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 September 30, 2007
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2587324
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK 12603
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(Address of principal executive offices)(Zip code)
(845) 486-0900
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(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 November 6, 2007, 89,719,050 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 September 30, 2007
and June 30, 2007................................................... 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2007 and September 30, 2006 .................... 4
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2007 and September 30, 2006 ............. 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................................. 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 29
Item 4. Controls and Procedures ............................................ 29
PART II - OTHER INFORMATION
Item 1A. Risk Factors ....................................................... 30
Item 3. Defaults Upon Senior Securities .................................... 31
Item 4. Submission of Matters to a Vote of Security Holders................. 31
Item 6. Exhibits ........................................................... 34
SIGNATURES .................................................................. 35
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
GILMAN + CIOCIA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Unaudited Audited
September 30, June 30,
2007 2007
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Assets
Cash & Cash Equivalents $ 2,425 $ 1,369
Marketable Securities 103 160
Trade Accounts Receivable, Net 3,623 3,243
Receivables from Employees, Net 630 766
Prepaid Expenses 363 655
Other Current Assets 257 282
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Total Current Assets 7,401 6,475
Property and Equipment (less accumulated depreciation of $6,246
at September 30, 2007 and $6,128 at June 30, 2007) 1,114 1,118
Goodwill 3,881 3,881
Intangible Assets (less accumulated amortization of $5,775 at
September 30, 2007 and $5,649 at June 30, 2007) 4,472 4,598
Other Assets 372 421
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Total Assets $ 17,240 $ 16,493
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Liabilities and Shareholders' Equity (Deficit)
Accounts Payable and Accrued Expenses $ 7,301 $ 10,691
Current Portion of Notes Payable and Capital Leases 915 6,052
Deferred Income 20 234
Due to Related Parties 1,503 3,635
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Total Current Liabilities 9,739 20,612
Long Term Portion of Notes Payable and Capital Leases 219 243
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Total Liabilities 9,958 20,855
Shareholders' Equity/(Deficit)
Preferred Stock, $0.001 par value; 100,000 shares authorized; none issued -- --
Common Stock, $0.01 par value 500,000,000 shares authorized; 89,748,300
and 9,668,579 shares issued at September 30, 2007 and June 30, 2007,
respectively 897 97
Additional Paid in Capital 36,002 29,041
Accumulated Deficit (29,617) (33,500)
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Total Shareholders' Equity/(Deficit) 7,282 (4,362)
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Total Liabilities & Shareholders' Equity/(Deficit) $ 17,240 $ 16,493
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See Notes to Unaudited Consolidated Financial Statements
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GILMAN + CIOCIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
For the Three Months Ended
September 30,
2007 2006
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Revenues
Financial Planning Services $ 11,839 $ 11,091
Tax Preparation and Accounting Fees 441 408
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Total Revenues 12,280 11,499
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Operating Expenses
Commissions 7,585 7,286
Salaries 2,223 2,020
General & Administrative 1,706 1,144
Advertising 354 350
Brokerage Fees & Licenses 329 289
Rent 515 519
Depreciation & Amortization 245 236
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Total Operating Expenses 12,957 11,844
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Loss from Operations
Before Other Income and Expenses (677) (345)
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Other Income/(Expenses)
Interest and Investment Income 9 14
Interest Expense (111) (224)
Other Income, Net 4,662 552
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Total Other Income/(Expense) 4,560 342
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Income/(Loss) from Operations
Before Income Taxes 3,883 (3)
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Income Taxes/(Benefit) -- --
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Net Income/(Loss) $ 3,883 $ (3)
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Weighted Average Number of Common
Shares Outstanding:
Basic and Diluted Shares 46,226,253 9,545,439
Basic and Diluted Net Income/(Loss) Per Share:
Net Income/(Loss) $ 0.08 $ (0.00)
See Notes to Unaudited Consolidated Financial Statements
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GILMAN + CIOCIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months Ended
September 30,
2007 2006
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Cash Flows from Operating Activities:
Net Income/(Loss): $ 3,883 $ (3)
Adjustments to reconcile net income/(loss) to net cash used in
operating activities:
Depreciation and amortization 245 236
Issuance of common stock for debt default penalties, interest and other 11 12
Allowance for doubtful accounts 95 (77)
Gain on debt extinguishment and other (4,599) (575)
Changes in assets and liabilities:
Accounts receivable (401) 497
Prepaid and other current assets 239 240
Change in marketable securities 57 33
Other assets 44 (165)
Accounts payable and accrued expenses (995) (855)
Deferred income (214) (210)
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Net cash used in operating activities: (1,635) (865)
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Cash Flows from Investing Activities:
Capital expenditures (114) (32)
Cash paid for acquisitions, net of cash acquired and debt incurred (1) --
Receivables from employees 140 (28)
Due from office sales 6 53
Proceeds from the sale of offices -- (2)
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Net cash provided by/(used in) investing activities: 31 (9)
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Cash Flows from Financing Activities:
Proceeds from bank and other loans 40 44
Proceeds from related parties -- 500
Proceeds from capital stock issuance 5,668 --
Payments of bank loans and other loans (2,820) (440)
Payments related to offering costs (228) --
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Net cash provided by financing activities: 2,660 104
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Net change in cash and cash equivalents 1,056 (770)
Cash and cash equivalents at beginning of period 1,369 1,124
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Cash and cash equivalents at end of period $ 2,425 $ 354
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See Notes to the Unaudited Consolidated Financial Statements and Supplemental
Disclosures to Consolidated Statements of Cash Flows
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GILMAN + CIOCIA, INC.
Supplemental Disclosures to Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
For the Three Months Ended
September 30,
2007 2006
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Cash Flow Information
Cash payments during the year for:
Interest $ 256 $ 70
Taxes $ -- $ --
Supplemental Disclosure of Non-Cash Transactions
Issuance of common stock for debt default
penalties, interest and other $ 11 $ 12
Payment of debt by issuance of shares $2,309 $ --
Equipment acquired under capital leases $ 21 $ --
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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") was founded in 1981 and is incorporated under the laws of the State
of Delaware. The Company provides federal, state and local tax preparation
services to individuals, predominantly in the middle and upper income tax
brackets, accounting services to small and midsize companies and financial
planning services, including securities brokerage, investment management
services, insurance and financing services. As of September 30, 2007, the
Company had 27 offices operating in four states (New York, New Jersey, Florida
and Pennsylvania).
The Company office financial planning clients generally are introduced to the
Company through the Company's tax return preparation services, accounting
services and educational workshops. The Company believes that its tax return
preparation and accounting services are inextricably intertwined with its
financial planning activities in the Company offices and that overall
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. Accordingly, management views and evaluates the Company as
one segment.
The Company has a highly seasonal business. The first and second quarters of the
Company's fiscal year are typically its weakest quarters and the third quarter
of its fiscal year it typically its strongest.
The Company also provides financial planning services through approximately 66
independently owned and operated offices in twelve states. The Company benefits
from economies of scale associated with the aggregate production of both Company
offices and independently owned offices. 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.
On August 20, 2007, the Company closed the sale (the "Investment Purchase
Closing") of 40.0 million shares of its common stock, par value $.01 per share
(the "Common Stock"), at a price of $0.10 per share for proceeds of $4.0 million
(the "Investment Purchase") pursuant to an Investor Purchase Agreement dated
April 25, 2007 (the "Purchase Agreement") with Wynnefield Small Cap Value
Offshore Fund, Ltd., Wynnefield Partners Small Cap Value, L.P., Wynnefield
Partners Small Cap Value, L.P.I and WebFinancial Corporation (the "Investment
Purchasers").
The Investment Purchase Closing was contingent upon the purchase of an
additional 40.0 million shares of Common Stock at a price of $0.10 per share in
cash or by the conversion of outstanding debt or other liabilities of the
Company (the "Private Placement") by other purchasers (the "Private Placement
Purchasers") including officers, directors and employees of the Company. The
closing of the Private Placement (the "Private Placement Closing") occurred on
August 20, 2007 simultaneously with the Investment Purchase Closing. At the
Private Placement Closing, the Company issued 16.9 million shares of Company
common stock for cash proceeds of $1.7 million and 23.1 million shares of
Company common stock for the conversion of $2.3 million of Company debt.
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On August 20, 2007, as a result of the Investment Purchase Closing and the
Private Placement Closing, Met Life Insurance Company of Connecticut ("Met
Life"), formerly known as the Travelers Insurance Company, was paid $2.4 million
in full satisfaction of the approximately $6.8 million, including principal and
interest, owed to Met Life.
See also Note 5 describing the equity transaction.
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 September 30, 2007, the
Consolidated Statements of Operations for the three months ended September 30,
2007 and 2006 and the Consolidated Statements of Cash Flows for the three months
ended September 30, 2007 and 2006 are unaudited. The Consolidated Financial
Statements reflect all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the Company's financial position and results of operations. The
operating results for the three months ended September 30, 2007 are not
necessarily indicative of the results to be expected for any other interim
period or any future year. These Consolidated Financial Statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K/A for the fiscal year ended
June 30, 2007.
Fiscal years are denominated by the year in which they end. Accordingly, fiscal
2007 refers to the year ended June 30, 2007.
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. In addition, under the PCS
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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
complaints, 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, the Company bases its judgments on
its knowledge of the situations, consultations with legal counsel and its
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 the Company's
judgments prove to be incorrect, its 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 September 30, 2007, the Company has accrued approximately $0.3
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 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.
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.
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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. The computation for the three months ended
September 30, 2007 and September 30, 2006 did not include outstanding options
because to do so would have an anti-dilutive effect for the periods.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, marketable securities, accounts receivable, notes receivable, and
accounts payable, approximated fair value as of September 30, 2007, 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/brokerage services, insurance and financing 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 standards 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 2007 10-K/A, which discusses
accounting policies that must be selected by management when there are
acceptable alternatives.
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3. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, The Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
permits entities to choose, at specified election dates, to measure eligible
items at fair value (the "fair value option"). A business entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS No. 157, "Fair
Value Measurements" ("SFAS No. 157"). The Company does not have eligible
financial assets or financial liabilities for fair value option accounting under
SFAS No. 159.
In September 2006, the FASB issued SFAS No. 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. Early adoption is permitted
provided that the reporting entity has not yet issued financial statements for
that fiscal year. The Company has adopted SFAS No. 157 effective September 30,
2007 and has recorded a $0.3 million allowance against its accounts payable
balance representing its fair value assessment of that account. See also Note 7
describing fair value measurements.
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 in the Court of Chancery of the State of
Delaware (the "Court of Chancery") alleging that the Company, its board of
directors and its management, breached their fiduciary duty of loyalty in
connection with the sale of certain of the Company's offices. A tentative
settlement of the lawsuit has been reached subject to approval by the Court of
Chancery. The Company does not believe that the final settlement of this lawsuit
will have a material adverse impact on its financial position.
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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.
The Company and PCS are defendants and respondents in lawsuits and Financial
Industry Regulatory Authority ("FINRA") arbitrations in the ordinary course of
business. On September 30, 2007, there were 17 pending lawsuits and
arbitrations, of which 4 are settled and pending payment, and of which 10 were
against PCS 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 determine the probability that losses have been incurred and a
reasonable estimate of the amount of the losses. In making these decisions, the
Company bases its judgments on its knowledge of the situations, consultations
with legal counsel and its 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 the Company's judgments prove to be incorrect, its 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. Management accrued $0.3 million as a reserve
for potential settlements, judgments and awards. PCS has errors & omissions
coverage that will cover a portion of such matters. In addition, under the PCS
registered representatives contract, each registered representative is
responsible for covering costs in connection with these claims. While the
Company will vigorously defend itself in these matters, and will assert
insurance coverage and indemnification 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. EQUITY TRANSACTION
On August 20, 2007, the Company closed the sale (the "Investment Purchase
Closing") of 40.0 million shares of its common stock, par value $0.01 per share
(the "Common Stock"), at a price of $0.10 per share (the "Investment Purchase")
for proceeds of $4.0 million pursuant to an Investor Purchase Agreement dated
April 25, 2007 (the "Purchase Agreement") with Wynnefield Small Cap Value
Offshore Fund, Ltd., Wynnefield Partners Small Cap Value, L.P., Wynnefield
Partners Small Cap Value, L.P.I and WebFinancial Corporation (the "Investment
Purchasers"). The 40.0 million shares of Common Stock were issued pursuant to an
exemption from the registration requirements of the Securities Act of 1933 under
Regulation D, Rule 506 ("Rule 506"). The proceeds from the Investment Purchase
Closing were used as follows: $2.4 million was paid to Met Life in full
satisfaction of the approximately $6.8 million, including principal and
interest, owed to Met Life by the Company; $50,000 was paid to Wachovia National
Association ("Wachovia") as a principal payment, which reduced the Company's
loan balance with Wachovia to approximately $0.7 million; $19,208 was paid to
Wachovia for a loan fee and legal fees; and the $1.6 million balance was
retained by the Company to be used as working capital.
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The Investment Purchase Closing was contingent upon, among other things, the
purchase of an additional 40.0 million shares of Common Stock at a price of
$0.10 per share in cash or by the conversion of outstanding debt or other
liabilities of the Company (the "Private Placement") by other purchasers (the
"Private Placement Purchasers") including officers, directors and employees of
the Company. Prime Partners II, LLC ("Prime Partners II"), a holding company
owned in part by Michael Ryan (the Company's President and Chief Executive
Officer and a member of the Company's Board of Directors) purchased 15.4 million
shares of Common Stock in the Private Placement by the conversion of $1.5
million of Company debt. The closing of the Private Placement (the "Private
Placement Closing") occurred on August 20, 2007 simultaneously with the
Investment Purchase Closing.
At the Private Placement Closing, the Company issued 16.9 million shares of
Company Stock for cash proceeds of $1.7 million and 23.1 million shares of
Common Stock for the conversion of $2.3 million of Company debt, including 15.4
million shares issued to Prime Partners II, for the conversion of $1.5 million
of Company debt. Such shares were issued pursuant to an exemption from the
registration requirements under Rule 506. The $1.7 million cash proceeds from
the Private Placement Closing were disbursed as follows: $3,750 for escrow agent
fees; and the $1.7 million balance was retained by the Company to be used to
retire the debt of affiliates.
In connection with the Investment Purchase Closing, the Company entered into a
Shareholders Agreement dated August 20, 2007 with the Investment Purchasers,
Michael Ryan, Carole Enisman (the Company's Executive Vice President of
Operations), Ted Finkelstein (the Company's Vice President and General Counsel),
Dennis Conroy, and Prime Partners, Inc. and Prime Partners II, holding companies
owned in part by Michael Ryan (the "Existing Shareholders").
Pursuant to the terms of the Shareholders Agreement: at the Investment Purchase
Closing, the Investment Purchasers were given the right to designate two
directors (the "Investor Directors") for election to the Company's Board of
Directors (the "Board"); so long as the Existing Shareholders own at least 10%
of the outstanding shares of Common Stock, the Existing Shareholders have the
right to nominate two directors (the "Existing Shareholder Directors") for
election to the Board; the Investor Directors and the Existing Shareholder
Directors shall jointly nominate three independent directors; the Investor
Purchasers and the Existing Shareholders agreed to take such action as may be
reasonably required under applicable law to cause the Investor Purchasers'
designees and the Existing Shareholders' designees to be elected to the Board;
the Company agreed to include each of the Director designees of the Investor
Purchasers and the Existing Shareholders on each slate of nominees for election
to the Board proposed by the Company, to recommend the election of such
designees to the shareholders of the Company, and to use commercially reasonable
efforts to cause such designees to be elected to the Board; one of the Investor
Directors shall be appointed as a member of the Compensation Committee of the
Board and one of the Investor Directors shall have the right to attend all Audit
Committee meetings; the consent of one of the Investor Directors is required for
certain Company actions above designated thresholds, including the issuance,
redemption or purchase of equity or debt, the issuance of an omnibus stock plan,
the creation of any new class of securities, certain affiliate transactions,
changes to the Company's certificate of incorporation or bylaws, entering into a
merger, reorganization or sale of the Company or acquiring any significant
business assets, or material changes to the business line of the Company; the
Investor Shareholders agreed to a one year standstill agreement concerning the
acquisition of Company assets, Company securities, proxy solicitations, voting
trusts or tender offers; the Investor Purchasers were granted a right of first
refusal for future securities issued by the Company; and the Company was granted
a right of first refusal for sales of Common Stock by the Investment Purchasers
and by the Existing Shareholders.
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GILMAN & CIOCIA INC - 10-Q
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Also in connection with the Investment Purchase Closing, the Company entered
into a Registration Rights Agreement dated August 20, 2007 with the Investment
Purchasers and the Private Placement Purchasers (the "Holders"). Pursuant to the
terms of the Registration Rights Agreement: subject to certain conditions, the
Company agreed to file for the Holders a Registration Statement (the
"Registration Statement") no later than the later of forty five days after the
Investment Purchase Closing and thirty days after the Company has filed its Form
10-K for the fiscal year ending June 30, 2007; if the Company is unable to
register all Registrable Securities in the Registration Statement, the Company
agreed to certain demand registrations by the Holders; the Company granted to
the Holders certain Tag-Along Registration rights; the Holders were given demand
registration rights on the happening of certain events; and the Company agreed
to delineated registration procedures. The Company has evaluated the accounting
for terms of the registration rights, pursuant to FASB Staff Position on the
Emerging Issues Tax Force 00-19-2 (FSP EITF 00-19-2"). The Company recorded $0.1
million as a liability for liquidated damages should the Company fail to file
timely a Registration Statement for certain purchasers of the Company's common
stock. On October 25, 2007, the Company filed the Registration Statement on Form
S-1 with the SEC and has subsequently reversed the $0.1 million liability
recorded for liquidated damages.
As a result of the Investor Purchase Closing and the Private Placement Closing,
the Company is reviewing whether its ability to utilize its net operating loss
carryovers may be restricted based on Internal Revenue Code Section 382 "changes
in ownership."
6. LIQUIDITY AND CASH FLOW
During the three months ended September 30, 2007, the Company had net income of
$3.9 million and at September 30, 2007 had a working capital deficit position of
$2.3 million. At September 30, 2007 the Company had $2.4 million of cash and
cash equivalents and $3.6 million of trade account receivables, net, to fund
short-term working capital requirements.
The Company anticipates meeting its cash flow requirements throughout fiscal
2008 and 2009 by, among other things, continuing to control operating expenses
and, due to the seasonality of the Company's business, at times pursuing
financing through outside lenders, and by implementing its acquisition strategy
to increase earnings and cash flow. In addition the Company increased its
working capital by $1.6 million as a result of the Investment Purchase on August
20, 2007. See also Note 5 describing the equity transaction.
7. FAIR VALUE MEASUREMENTS
The Company elected early adoption of SFAS No. 157, beginning July 1, 2007, the
first day of its fiscal year 2008. SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is a relevant measurement attribute. Accordingly,
this Statement does not require any new fair value measurements. However, for
some entities, the application of this Statement will change current practices.
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The following table sets forth the liabilities the Company has elected to fair
value under SFAS No. 157 as of September 30, 2007:
Fair Value Measurements at Reporting Date
($ in thousands) Using Significant Unobservable Inputs
Description (Level 3)
- ------------------------------------------------------------------------
Accounts Payable:
Beginning Balance $2,402
Allowance (284)
------
Ending Balance $2,118
The Company has significant legacy accounts payable balances that are at least
four years old and that it believes will never require a financial payment for a
variety of reasons. Accordingly, under SFAS No. 157, the Company has established
an estimate of fifteen cents on the dollar on these legacy balances that it
would potentially pay out against these balances based on the Company's
historical pay out on these legacy balances. The allowance of $0.3 million is
recorded in other income, net on the Company's Consolidated Statement of
Operations as of September 30, 2007.
8. DISPOSITIONS
The Company has financed the sale of one office with the receipt of a note to be
paid over 48 months. This note has a guarantee from the respective office
purchaser and certain default provisions. This note is non-interest bearing and
has been recorded with a 7% discount. The remaining payments are $14,388 and
$6,006 in 2008 and 2009 respectively.
9. DEBT
As a result of the Investment Purchase Closing and the Private Placement
Closing, on August 20, 2007, Met Life was paid $2.4 million in full satisfaction
of the approximately $6.8 million, including principal and interest, owed to Met
Life. The gain on the settlement of the Met Life debt in the amount of $4.3
million was recorded in other income, net on the Company's Consolidated
Statement of Operations as of September 30, 2007. See also Note 5 describing the
equity transaction.
As of September 30, 2007 the Company was in default of certain covenants under
its term loan/revolving letter of credit financing with Wachovia. The Company
entered into a debt forbearance agreement with Wachovia which was last amended
on April 1, 2006. The Company does not believe that Wachovia will issue a notice
of default for any of these defaults. As a result of these defaults, the
Company's debt with Wachovia has been classified as a current liability on its
financial statements. On August 20, 2007, as a result of the Investment Purchase
Closing and the Private Placement Closing, a $50,000 principal payment was made
to Wachovia. As of November 1, 2007, the Company was current with its monthly
payments to Wachovia and the outstanding principal balance was $0.6 million.
On August 20, 2007, as part of the Private Placement Closing $0.7 million of a
loan owed by the Company to a group of Company management and employees was
converted to 7.1 million shares of Company common stock, leaving a de minimis
debt balance which was paid in full in October 2007.
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10. STOCK BASED COMPENSATION
On July 1, 2005 (the first day of its 2006 fiscal year), the Company adopted
SFAS No. 123-R Share-Based Payment ("SFAS No. 123-R"). The Company adopted SFAS
No. 123-R using a modified prospective application, as permitted under SFAS No.
123-R. Accordingly, prior period amounts have not been restated. Under this
application, the Company is required to record compensation expense using a
fair-value-based measurement method 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. Pursuant to the provisions of SFAS No.
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 three months ended
September 30, 2007 were as follows:
Weighted
Average
Shares Exercise Price
--------------------------
Outstanding, June 30, 2007 788,500 7.11
Granted -- --
Exercised -- --
Expired -- --
Canceled -- --
--------------------------
Outstanding, September 30, 2007 788,500 7.11
Exercisable September 30, 2007 788,500 7.11
11. EMPLOYMENT AGREEMENT WITH CHIEF EXECUTIVE OFFICER
On August 20, 2007, the Company entered into an employment agreement with
Michael Ryan, its President and Chief Executive Officer (the "Employment
Agreement"). The Employment Agreement contains the following salient terms: the
term is from July 1, 2007 to June 30, 2011; the base salary is $0.4 million per
year; a bonus will be awarded to Mr. Ryan ranging from 40% of base salary to
100% of base salary if actual EBITDA results for a fiscal year exceed at least
85% of the EBITDA budgeted for such fiscal year; any commissions paid to Mr.
Ryan for personal production will reduce the bonus; a severance payment equal to
base salary and bonus (computed at 100% of base salary) will be paid to Mr. Ryan
for the greater of three years or the ending date of the term if he is
terminated as the result of an involuntary change of control, or the greater of
one year or the ending date of the term if he is terminated as the result of a
voluntary change of control. In addition, Mr. Ryan agreed to a one year covenant
not to compete with the Company and a two year covenant not to solicit customers
or employees of the Company or registered representatives of the Company's
broker-dealer subsidiary.
12. RELATED PARTY TRANSACTIONS
On August 20, 2007, the Company sold 40.0 million shares of Company common stock
to certain private placement purchasers, including officers, directors and
employees of the Company and Prime Partners II, LLC, a holding company owned in
part by Michael Ryan (the Company's President and Chief Executive Officer and a
member of the Company's Board of Directors). See also Note 5 describing the
equity transaction.
James Ciocia, Michael Ryan and Kathryn Travis, all Company directors, personally
guaranteed the repayment of the Company's distribution financing agreement with
Met Life, which was fully satisfied on August 20, 2007. Mr. Ciocia and Mr. Ryan
personally guaranteed the repayment of the Company's loan from Wachovia. Such
shareholders received no consideration for such guarantees other than their
salaries and other compensation.
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On August 16, 2007, Prime Partners, Inc. sold to Prime Partners II, LLC $1.5
million of Company debt, which included $0.2 million related to the Purchasing
Group Loan, of the $2.8 million owed to it by the Company. On August 20, 2007,
as part of the Private Placement Closing, Prime Partners II, LLC converted the
$1.5 million of Company debt into 15.4 million shares of Company common stock.
As of September 30, 2007, the Company owed Prime Partners, Inc. $1.4 million in
principal, which was due on August 31, 2007, but is being extended to January
31, 2008. Michael Ryan is a director, an officer and a significant shareholder
of Prime Partners, Inc. Prime Partners II, LLC is a limited liability company.
Michael Ryan is a significant member and a manager of Prime Partners II, LLC.
As of September 30, 2007, Prime Partners, Inc. owed $0.5 million to a trust, of
which Ted H. Finkelstein, the Company's Vice President and General Counsel is
the trustee, which was due on August 31, 2007, but is being extended to January
31, 2008. As security for the loan, Prime Partners, Inc. gave the trust a
security interest in the notes that the Company owes to Prime Partners, Inc.
On August 20, 2007, as part of the Private Placement Closing $0.7 million of a
loan owed by the Company to a group of Company management and employees was
converted to 7.1 million shares of Company common stock, leaving a de minimis
debt balance which was paid in full in October 2007.
On August 20, 2007, $30,000 of a note owed to Ted H. Finkelstein, the Company's
Vice President and General Counsel, including accrued interest, was converted to
0.3 million shares of Company common stock.
On August 20, 2007, $0.2 million of debt owed to James Ciocia, a Director of the
Company was converted to 2.3 million shares of Company common stock.
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13. ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
(in thousands) September 30, June 30,
2007 2007
--------------------------
Accounts payable $ 2,118 $ 2,349
Commission payable 3,387 3,871
Accrued compensation 170 228
Accrued bonus 239 238
Accrued related party compensation and bonus 179 270
Accrued related party other 150 250
Accrued vacation 188 165
Accrued settlement fees 148 293
Accrued audit fees & tax fees 111 155
Accrued interest 236 2,403
Accrued other 375 469
--------------------------
Total Accounts Payable and Accrued Expenses $ 7,301 $10,691
==========================
14. SUBSEQUENT EVENTS
On October 25, 2007, the Company filed a Registration Statement on Form S-1 with
the SEC pursuant to the Registration Rights Agreement dated August 20, 2007 with
the Investment Purchasers and the Private Placement Purchasers.
On November 1, 2007, $0.4 million of debt owed to Prime Partners Inc., was paid,
reducing the remaining principal balance to $1.0 million.
On October 31, 2007, the Company entered into an asset purchase agreement to
purchase a tax preparation and accounting business. The purchase price is equal
to a percentage of annual gross revenue generated from the preparation of tax
returns of the clients and from accounting services rendered to clients during
the period October 31, 2007 through October 2012. In addition the Company paid
the seller at closing $4,000 for tangible personal property and a down payment
of $33,345. Commencing on December 31, 2007 and each ninety day period
thereafter, the Company will pay the seller additional installment payments
based on a percentage of gross revenue generated until October 2012 less all
prior payments received.
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 Company's expectations about its ability to raise capital, its
strategy to achieve its corporate objectives, including its strategy to pursue
growth through acquisitions, the dependence of profitability on the Company's
two channels leveraging off each other, to increase revenues through its
registered representative recruiting program and expand its brand awareness and
business presence, its liquidity and ability and proposed means of meeting its
cash requirements, its expectations regarding the payment of dividends, the
impact of new accounting pronouncements, the outcome of litigation, arbitration
and regulatory investigations, its expectations regarding relationships with
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GILMAN & CIOCIA INC - 10-Q
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lenders, its expectations regarding legacy accounts payables, and others, are
based upon current information, expectations, estimates and projections
regarding the Company, the industries and markets in which the Company operates,
and management's assumptions and beliefs relating thereto. Words such as "will,"
"plan," "expect," "remain," "intend," "estimate," "approximate," and variations
thereof and similar expressions are intended to identify such forward-looking
statements. These statements speak only as of the date on which they are made,
are not guarantees of future performance, and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results could materially differ from what is expressed, implied or
forecast in such forward-looking statements. Such differences could be caused by
a number of factors including, but not limited to, the uncertainty of laws,
legislation, regulations, supervision and licensing by federal, state and local
authorities and their impact on the lines of business in which the Company and
its subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; changes in competition and the effects of
such changes; the inability to implement the Company's strategies; changes in
management and management strategies; the Company's inability to successfully
design, create, modify and operate its computer systems and networks; the
ability of certain significant shareholders to influence shareholder actions,
limitations on our ability to use net operating loss carryforwards, litigation
and investigations involving the Company; and risks described in Item 1A."Risk
Factors" of this quarterly report on Form 10-Q and in the Company's Annual
Report on Form 10-K/A for the fiscal year ended 2007. 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
The Company provides federal, state and local income tax return preparation for
individuals predominantly in middle and upper income brackets and accounting
services to small and midsize companies and financial planning services,
including securities brokerage, investment management services, insurance and
financing services. Clients often consider other aspects of their financial
needs such as investments, insurance, pension and estate planning, while having
their tax returns prepared by the Company. The Company believes that its tax
return preparation and accounting services are inextricably intertwined with its
financial planning activities. Neither channel would operate as profitably by
itself and the two channels leverage off each other, improving profitability and
client retention. The financial planners who provide such services are employees
of the Company and/or independent contractors of the Company's Prime Capital
Services, Inc. ("PCS") subsidiary. The Company and PCS earn a share of
commissions (depending on what service is provided) from the services that the
financial planners provide to the clients in transactions for securities,
insurance and related products. The Company also earns substantial revenue from
asset management services provided through Asset & Financial Planning, Ltd.
("AFP"), a wholly owned subsidiary. The Company also earns revenues from
commissions for acting as an insurance agent and as a broker for financing
services. PCS also earns revenues ("PCS Marketing") from its strategic marketing
relationships with certain product sponsors which enables PCS to efficiently
utilize its training, marketing and sales support resources.
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For the quarter ended September 30, 2007, approximately 4.0% of the Company's
revenues were earned from tax preparation and accounting services and 96.0% were
earned from all financial planning and related services of which approximately
72.0% was earned from mutual funds, annuities and securities transactions, 21.0%
from asset management, 3.0% from insurance, 3.0% from PCS Marketing, and less
than 1.0% from financing services.
The Company has a highly seasonal business. The first and second quarters of the
Company's fiscal year are typically its weakest quarters and the third quarter
of its fiscal year is typically its strongest.
During the three months ended September 30, 2007, the Company had net income of
$3.9 million compared to a net loss of $2,946 during the three months ended
September 30, 2006. This increase in net income is mostly attributable to the
gain from the extinguishment of debt resulting from the investment purchase and
the private placement closings described below.
At September 30, 2007 the Company had a working capital deficit of $2.3 million.
At September 30, 2007 the Company had $2.4 million of cash and cash equivalents
and $3.6 million of trade accounts receivables, net, to fund short-term working
capital requirements.
On August 20, 2007, the Company closed the sale (the "Investment Purchase
Closing") of 40.0 million shares of its common stock, par value $0.01 per share
(the "Common Stock"), at a price of $0.10 per share (the "Investment Purchase")
for proceeds of $4.0 million pursuant to an Investor Purchase Agreement dated
April 25, 2007 (the "Purchase Agreement") with Wynnefield Small Cap Value
Offshore Fund, Ltd., Wynnefield Partners Small Cap Value, L.P., Wynnefield
Partners Small Cap Value, L.P.I and WebFinancial Corporation (the "Investment
Purchasers"). The 40.0 million shares of Common Stock were issued pursuant to an
exemption from the registration requirements of the Securities Act of 1933 under
Regulation D, Rule 506 ("Rule 506"). The proceeds from the Investment Purchase
Closing were used as follows: $2.4 million was paid to Met Life Insurance
Company of Connecticut ("Met Life"), formerly known as the Travelers Insurance
Company, in full satisfaction of the approximate $6.8 million including
principal and interest owed to Met Life by the Company; $50,000 was paid to
Wachovia Bank, National Association ("Wachovia") as a principal payment, which
reduced the Company's loan balance with Wachovia to approximately $0.7 million;
$19,208 was paid to Wachovia for a loan fee and legal fees; and the $1.6 million
balance was retained by the Company to be used as working capital.
The Investment Purchase Closing was contingent upon, among other things, the
purchase of an additional 40.0 million shares of Common Stock at a price of
$0.10 per share in cash or by the conversion of outstanding debt or other
liabilities of the Company (the "Private Placement") by other purchasers (the
"Private Placement Purchasers") including officers, directors and employees of
the Company. Prime Partners II, LLC ("Prime Partners II"), a holding company
owned in part by Michael Ryan (the Company's President and Chief Executive
Officer and a member of the Company's Board of Directors) purchased 15.4 million
shares of Common Stock in the Private Placement by the conversion of $1.5
million of Company debt. The closing of the Private Placement (the "Private
Placement Closing") occurred on August 20, 2007 simultaneously with the
Investment Purchase Closing.
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At the Private Placement Closing, the Company issued 16.9 million shares of
Company Stock for cash proceeds of $1.7 million and 23.1 million shares of
Common Stock for the conversion of $2.3 million of Company debt, including 15.4
million shares issued to Prime Partners II, for the conversion of $1.5 million
of Company debt. Such shares were issued pursuant to an exemption from the
registration requirements under Rule 506. The $1.7 million cash proceeds from
the Private Placement Closing were disbursed as follows: $3,750 for escrow agent
fees; and the $1.7 million balance was retained by the Company to be used to
retire the debt of affiliates.
In prior fiscal years, the Company had significant working capital deficiencies.
The Company's liquidity improved during fiscal 2007 as evidenced by positive
earnings and cash flow from operations. Additionally, the Company's debt was
significantly reduced as a result of the Investment Purchase Closing and the
Private Placement Closing. The Company anticipates meeting its cash flow
requirements throughout fiscal 2008 and 2009 by, among other things, continuing
to control operating expenses and, due to the seasonality of the Company's
business, at times pursuing short-term financing through outside lenders, and by
implementing its acquisition strategy to increase earnings and cash flow. In
addition the Company increased its working capital by $1.6 million as a result
of the Investment Purchase on August 20, 2007.
The Company continues to redefine its product mix by putting a greater emphasis
on the sale of financial products that generate recurring income. 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 result will be continued downward pressure on total revenues in
future quarters until the Company starts to more significantly benefit from the
effect 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 SEPTEMBER 30, 2007 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2006
The following table presents revenue by product line and brokerage revenue by
product type:
(in thousands) For the Three Months Ended
September 30
Consolidated Revenue Detail % Change
2007 2006 07-06
----------------------------------
Revenue by Product Line
Brokerage Commissions $ 8,533 $ 7,680 11.1%
Insurance Commissions 343 339 1.2%
Advisory Fees 2,551 2,512 1.6%
Tax Preparation and Accounting Fees 441 408 8.1%
Lending Services 51 177 -71.2%
Marketing Revenue 361 383 -5.7%
----------------------------------
Total Revenue $12,280 $11,499 6.8%
==================================
Brokerage Commissions by Product Type
Mutual Funds $ 1,065 $ 756 40.9%
Equities, Bonds & UIT 307 220 39.5%
Annuities 4,735 4,530 4.5%
Trails 2,106 1,842 14.3%
All other products 320 332 -3.6%
----------------------------------
Brokerage Commissions $ 8,533 $ 7,680 11.1%
==================================
The Company's total revenues for the three months ended September 30, 2007 were
$12.3 million compared to $11.5 million for the three months ended September 30,
2006, an increase of $0.8 million or 6.8%. The Company's total revenues for the
three months ended September 30, 2007 consisted of $11.8 million for financial
planning services and $0.4 million for tax preparation and accounting services.
Financial planning services represented approximately 96.0% and tax preparation
and accounting services represented approximately 4.0% of the Company's total
revenues during the three months ended September 30, 2007. The Company's total
revenues for the three months ended September 30, 2006 consisted of $11.1
million for financial planning services and $0.4 million for tax preparation and
accounting services. Financial planning services represented approximately 96.0%
and tax preparation fees represented approximately 4.0% of the Company's total
revenues during the three months ended September 30, 2006.
For the three months ended September 30, 2007, financial planning revenue was
$11.8 million compared to $11.1 million for the same period last year. This
increase is mostly attributable to increases in mutual funds, trails, annuities
and advisory fees. The Company's continued efforts to diversify its revenue to
more recurring revenue streams are reflected in the increase of advisory fees
and trails of $0.3 million for the three months ended September 30, 2007 over
the same period last year.
Tax preparation and accounting services revenue increased slightly for the three
months ended September 30, 2007 compared with the same period last year. This
increase in tax preparation and accounting services revenue is attributable to
the additional revenue generated from the five tax preparation and accounting
businesses that were acquired in January and February 2007.
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For the three months ended September 30, 2007, revenues from recurring revenue
sources (advisory and trails) increased to $4.7 million, up $0.3 million from
$4.4 million for the three months ended September 30, 2006, representing a 7.0%
increase in recurring revenue. The increase in recurring revenues is mostly
attributable to higher assets under management and assets under custody compared
to the same period last year.
As indicated in the following table, as of September 30, 2007, assets under AFP
management increased $61.5 million, to $680.9 million, up from $619.4 million as
of September 30, 2006. This increase is attributable to increases in assets
under management, as well as market fluctuations. As of September 30, 2007,
total Company assets under custody were $5.0 billion, up $21.8 million from the
fiscal year ended June 30, 2007 and up $439.4 million from September 30, 2006
one year ago.
The following table presents the market values of assets under AFP management:
(in thousands) Market Value as of September 30,
2007 2006 % Change
----------------------------------------
Annuities $396,987 $350,775 13.2%
Brokerage 283,914 268,641 5.7%
----------------------------------------
Total Assets Under Management $680,901 $619,416 9.9%
========================================
The following table presents the market values of total Company assets under
custody:
(in thousands) Total Company
Assets Under
Market Value as of Custody
- ------------------ -------------
9/30/2007 $4,983,177
6/30/2007 $4,961,358
03/31/2007 $4,632,199
12/31/2006 $4,648,293
9/30/2006 $4,543,796
The Company's total operating expenses for the three months ended September 30,
2007 were $12.9 million, up $1.1 million or 9.4%, compared to $11.8 million for
the three months ended September 30, 2006. The increase is primarily due to
increases in commission expense, salaries, general and administrative expenses
and brokerage fees and licenses, while advertising and rent remained flat
compared to the same period last year.
Commission expense was $7.6 million for the three months ended September 30,
2007, compared with $7.3 million for the same period last year. This increase is
mostly attributable to increased financial planning revenue. The percentage of
commission expense to revenue was 66.0% and 68.0% for the three months ended
September 30, 2007 and September 30, 2006, respectively. This decrease as a
percentage to revenue is attributable to increased revenue generated through the
Company's employee channel where commission pay out rates are lower than on the
independent channel compared with the same period last year where the
independent channel generated a greater percentage of revenue.
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Salaries increased by $0.2 million, or 10.0% in the three months ended September
30, 2007 compared with the same period last year. This increase is mostly
attributable to increased staff at the Company's headquarters related to the
Company's marketing efforts and compliance needs as well as increases in branch
office staff to support increases in production.
General and administrative expenses increased $0.6 million or 49.0% in the three
months ended September 30, 2007 compared with the same period last year. This
increase is primarily attributable to an increase in bad debt expense of $0.1
million resulting from an increase in the allowance related to certain
receivables compared with the same period last year where the Company recorded a
reduction of the allowance resulting from the increased collections on two
office sale notes. Additionally, $0.5 million of the increase is mostly related
to increased professional fees, increased office equipment rental expense due to
the expiration of office equipment leases that were renewed with new equipment
resulting in higher office equipment rental expense, and higher costs associated
with professional development and training.
Brokerage fees and licenses increased slightly compared with the same period
last year. This increase is mostly due to the increase in financial planning
revenue.
Depreciation and amortization expense increased slightly for the three months
ended September 30, 2007 compared with the same period last year. This slight
increase is attributable to increased capital expenditures, offset partially by
assets reaching their full depreciable lives.
The Company's loss before other income and expense for the three months ended
September 30, 2007 was $0.7 million compared to a loss of $0.3 million for the
same period last year. This decline was primarily attributable to increased
operating expenses partially offset by increased financial planning revenue.
Total other income/(expense) for the three months ended September 30, 2007 was
$4.6 million compared to $0.3 million for the three months ended September 30,
2006. The increase in other income was primarily due to the gain from the
extinguishment of debt owed to Met Life resulting from the Investment Purchase
and the Private Placement closings on August 20, 2007 and from the adoption of
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("SFAS No. 157").
The Company's net income for the three months ended September 30, 2007 was $3.9
million, or $0.08 per diluted share, compared with a net loss of ($2,946), or
($0.00) per diluted share for the three months ended September 30, 2006. This
increase is mostly attributable to the extinguishment of Company debt owed to
Met Life, the adoption of SFAS No. 157 and increased financial planning revenue,
partially offset by increased operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
On August 20, 2007, the Company sold 40.0 million shares of Company common stock
to certain investment purchasers (the "Investment Purchase Closing") and sold an
additional 40.0 million shares of Company common stock to certain private
placement purchasers (the "Private Placement Closing"). As a result of the
Investment Purchase Closing and the Private Placement Closing, on August 20,
2007, Met Life was paid $2.4 million in full satisfaction of the approximately
$6.8 million, including principal and interest, owed to Met Life. See Note 5 to
Notes to Consolidated Financial Statements for a discussion of the stock sales.
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As of September 30, 2007, the Company was in default of certain covenants under
its term loan/revolving letter of credit financing with Wachovia Bank, National
Association ("Wachovia"). The Company's debt forbearance agreement with Wachovia
was last amended on April 1, 2006. The Company does not believe that Wachovia
will issue a notice of default for any of these defaults. As a result of these
defaults, the Company's debt with Wachovia has been classified as a current
liability on its financial statements. On August 20, 2007, as a result of the
Investment Purchase Closing and the Private Placement Closing, a $50,000
principal payment was made to Wachovia. As of November 1, 2007, the Company was
current with its monthly payments to Wachovia and the outstanding principal
balance was $0.6 million.
On August 20, 2007, as part of the Private Placement Closing $0.7 million of a
loan owed by the Company to a group of Company management and employees was
converted to 7.1 million shares of Company common stock, leaving a de minimis
debt balance which was paid in full in October 2007.
During the three months ended September 30, 2007, the Company had net income of
$3.9 million and at September 30, 2007 had a working capital deficit position of
$2.3 million. At September 30, 2007 the Company had $2.4 million of cash and
cash equivalents, $0.1 million in marketable securities and $3.6 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 September 30, 2007 the Company was in compliance with this
regulation.
The Company had previously funded working capital commitments through loans from
Prime Partners, Inc. As of September 30, 2007, the Company owed Prime Partners,
Inc. $1.4 million, reduced by $1.4 million from June 30, 2007 as a result of the
Private Placement Closing.
In prior fiscal years, the Company had significant working capital deficiencies.
The Company's liquidity improved during fiscal 2007 as evidenced by positive
earnings and cash flow from operations. Additionally, the Company's debt was
significantly reduced as a result of the Investment Purchase Closing and the
Private Placement Closing. The Company anticipates meeting its cash flow
requirements throughout fiscal 2008 and 2009 by, among other things, continuing
to control operating expenses and, due to the seasonality of the Company's
business, at times pursuing short-term financing through outside lenders and by
implementing its acquisition strategy to increase earnings and cash flow. In
addition the Company increased its working capital by $1.6 million as a result
of the Investment Purchase on August 20, 2007.
The Company's net cash used in operating activities was $1.6 million for the
three months ended September 30, 2007, compared with net cash used in operating
activities of $0.9 million for the three months ended September 30, 2006. The
increase in net cash used in operating activities was primarily attributable to
increased cash outflows to pay down accounts payable and accrued expenses,
including commission payables. The Company also had a higher accounts receivable
balance at the end of the period. 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.
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Net cash provided by investing activities was $31.0 thousand for the three
months ended September 30, 2007 compared with net cash used in investing
activities of $9.0 thousand for the three months ended September 30, 2006. This
increase in cash provided by investing activities was mostly attributable to the
collection of employee receivables offset partially by increased capital
expenditures.
Net cash provided by financing activities was $2.7 million for the three months
ended September 30, 2007 compared with net cash provided by financing activities
of $0.1 million for the three months ended September 30, 2006. This increase is
due primarily to proceeds from the Investment Purchase and Private Placement on
August 20, 2007, offset by the pay off of the Company's debt with Met Life.
CONTRACTUAL OBLIGATION AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to September 30, 2007, and thereafter. The amounts represent
the maximum future cash contractual obligations.
Contractual Obligations and Commercial Commitments
Payment Due by Period
Contractual Obligations Total 2008 2009 2010 2011 2012 Thereafter
----------------------------------------------------------------------------------------------
Debt $ 705,985 $ 506,464 $ 199,521 $ -- $ -- $ -- $ --
Related Party 1,503,103 1,503,103 -- -- -- -- --
Operating Leases 7,322,169 1,545,630 1,800,983 1,340,675 1,096,014 604,656 934,211
Capital Leases 427,246 181,858 114,420 77,501 26,836 19,362 7,269
----------------------------------------------------------------------------------------------
Total contractual cash
obligations $9,958,503 $3,737,055 $2,114,924 $1,418,176 $1,122,850 $ 624,018 $ 941,480
==============================================================================================
Note: This Contractual Obligations schedule reflects the contractual payment
terms of the debt maturities, while $0.2 million related to the Wachovia debt
has been reclassified to current liabilities in the balance sheet since such
debt is in technical default.
The contractual obligations and commercial commitments schedule does not include
contingent payments related to several asset purchase agreements entered into by
the Company, which include contingent consideration based upon gross revenue
generated in future periods. The Company did not record a liability for these
contingent payments as they were deemed immaterial.
Pursuant to Amendment No. 4 with Wachovia, the amortization schedule for the
Wachovia Loan was extended by approximately seven months and the Maturity Date
was extended to October 10, 2008. Under Amendment No. 4, the Company will pay
Wachovia principal on the loan of $50,000 monthly, plus interest.
The Company is also contractually obligated to certain employees and executives
pursuant to commission agreements and compensation agreements.
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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
"grey 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.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
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
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 September 30, 2007, the Company has
accrued approximately $0.3 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.
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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.
Income Tax Recognition of Deferred Tax Items
The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. Significant management judgment is required in
determining our deferred tax assets and liabilities. Management makes an
assessment of the likelihood that our deferred tax assets will be recovered from
future taxable income, and to an amount that it believes is more likely than not
to be realized.
Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting services and 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.
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 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. Early adoption is permitted
provided that the reporting entity has not yet issued financial statements for
that fiscal year. The Company has adopted SFAS No. 157 effective September 30,
2007.
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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 2007 10-K/A, which discusses
accounting policies that must be selected by management when there are
acceptable alternatives.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
To date, the Company's exposure to market risk has been limited and it is not
currently hedging any market risk, although it may do so in the future. The
Company does not hold or issue any derivative financial instruments for trading
or other speculative purposes. The Company is exposed to market risk associated
with changes in the fair market value of the marketable securities that it
holds. The Company's revenue and profitability may be adversely affected by
declines in the volume of securities transactions and in market liquidity, which
generally result in lower revenues from trading activities and commissions.
Lower securities price levels may also result in a reduced volume of
transactions, as well as losses from declines in the market value of securities
held by the Company in trading 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.
Interest Rate Risk
The Company's obligations under its Wachovia loan agreement bears interest at
floating rates and therefore, the Company is impacted by changes in prevailing
interest rates. For the three months ended September 30, 2007, had the interest
rate fluctuated plus or minus 1.0%, interest expense would have been higher or
lower by approximately $7,000.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's senior management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 13a-15 and
15d-15 under the Exchange Act) designed to ensure that information required to
be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including its principal executive officer or officers and
principal financial officers, to allow timely decisions regarding required
disclosure.
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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 Principal Financial and Chief Accounting Officer, of the disclosure controls
and procedures of the Company as defined in Exchange Act Rule 13(a)-15(e). In
designing and evaluating disclosure controls and procedures, the Company and its
management recognize that any disclosure controls and procedures, no matter how
well designed and operated, can only provide reasonable assurance of achieving
the desired control objective. As of September 30, 2007, management concludes
that the Company's disclosure controls and procedures are effective.
Changes in Internal Controls
During the three months ended September 30, 2007, there were no changes in the
Company's internal controls over financial reporting that materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
The risk factors below include material changes to the description of the risk
factors affecting our business as previously disclosed in Item 1A. to Part 1 of
our Annual Report on Form 10-K/A for the fiscal year ended June 30, 2007.
Certain private shareholders, including some of our directors and officers,
control a substantial interest in us and thus may influence certain actions
requiring a vote of our stockholders.
On August 20, 2007, Michael Ryan (our Chief Executive Officer), Carole Enisman
(our Executive Vice President of Operations), Ted Finkelstein (our Vice
President and General Counsel), Dennis Conroy, Prime Partners, Inc. and Prime
Partners II, LLC (holding companies owned in part by Michael Ryan), Wynnefield
Small Cap Value Offshore Fund, Ltd., Wynnefield Partners Small Cap Value, L.P.,
Wynnefield Partners Small Cap Value, L.P.I and WebFinancial Corporation entered
into a stockholders agreement concerning the voting of their shares of our
common stock. As of the date of this prospectus these stockholders collectively
own approximately 69.0% of our issued and outstanding shares of common stock.
Pursuant to the stockholders agreement, these stockholders will have the ability
to influence certain actions requiring a stockholder vote, including, the
election of directors. This concentration of ownership and control by these
stockholders could delay or prevent a change in our control or other action,
even when a change in control or other action might be in the best interests of
our other stockholders.
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Our staggered board may entrench management, could prevent or delay a change of
control of our company and discourage unsolicited stockholder proposals or bids
for our common stock that may be in the best interests of our stockholders.
Our restated certificate of incorporation provides that our board of directors
is divided into three classes, serving staggered three-year terms. As a result,
at any annual meeting only a minority of our board of directors will be
considered for election. Since our "staggered board" would prevent our
stockholders from replacing a majority of our board of directors at any annual
meeting, it may entrench management, delay or prevent a change in our control
and discourage unsolicited stockholder proposals or unsolicited bids for our
common stock that may be in the best interests of our stockholders.
Our sale of 80,000,000 shares of common stock in August 2007 significantly
diluted the common stock ownership of our stockholders and could adversely
affect future prices of our stock.
The significant dilution of the common stock ownership of existing stockholders
resulting from our August 2007 private placements could have an adverse effect
on the future price of the shares of our common stock and on the future volume
of the shares traded.
A Section 382 limitation on the use of our net operating loss carryforwards
could have a negative impact on our future tax liability.
Our net operating loss carryforwards of $19.0 million at June 30, 2007 expire
generally from 2017 to 2027. As a result of equity transactions we completed in
August 2007 we are reviewing whether our ability to utilize our net operating
loss carryforwards may be restricted under the Internal Revenue Code. If we are
unable to utilize our net operating loss carryforwards, it would increase our
tax liability which would have a material adverse effect on our operating
results.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 9 to Notes to Consolidated Financial Statements herein for a discussion
of the Company's defaults on debt.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on July, 19, 2007. At this
meeting:
1. The stockholders approved the adoption of the Company's 2007 Stock Incentive
Plan (the "2007 Plan").
The 2007 Plan provides that it will be administered by the Company's board of
directors or a committee of two or more members of the board appointed by the
board (the "Committee"). The board or the Committee will generally have the
authority to administer the 2007 Plan, determine participants who will be
granted awards under the 2007 Plan, the size and types of awards, the terms and
conditions of awards and the form and content of the award agreements
representing awards.
The 2007 Plan provides for the grant of any or all of the following types of
awards: (a) common stock options, (b) restricted common stock, (c) deferred
common stock and (d) other common stock-based awards. Awards may be granted
singly, in combination, or in tandem. Subject to anti-dilution adjustments as
provided in the 2007 Plan, (i) the 2007 Plan provides for a total of 16.1
million shares of the Company's common stock to be available for distribution
pursuant to the 2007 Plan, and (ii) the maximum number of shares of the
Company's common stock with respect to which stock options, restricted stock,
deferred stock, or other stock-based awards may be granted to any participant
under the 2007 Plan during any calendar year or part of a year may not exceed
0.6 million shares.
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Awards under the 2007 Plan may be granted to employees, directors, consultants
and advisors of the Company and its subsidiaries. However, only employees of the
Company and its subsidiaries will be eligible to receive options that are
designated as incentive stock options.
With respect to options granted under the 2007 Plan, the exercise price must be
at least 100% (110% in the case of an incentive stock option granted to a ten
percent stockholder within the meaning of Section 422(b)(6) of the Internal
Revenue Code of 1986) of the fair market value of the common stock subject to
the award, determined as of the date of grant. Restricted stock awards are
shares of common stock that are awarded subject to the satisfaction of the terms
and conditions established by the administrator. In general, awards that do not
require exercise may be made in exchange for such lawful consideration,
including services, as determined by the administrator.
2. The stockholders approved an amendment of the Company's Certificate of
Incorporation to increase the Company's authorized common stock to 500.0 million
shares (the "Amendment"). The Amendment was effected on July 20, 2007. Prior to
the Amendment, the Company's Certificate of Incorporation provided for 20.0
million shares of authorized common stock.
3. The stockholders approved the sale of 40.0 million shares of Company common
stock to certain investment purchasers, and the sale of an additional 40.0
million shares of Company common stock to certain private placement purchasers.
See Note 5 to Notes to Consolidated Financial Statements for a discussion of the
stock sales.
4. The stockholders elected the following directors: Edward Cohen as a Class A
director (whose term expires at the annual meeting of stockholders to be held
for the fiscal year ending June 30, 2007), James Ciocia and Michael Ryan as
Class B directors (whose terms expire at the annul meeting of stockholders to be
held for the fiscal year ending June 30, 2008) and John Levy and Allan Page as
Class C directors (whose terms expire at the annual meeting of stockholders to
be held for the fiscal year ending June 30, 2009).
5. The stockholders ratified the appointment of Sherb & Co., LLP as the
Company's independent auditors for the fiscal year ending June 30, 2007.
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The following table sets forth the results of votes of security holders related
to the above submission of matters:
Submission of Matters to a Vote of Security Holders For Against Withheld Abstained
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1. Adoption of the Company's 2007 Stock Incentive Plan 5,204,874 75,491 -- 56,604
2. Increase the Company's authorized common stock to 500.0
million 5,223,711 49,771 -- 63,487
3. Approve sale of 40.0 million shares of Company common stock
to certain investment purchasers, and the sale of an
additional 40.0 million shares of Company common stock to
certain private placement purchasers 5,234,062 36,551 -- 66,356
4. Elect the following directors:
Edward Cohen as Class A Director 7,617,563 -- 316,909 --
James Ciocia as Class B Director 7,615,296 -- 319,176 --
Michael Ryan as Class B Director 7,616,763 -- 317,709 --
John Levy as Class C Director 7,617,363 -- 317,109 --
Allan Page as Class C Director 7,617,363 -- 317,109 --
5. Ratify the appointment of Sherb & Co., LLP as the Company's
independent auditors for the fiscal year ending June 30,
2007 7,645,119 214,325 -- 74,828
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ITEM 6. EXHIBITS
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Principal Financial and 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 Principal Financial and 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: November, 14, 2007 By: /s/ Michael P. Ryan
------------------------------
Chief Executive Officer
Dated: November 14, 2007 By: /s/ Karen Fisher
------------------------------
Principal Financial and
Chief Accounting Officer
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