may be
adversely affected. Departing employees and financial planners may compete with
the Company. Although the Company attempts to restrict such competition
contractually, as a practical matter, enforcement of contractual provisions
prohibiting small-scale competition by individuals is difficult. In the past,
departing employees and financial planners have competed with the Company. They
have the advantage of knowing the Company's methods and, in some cases, having
access to the Company's clients. No assurance can be given that the Company will
be able to retain its most important employees and financial planners or that
the Company will be able to prevent competition from them or successfully
compete against them. If a substantial amount of such competition occurs, the
corresponding reduction of revenue may materially adversely affect the Company's
operating results.
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Departure of key personnel could adversely affect the Company's operations
If any of the Company's key personnel were to leave its employ, the Company's
operations may be adversely affected. The Company believes that its ability to
successfully implement its business strategy and operate profitably depends on
the continued employment of James Ciocia, its Chairman of the Board, Michael
Ryan, its President and Chief Executive Officer, Ted H. Finkelstein, its Vice
President and General Counsel as of February 1, 2007, Kathryn Travis, its
Secretary, Carole Enisman, its Executive Vice President of Operations, and
Dennis Conroy, its Chief Accounting Officer. Michael Ryan and Carole Enisman are
married. If any of these individuals become unable or unwilling to continue in
his or her present position, the Company's business and financial results could
be materially adversely affected.
The bankruptcy of a key director could adversely affect the confidence of
potential investors in the Company's common stock
On December 28, 2005, Stephen J. Gilbert, a director of the Company, filed a
motion to convert his personal Chapter 11 bankruptcy case to a Chapter 7 case.
On June 6, 2006, a Discharge of Debtor was granted to Mr. Gilbert by the United
States Bankruptcy Court under Section 727 of the Bankruptcy Code. The bankruptcy
of a key director could adversely affect the confidence of potential investors
of the Company's common stock.
Tax return preparation malpractice and the Company's uninsured liability in such
cases could materially adversely affect the Company's business and operating
results
The Company's business of preparing tax returns subjects it to potential civil
liabilities for violations of the Internal Revenue Code or other regulations of
the IRS, although the Company has never been assessed with material civil
penalties or fines. If a Company violation resulted in a material fine or
penalty, the Company's operating results could be materially adversely affected.
In addition, the Company does not maintain any professional liability or
malpractice insurance policies for tax preparation.
The Company has never been the subject of a material tax preparation malpractice
lawsuit, however, the significant uninsured liability and the legal and other
costs relating to such claims could materially adversely affect the Company's
business and operating results.
In addition, making fraudulent statements on a tax return, willfully delivering
fraudulent documents to the IRS and unauthorized disclosure of taxpayer
information may constitute criminal offenses. If the Company were to be charged
with a criminal offense and found guilty, or if any of its employees or
executives were convicted of a criminal offense, in addition to the costs of
defense and possible fines, the Company would likely experience an adverse
effect to its reputation, which could directly lead to a decrease in revenues
from the loss of clients.
The Company does not hire a large number of Certified Public Accountants (CPAs),
which could affect the Company's ability to provide adequate IRS representation
services to the marketplace. The Company utilizes a significant number of
seasonal employees who are not CPAs or tax attorneys to provide tax preparation
services. Under state law, the Company is not allowed to provide legal tax
advice and the Company does not employ nor does it retain any tax attorneys on a
full time basis. Because most of the Company's employees who prepare tax returns
are not certified public accountants, tax attorneys or otherwise enrolled to
practice before the IRS, such employees of the Company are strictly limited as
to the roles they may take in assisting a client in an audit with the IRS. These
limitations on services that the Company may provide could hinder the Company's
ability to market its services.
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Furthermore, the small percentage of CPAs or tax attorneys available to provide
assistance and guidance to the Company's tax preparers may increase the risk of
the improper preparation of tax returns by the Company. The improper preparation
of tax returns could result in significant defense expenses and civil liability.
Government initiatives that simplify tax return preparation could reduce the
need for the Company's services as a third party tax return preparer
Many taxpayers seek assistance from paid tax return preparers such as the
Company because of the level of complexity involved in the tax return
preparation and filing process. From time to time, government officials propose
measures seeking to simplify the preparation and filing of tax returns or to
provide additional assistance with respect to preparing and filing such tax
returns. The passage of any measures that significantly simplify tax return
preparation or otherwise reduce the need for a third party tax return preparer
could reduce demand for the Company's services, causing its revenues or
profitability to decline.
Initiatives that improve the timing and efficiency of processing tax returns
could reduce the demand for financial products available to the Company's
customers and demand for its services
The Company's performance depends in part on its customers' interest in
obtaining the various financial products available through its offices. The
federal government and various state and local municipalities have, from time to
time, announced initiatives designed to modernize their operations and improve
the timing and efficiency of processing tax returns and delivery of tax refunds.
If tax authorities are able to increase the speed and efficiency with which they
process tax returns and deliver tax refunds, the demand for financial products
and demand for the Company's tax preparation services could be reduced, causing
its revenues or profitability to decline.
Changes in the tax law that result in a decreased number of tax returns filed or
a reduced size of tax refunds could harm the Company's business
From time to time, the United States Treasury Department and the IRS adopt
policy and rule changes and other initiatives that result in a decrease in the
number of tax returns filed or reduce the size of tax refunds. Similar changes
in the tax law could reduce demand for the Company's services, causing its
revenues or profitability to decline.
The highly seasonal nature of the Company's business presents a number of
financial risks and operational challenges which if the Company fails to meet
could materially affect its business
The Company's business is highly seasonal. The Company generates substantially
all its tax preparation revenues during the tax season, which is the period from
January 1 through April 30. The concentration of these revenue-generating
activity during this relatively short period presents a number of operational
challenges for the Company including: (i) cash and resource management during
the first eight months of its fiscal year, when the Company generally operates
at a loss and incurs fixed costs and costs of preparing for the upcoming tax
season; (ii) flexible staffing, because the number of employees at the Company's
offices during the peak of the tax season is exponentially higher than at any
other time; (iii) accurate forecasting of revenues and expenses; and (iv)
ensuring optimal uninterrupted operations during peak season, which is the
period from late January through February.
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If the Company were unable to meet these challenges or was to experience
significant business interruptions during the tax season, which may be caused by
labor shortages, systems failures, work stoppages, adverse weather or other
events, many of which are beyond the its control, the Company could experience a
loss of business, which could have a material adverse effect on its business,
financial condition and results of operations.
The loss of trademarks or other proprietary rights could cause the Company's
revenues to decline
If the Company were to lose its trademarks or other proprietary rights, the
Company could suffer decreased revenues. The Company believes that its
trademarks and other proprietary rights are important to its success and its
competitive position. The Company has registered its "Gilman + Ciocia"
trademark. However, the actions taken by the Company to establish and protect
its trademarks and other proprietary rights may be inadequate to prevent
imitation of its services and products by others or to prevent others from
claiming violations of their trademarks and proprietary rights by the Company.
In addition, others may assert rights in the Company's trademarks and other
proprietary rights. If the Company were to lose the exclusive right to its
trademarks, its operations could be materially adversely affected.
The decision not to pay dividends could impact the marketability of the
Company's common stock
The Company's decision not to pay dividends could negatively impact the
marketability of the Company's common stock. Since its initial public offering
of securities in 1994, the Company has not paid dividends and it does not plan
to pay dividends in the foreseeable future. The Company currently intends to
retain future earnings, if any, to finance the growth of the Company. It is very
likely that dividends will not be distributed in the near future, which may
reduce the marketability of the Company's common stock.
The low trading volume of the Company's common stock increases volatility, which
could impair the Company's ability to obtain equity financing
Low trading volume in the Company's common stock increases volatility, which
could result in the impairment of the Company's ability to obtain equity
financing. As a result, historical market prices may not be indicative of market
prices in the future. In addition, the stock market has recently experienced
extreme stock price and volume fluctuation. The Company's market price may be
impacted by changes in earnings estimates by analysts, economic and other
external factors and the seasonality of the Company's business. Fluctuations or
decreases in the trading price of the common stock may adversely affect the
stockholders' ability to buy and sell the common stock and the Company's ability
to raise money in a future offering of common stock. The shares of the Company's
common stock were delisted from The NASDAQ National Market in August 2002, and
the market price of the Company's shares has dramatically declined since the
delisting.
The release of restricted common stock may have an adverse affect on the market
price of the common stock
The release of various restrictions on the possible future sale of the Company's
Common Stock may have an adverse affect on the market price of the common stock.
Based on information received from the Company's transfer agent, approximately
5.3 million shares of the common stock outstanding are "restricted securities"
under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act").
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In general, under Rule 144, a person who has satisfied a one year holding period
may, under certain circumstances, sell, within any three month period, a number
of shares of "restricted securities" that do not exceed the greater of one
percent of the then outstanding shares of common stock or the average weekly
trading volume of such shares during the four calendar weeks prior to such sale.
Rule 144 also permits, under certain circumstances, the sale of shares of common
stock by a person who is not an "affiliate" of the Company (as defined in Rule
144) and who has satisfied a two-year holding period, without any volume or
other limitation.
The general nature of the securities industry as well as its regulatory
requirements could materially affect the Company's business
If a material risk inherent to the securities industry was to be realized, the
value of the Company's common stock may decline. The securities industry, by its
very nature, is subject to numerous and substantial risks, including the risk of
declines in price level and volume of transactions, losses resulting from the
ownership, trading or underwriting of securities, risks associated with
principal activities, the failure of counterparties to meet commitments,
customer, employee or issuer fraud risk, litigation, customer claims alleging
improper sales practices, errors and misconduct by brokers, traders and other
employees and agents (including unauthorized transactions by brokers), and
errors and failure in connection with the processing of securities transactions.
Many of these risks may increase in periods of market volatility or reduced
liquidity. In addition, the amount and profitability of activities in the
securities industry are affected by many national and international factors,
including economic and political conditions, broad trends in industry and
finance, level and volatility of interest rates, legislative and regulatory
changes, currency values, inflation, and the availability of short-term and
long-term funding and capital, all of which are beyond the control of the
Company.
Several current trends are also affecting the securities industry, including
increasing consolidation, increasing use of technology, increasing use of
discount and online brokerage services, greater self-reliance of individual
investors and greater investment in mutual funds. These trends could result in
the Company facing increased competition from larger broker-dealers, a need for
increased investment in technology, or potential loss of clients or reduction in
commission income. These trends or future changes could have a material adverse
effect on the Company's business, financial condition, and results of operations
or cash flows.
If new regulations are imposed on the securities industry, the operating results
of the Company may be adversely affected. The SEC, the NASD, the NYSE and
various other regulatory agencies have stringent rules with respect to the
protection of customers and maintenance of specified levels of net capital by
broker-dealers. The regulatory environment in which the Company operates is
subject to change. The Company may be adversely affected as a result of new or
revised legislation or regulations imposed by the SEC, the NASD, other U.S.
governmental regulators or SROs. The Company also may be adversely affected by
changes in the interpretation or enforcement of existing laws and rules by the
SEC, other federal and state governmental authorities and SROs.
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PCS is subject to periodic examination by the SEC, the NASD, SROs and various
state authorities. PCS sales practice operations, recordkeeping, supervisory
procedures and financial position may be reviewed during such examinations to
determine if they comply with the rules and regulations designed to protect
customers and protect the solvency of broker-dealers. Examinations may result in
the issuance of letters to PCS, noting perceived deficiencies and requesting PCS
to take corrective action. Deficiencies could lead to further investigation and
the possible institution of administrative proceedings, which may result in the
issuance of an order imposing sanctions upon PCS and/or their personnel.
The Company's business may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume and profitability of the Company's
or its clients' trading activities in a specific period could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities.
The Company could be held liable to clients for misconduct alleged in civil
proceedings causing operations to be adversely affected
If the Company were to be found liable to clients for misconduct alleged in
civil proceedings, the Company's operations may be adversely affected. Many
aspects of the Company's business involve substantial risks of liability. There
has been an increase in litigation and arbitration within the securities
industry in recent years, including class-action suits seeking substantial
damages. Broker-dealers such as PCS are subject to claims by dissatisfied
clients, including claims alleging they were damaged by improper sales practices
such as unauthorized trading, churning, sale of unsuitable securities, use of
false or misleading statements in the sale of securities, mismanagement and
breach of fiduciary duty. Broker-dealers may be liable for the unauthorized acts
of their retail brokers and independent contractors if they fail to adequately
supervise their conduct. PCS is currently a defendant/respondent in numerous
such proceedings. It should be noted, however, that PCS maintains securities
broker-dealer's professional liability insurance to insure against this risk,
but the insurance policy contains a deductible (presently $50,000) and a
cumulative cap on coverage (presently $3,000,000). In addition, certain
activities engaged in by brokers may not be covered by such insurance. The
adverse resolution of any legal proceedings involving the Company could have a
material adverse effect on its business, financial condition, and results of
operations or cash flows.
System or network failures or breaches in connection with the Company's services
and products could reduce its sales, impair its reputation, increase costs or
result in liability claims, and seriously harm its business
Any disruption to the Company's services and products, its own information
systems or communications networks or those of third-party providers upon whom
the Company relies as part of its own product offerings, including the Internet,
could result in the inability of its customers to receive its products for an
indeterminate period of time. The Company's services and products may not
function properly for any of the following reasons:
o System or network failure;
o Interruption in the supply of power;
o Virus proliferation;
o Security breaches;
o Earthquake, fire, flood or other natural disaster; or
o An act of war or terrorism.
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Although the Company has made significant investments, both internally and with
third-party providers, in redundant and back-up systems for some of its services
and products, these systems may be insufficient or may fail and result in a
disruption of availability of its products or services to its customers. Any
disruption to the Company's services could impair its reputation and cause it to
lose customers or revenue, or face litigation, customer service or repair work
that would involve substantial costs and distract management from operating its
business.
The Company has a history of losses and may incur losses in the future
The Company incurred losses in fiscal years 2005 and 2006 and may incur losses
again in the future. As of December 31, 2006, the Company's accumulated deficit
was $34.6 million. If the Company fails to become profitable, the value of your
investment may not increase or may decline.
Failure to comply with laws and regulations that protect customers' personal
information could result in significant fines and harm the Company's brand and
reputation
The Company manages highly sensitive client information in all of its operating
segments, which is regulated by law. Problems with the safeguarding and proper
use of this information could result in regulatory actions and negative
publicity, which could adversely affect the Company's reputation and results of
operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 7 to Notes to Consolidated Financial Statements herein for a discussion
of the Company's defaults on debt.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Accounting Officer.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GILMAN + CIOCIA, INC.
Dated: February 14, 2007 By: /s/ Michael P. Ryan
-----------------------------
Chief Executive Officer
Dated: February 14, 2007 By: /s/ Dennis Conroy
-----------------------------
Chief Accounting Officer
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