GILMAN & CIOCIA INC - 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2587324
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK 12603
(Address of principal executive offices)(Zip code)
(845) 486-0900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |_| Non-accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes |_| No |X|
As of February 1, 2008, 89,719,050 shares of the issuer's common stock, $0.01
par value, were outstanding.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of December 31, 2007
and June 30, 2007................................................... 3
Consolidated Statements of Operations for the Three Months and
Six Months Ended December 31, 2007 and December 31, 2006 ........... 4
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2007 and December 31, 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.......... 32
Item 4. Controls and Procedures ............................................ 32
PART II - OTHER INFORMATION
Item 1A. Risk Factors ..................................................... 33
Item 3. Defaults Upon Senior Securities ................................... 34
Item 6. Exhibits .......................................................... 35
SIGNATURES.................................................................. 36
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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
December 31, June 30,
2007 2007
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Assets
Cash & Cash Equivalents $ 1,253 $ 1,369
Marketable Securities 69 160
Trade Accounts Receivable, Net 3,095 3,243
Receivables from Employees, Net 590 766
Prepaid Expenses 496 655
Other Current Assets 232 282
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Total Current Assets 5,735 6,475
Property and Equipment (less accumulated depreciation of $6,369
at December 31, 2007 and $6,128 at June 30, 2007) 1,212 1,118
Goodwill 3,917 3,881
Intangible Assets (less accumulated amortization of $5,907 at
December 31, 2007 and $5,649 at June 30, 2007) 4,645 4,598
Other Assets 360 421
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Total Assets $ 15,869 $ 16,493
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Liabilities and Shareholders' Equity/(Deficit)
Accounts Payable and Accrued Expenses $ 6,169 $ 10,691
Current Portion of Notes Payable and Capital Leases 809 6,052
Deferred Income 19 234
Due to Related Parties 1,147 3,635
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Total Current Liabilities 8,144 20,612
Long Term Portion of Notes Payable and Capital Leases 274 243
Long Term Portion of Related Party Notes 265 --
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Total Liabilities 8,683 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; 89,799,050
and 9,668,579 shares issued at December 31, 2007 and June 30, 2007,
respectively 898 97
Additional Paid in Capital 36,109 29,041
Accumulated Deficit (29,821) (33,500)
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Total Shareholders' Equity/(Deficit) 7,186 (4,362)
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Total Liabilities & Shareholders' Equity/(Deficit) $ 15,869 $ 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 For the Six Months Ended
December 31, December 31,
2007 2006 2007 2006
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Revenues
Financial Planning Services $ 11,943 $11,729 $ 23,782 $22,820
Tax Preparation and Accounting Fees 414 302 855 710
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Total Revenues 12,357 12,031 24,637 23,530
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Operating Expenses
Commissions 7,636 8,053 15,221 15,339
Salaries 2,235 1,891 4,458 3,911
General & Administrative 1,300 1,011 3,006 2,155
Advertising 320 250 674 600
Brokerage Fees & Licenses 305 270 634 559
Rent 518 475 1,033 994
Depreciation & Amortization 255 236 500 472
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Total Operating Expenses 12,569 12,186 25,526 24,030
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Loss from Operations
Before Other Income and Expenses (212) (155) (889) (500)
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Other Income/(Expense)
Interest and Investment Income 15 14 24 28
Interest Expense (64) (223) (175) (447)
Other Income, Net 57 66 4,719 618
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Total Other Income/(Expense) 8 (143) 4,568 199
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Income/(Loss) from Operations
Before Income Taxes (204) (298) 3,679 (301)
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Income Taxes/(Benefit) -- -- -- --
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Net Income/(Loss) $ (204) $ (298) $ 3,679 $ (301)
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Weighted Average Number of Common
Shares Outstanding:
Basic and Diluted Shares 89,749,594 9,591,624 67,987,923 9,568,531
Basic and Diluted Net
Income/(Loss) Per Share:
Net Income/(Loss) $ (0.00) $ (0.03) $ 0.05 $ (0.03)
See Notes to Unaudited Consolidated Financial Statements
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GILMAN CIOCIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Six Months Ended
December 31,
2007 2006
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Cash Flows from Operating Activities:
Net Income/(Loss): $ 3,679 $ (301)
Adjustments to reconcile net income/(loss) to net cash used in
operating activities:
Depreciation and amortization 500 472
Issuance of common stock for services, interest and other 19 19
Gain on sale of discontinued operations -- (65)
Allowance for doubtful accounts 85 (197)
Gain on debt extinguishment and other (4,682) --
Changes in assets and liabilities:
Accounts receivable 142 47
Prepaid and other current assets 167 480
Change in marketable securities 91 102
Other assets 52 19
Accounts payable and accrued expenses (1,783) (853)
Deferred income (215) (689)
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Net cash used in operating activities: (1,945) (966)
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Cash Flows from Investing Activities:
Capital expenditures (176) (51)
Cash paid for acquisitions, net of cash acquired and debt incurred (167) (3)
Receivables from employees 145 (81)
Due from office sales 8 138
Proceeds from the sale of offices -- 16
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Net cash provided by/(used in) investing activities: (190) 19
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Cash Flows from Financing Activities:
Proceeds from bank and other loans 115 61
Proceeds from related parties -- 1,000
Proceeds from capital stock issuance 5,668 --
Payments of bank loans and other loans (3,092) (700)
Payments to related parties (444) --
Payments related to offering costs (228) --
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Net cash provided by financing activities: 2,019 361
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Net change in cash and cash equivalents (116) (586)
Cash and cash equivalents at beginning of period 1,369 1,124
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Cash and cash equivalents at end of period $ 1,253 $ 538
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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 Six Months Ended
December 31,
2007 2006
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Cash Flow Information
Cash payments during the year for:
Interest $ 338 $ 126
Taxes $ -- $ --
Supplemental Disclosure of Non-Cash Transactions
Issuance of common stock for services, interest
and other $ 19 $ 19
Payment of debt by issuance of shares $ 2,309 $ --
Debt reduction related to assignment of office sale
promissory notes to related party (1) $ 304
Equipment acquired under capital leases $ 143 $ 14
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(1) In December 2006, Gilman Ciocia, Inc. (the "Company") assigned to Prime
Partners, Inc. two promissory notes to the Company related to the sale of its
Colorado Springs, Colorado and Westport, Connecticut businesses as consideration
for the reduction of the $0.3 million against the outstanding principle owed to
Prime Partners, Inc.
See Notes to the Unaudited Consolidated Financial Statements
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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
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 December 31, 2007, the Company had 27
offices operating in four states (New York, New Jersey, Florida and
Pennsylvania).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. The Consolidated Balance Sheet as of December 31, 2007, the
Consolidated Statements of Operations for the three and six months ended
December 31, 2007 and 2006 and the Consolidated Statements of Cash Flows for the
six months ended December 31, 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 and six months ended December 31, 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.
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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
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 December 31, 2007, the Company has accrued approximately $0.2
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. 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.
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.
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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 and six months
ended December 31, 2007 and December 31, 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,
accounts payable and debt, approximated fair value as of December 31, 2007
because of the relatively short-term maturity of these instruments and their
market interest rates.
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.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"). This statement replaces FASB Statement No. 141,
"Business Combinations" ("SFAS No. 141"). This statement retains the fundamental
requirements in SFAS No. 141 that the acquisition method of accounting (which
SFAS No. 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. SFAS No.
141R defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control. SFAS No. 141R's scope is broader
than that of SFAS No. 141, which applied only to business combinations in which
control was obtained by transferring consideration. By applying the same method
of accounting--the acquisition method--to all transactions and other events in
which one entity obtains control over one or more other businesses, this
statement improves the comparability of the information about business
combinations provided in financial reports.
SFAS No. 141R requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. That replaces SFAS No. 141's
cost-allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values.
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SFAS No. 141R applies to all transactions or other events in which an entity
(the acquirer) obtains control of one or more businesses (the acquiree),
including those sometimes referred to as "true mergers" or "mergers of equals"
and combinations achieved without the transfer of consideration, for example, by
contract alone or through the lapse of minority veto rights. This statement
applies to all business entities, including mutual entities that previously used
the pooling-of-interests method of accounting for some business combinations. It
does not apply to: (a) The formation of a joint venture, (b) The acquisition of
an asset or a group of assets that does not constitute a business, (c) A
combination between entities or businesses under common control, (d) A
combination between not-for-profit organizations or the acquisition of a
for-profit business by a not-for-profit organization.
This statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. An entity may not apply it
before that date. Management is assessing the impact on the financial statements
of the Company once adopted.
In February 2007, 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"). 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 No. 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 $0.2 million allowance against its accounts payable
balance as of December 31, 2007 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 August 2006 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 December 31, 2007, there were 16 pending lawsuits and arbitrations,
of which 4 are settled and pending payment, and of which 9 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 $0.2 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
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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.
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 of 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. As of December 31, 2007, the balance due
affiliates was $1.5 million.
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 (a former employee), 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 10.0%
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 Investment
Purchasers and the Existing Shareholders agreed to take such action as may be
reasonably required under applicable law to cause the Investment 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 Investment
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,
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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
Investment Purchasers agreed to a one year standstill agreement concerning the
acquisition of Company assets, Company securities, proxy solicitations, voting
trusts or tender offers; the Investment 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.
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 or 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 a Registration Statement on
Form S-1 with the SEC and reversed the $0.1 million liability recorded for
liquidated damages as of December 31, 2007. As of February 14, 2008, the
Registration Statement is still being reviewed by the SEC.
As a result of the Investment Purchase Closing and the Private Placement
Closing, the Company is reviewing whether its ability to utilize its net
operating loss carryovers may be restricted based on Internal Revenue Code
Section 382 "changes in ownership."
6. FAIR VALUE MEASUREMENTS
The Company elected early adoption of SFAS No. 157, beginning July 1, 2007, the
first day of its fiscal year 2008. SFAS No. 157 defines fair value, establishes
a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is a relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practices.
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Page 13
The following table sets forth the liabilities the Company has elected to fair
value under SFAS No. 157 as of December 31, 2007:
Fair Value Measurements at December 31, 2007
($ in thousands) Using Significant Unobservable Inputs
Description (Level 3)
- ----------------------------------------------------------------------
Accounts Payable:
Beginning Balance $1,655
Allowance (232)
------
Ending Balance $1,423
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 income recorded during the six
months ended December 31, 2007 was $0.2 million and is recorded in other income,
net on the Company's Consolidated Statement of Operations.
7. ACQUISITIONS
In October and November 2007, the Company entered into two asset purchase
agreements to purchase tax preparation and accounting businesses. In each case,
the purchase price is equal to a percentage of average annual gross revenue
generated from the preparation of tax returns of the clients and from accounting
services rendered to clients during a five year period from the closing dates of
the acquisitions. The Company paid the sellers at closing down payments of $0.2
million in the aggregate. Commencing on December 31, 2007 and each ninety day
period thereafter, the Company will pay the sellers additional installment
payments based on a percentage of gross revenue generated during five years less
all prior payments. Based on an estimate of these future revenues, the Company
has a contingent liability as of December 31, 2007 of $1.2 million, subject to
change based on actual future revenues earned.
8. 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 December 31, 2007. See also Note 5 describing the
equity transaction.
As of December 31, 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 February 1, 2008, the Company was current with its monthly
payments to Wachovia and the outstanding principal balance was $0.4 million.
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Page 14
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 (the
"Purchasing Group Loan") 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.
9. 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 six months ended
December 31, 2007 were as follows:
Weighted
Average
Shares Exercise Price
-----------------------------
Outstanding, June 30, 2007 788,500 7.11
Granted - -
Exercised - -
Expired 349,000 5.35
Canceled - -
-----------------------------
Outstanding, December 31, 2007 439,500 8.51
Exercisable December 31, 2007 439,500 8.51
10. 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 40.0% of base salary to
100.0% of base salary if actual EBITDA results for a fiscal year exceed at least
85.0% 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 100.0% 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.
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Page 15
11. 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 or
officers, 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.
On August 16, 2007, Prime Partners, Inc. sold to Prime Partners II, LLC $1.5
million of the total of $2.8 million owed to it by the Company, which included
$0.2 million related to the Purchasing Group Loan. 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
December 31, 2007, the Company owed Prime Partners, Inc. a total of $1.3 million
in principal. A $1.0 million note to Prime Partners, Inc. was due on January 31,
2008, but was extended to June 30, 2008. On December 26, 2007, the Company
entered into a promissory note in the amount of $0.3 million with Prime
Partners, Inc. for related party debt which was previously included in accrued
expenses. The note pays interest at the rate of 10.0% per annum. The note is
payable over 31 months and the first payment of approximately eleven thousand
was due in January 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 December 31, 2007, Prime Partners, Inc. owed $0.5 million to a trust, of
which Ted Finkelstein, the Company's Vice President and General Counsel is the
trustee, which was due on January 31, 2008, but was extended to June 30, 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 the
Purchasing Group Loan 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 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.
On December 26, 2007, the Company entered into promissory notes with James
Ciocia and Kathryn Travis for $59,350 and $50,000, respectively, to convert
previously recorded related party debt which was included in accrued expenses.
The notes pay interest at the rate of 10.0% per annum. Commencing January 2008,
the Company will pay 31 installments of approximately $4,000 each month for
these notes.
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Page 16
12. ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
(in thousands) December 31, June 30,
2007 2007
------------------------
Accounts payable $ 1,423 $ 2,349
Commission payable 3,403 3,871
Accrued compensation 281 228
Accrued bonus 190 238
Accrued related party compensation and bonus 178 270
Accrued related party other(1) - 250
Accrued vacation 67 165
Accrued settlement fees 113 293
Accrued audit fees & tax fees 112 155
Accrued interest 17 2,403
Accrued other 194 469
Accrued acquisitions short term 191 -
------------------------
Total Accounts Payable and Accrued Expenses $ 6,169 $10,691
========================
- ----------
(1) $100,000 of related party other was converted to shares of Company common
stock as part of the Private Placement Closing on August 20, 2007. The remaining
balance of $150,000 was converted to related party notes payable amortizable
over 31 months.
13. SUBSEQUENT EVENTS
In January 2008, the Company entered into two asset purchase agreements to
purchase tax preparation and accounting businesses. In each case, the purchase
price is equal to a percentage of gross revenue generated from the preparation
of tax returns of the clients and from accounting services rendered to clients
during a one to two year period. In addition, the Company paid the sellers at
closing down payments of $0.1 million in the aggregate. Commencing on March 31,
2008 and each ninety day period thereafter, the Company will pay the sellers
additional installment payments based on a percentage of gross revenue generated
during periods from one to two years after the closing dates less all prior
payments received. Based on an estimate of these future revenues, the Company
will have a contingent liability of $0.8 million, subject to change based on
actual future revenues earned.
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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 and the
timing of the availability of proceeds from its registered stock offering, 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, the impact of new accounting pronouncements, the outcome of
litigation, arbitration and regulatory investigations, its expectations
regarding relationships with 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 Reports
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
- --------------------------------------------------------------------------------
Page 18
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.
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 also provides financial planning services through approximately 54
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.
For the quarter ended December 31, 2007, approximately 3.0% of the Company's
revenues were earned from tax preparation and accounting services and 97.0% were
earned from all financial planning and related services of which approximately
72.0% were earned from brokerage commissions, 22.0% from asset management, 4.0%
from insurance, 1.0% from PCS Marketing, and 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 December 31, 2007, the Company had a net loss of
$0.2 million compared to a net loss of $0.3 million during the three months
ended December 31, 2006. This decrease in net loss is mostly attributable to
increased financial planning and tax preparation and accounting services and
decreased interest expense related to the extinguishment of debt, partially
offset by increased operating expenses.
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Page 19
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 approximately $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.
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 of 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.
At December 31, 2007 the Company had a working capital deficit of $2.4 million,
$1.3 million of cash and cash equivalents and $3.1 million of trade accounts
receivables, net, to fund short-term working capital requirements.
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 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. On December 21, 2007, the Company
filed a Form S-1 Registration Statement with the SEC seeking approval of a $2.0
million aggregate, 20,000,000 share, par value $0.01, common stock offering at
$0.10 per share (the "Stock Offering"). The Investment Purchasers and the
Private Placement Purchasers cannot participate in the Stock Offering. The
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Page 20
Registration Statement is still being reviewed by the SEC. Although the Company
cannot predict the outcome of the Stock Offering, the Company anticipates the
net proceeds received to be available during the fourth quarter of its fiscal
year.
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 overall operating 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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Page 21
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 2006
The following table presents revenue by product line and brokerage revenue by
product type:
(in thousands) For the Three Months Ended
December 31
Consolidated Revenue Detail % Change
2007 2006 07-06
---------------------------------------
Revenue by Product Line
Brokerage Commissions $ 8,595 $ 8,712 -1.3%
Insurance Commissions 501 259 93.4%
Advisory Fees 2,613 2,454 6.5%
Tax Preparation and Accounting Fees 414 301 37.5%
Lending Services 117 136 -14.0%
Marketing Revenue 117 169 -30.8%
---------------------------------------
Total Revenue $12,357 $12,031 2.7%
---------------------------------------
Brokerage Commissions by Product Type
Mutual Funds $ 1,193 $ 1,461 -18.3%
Equities, Bonds & UIT 350 342 2.3%
Annuities 4,689 4,765 -1.6%
Trails 2,082 1,739 19.7%
All other products 281 405 -30.6%
---------------------------------------
Brokerage Commissions $ 8,595 $ 8,712 -1.3%
=======================================
The Company's total revenues for the three months ended December 31, 2007 were
$12.4 million compared to $12.0 million for the three months ended December 31,
2006, an increase of $0.3 million or 2.7%. The Company's total revenues for the
three months ended December 31, 2007 consisted of $11.9 million for financial
planning services and $0.4 million for tax preparation and accounting services.
Financial planning services represented approximately 97.0% and tax preparation
and accounting services represented approximately 3.0% of the Company's total
revenues during the three months ended December 31, 2007. The Company's total
revenues for the three months ended December 31, 2006 consisted of $11.7 million
for financial planning services and $0.3 million for tax preparation and
accounting services. Financial planning services represented approximately 97.0%
and tax preparation fees represented approximately 3.0% of the Company's total
revenues during the three months ended December 31, 2006.
For the three months ended December 31, 2007, financial planning revenue was
$11.9 million compared to $11.7 million for the same period last year. This
increase is mostly attributable to increases in commissions paid to PCS as the
broker dealer each year a client's money remains in a mutual fund or in a
variable annuity account, as compensation for services rendered to the client
("Trails"), insurance commissions and advisory fees, partially offset by
decreased mutual funds.
Tax preparation and accounting services revenue was $0.4 million for the three
months ended December 31, 2007 compared to $0.3 million for the same period last
year. This increase in tax preparation and accounting services revenue is
attributable to the additional revenue generated from five tax preparation and
accounting businesses that the Company acquired in January and February 2007.
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For the three months ended December 31, 2007, revenues from recurring revenue
sources (advisory and trails) increased to $4.7 million, up $0.5 million from
$4.2 million for the three months ended December 31, 2006, representing a 12.0%
increase in recurring revenue. The increase in recurring revenues is mostly
attributable to higher assets under management and assets under custody at
September 30, 2007, at which point fees are determined and revenue is recognized
during the three months ended December 31, 2007, compared with the same period
last year.
As indicated in the following table, as of December 31, 2007, assets under AFP
management decreased $44.6 million, to $636.3 million, from $680.9 million as of
September 30, 2007. This decrease is attributable to market fluctuations offset
by net increases in assets under management. As of December 31, 2007, total
Company assets under custody were $4.7 billion, down $312.5 million from
September 30, 2007.
The following table presents the market values of assets under AFP management:
(in thousands) Total Assets
Under
Market Value as of Annuities Brokerage Management
-----------------------------------------------
12/31/2007 $351,341 $284,952 $636,293
9/30/2007 $396,987 $283,915 $680,902
6/30/2007 $354,659 $274,943 $629,602
The following table presents the market values of total Company assets under
custody:
(in thousands) Total Company
Assets Under
Market Value as of Custody
- ---------------------------- -------------
12/31/2007 $4,670,672
9/30/2007 $4,983,177
6/30/2007 $4,961,358
The Company's total operating expenses for the three months ended December 31,
2007 were $12.6 million, up $0.4 million or 3.1%, compared to $12.2 million for
the three months ended December 31, 2006. The increase is primarily due to
increases in all operating expense categories except commissions, which
declined.
Commission expense was $7.6 million for the three months ended December 31,
2007, compared with $8.2 million for the same period last year. Commission
expense as a percentage of revenue was 64.0% and 70.0% for the three months
ended December 31, 2007 and December 31, 2006, respectively. This decrease as a
percentage of 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 $0.3 million, or 18.2% in the three months ended December
31, 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 $0.3 million or 28.6% in the three
months ended December 31, 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 and the reversal of the established allowance related to
certain gross receivables transferred to Prime Partners, Inc. at face value to
reduce the outstanding principle owed to Prime Partners, Inc. Additionally, $0.2
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 travel related costs.
Advertising increased $0.1 million for the three months ended December 31, 2007
compared with the same period last year. This increase is mostly due to
increased marketing efforts related to media advertisement.
Brokerage fees and licenses increased $35.9 thousand for the three months ended
December 31, 2007 compared with the same period last year. This increase is
mostly due to the increase in financial planning revenue.
Rent increased $44.1 thousand for the three months ended December 31, 2007
compared with the same period last year. This increase is mostly due to annual
rent increases, new offices related to acquisitions and the relocation of
existing offices to more prominent office locations, offset partially by the
consolidation of office locations.
Depreciation and amortization expense increased $19.0 thousand for the three
months ended December 31, 2007 compared with the same period last year. This
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 increased $58.3 thousand for
the three months ended December 31, 2007 compared to the three months ended
December 31, 2006. 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 December 31, 2007 was
income of $8,298 compared to expense of $0.1 million for the three months ended
December 31, 2006. This increase in other income/(expense) was primarily due to
reduced interest expense related to the extinguishment of debt owed to Met Life
and the conversion of a portion of related party debt to the Company's common
stock resulting from the Investment Purchase and the Private Placement closings
on August 20, 2007.
The Company's net loss for the three months ended December 31, 2007 was $0.2
million, or $(0.00) per diluted share, compared with a net loss of $0.3 million,
or ($0.03) per diluted share for the three months ended December 31, 2006. This
decrease in net loss is mostly attributable to increased financial planning and
tax preparation and accounting services revenue, reduced interest expense
related to the extinguishment of Company debt owed to Met Life and related
parties, partially offset by increased operating expenses.
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RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 2007 COMPARED TO SIX
MONTHS ENDED DECEMBER 31, 2006
The following table presents revenue by product line and brokerage revenue by
product type:
(in thousands) For the Six Months Ended
December 31
Consolidated Revenue Detail % Change
2007 2006 07-06
--------------------------------------
Revenue by Product Line
Brokerage Commissions $17,128 $16,393 4.5%
Insurance Commissions 844 597 41.4%
Advisory Fees 5,164 4,966 4.0%
Tax Preparation and Accounting Fees 855 710 20.4%
Lending Services 168 313 -46.3%
Marketing Revenue 478 551 -13.2%
--------------------------------------
Total Revenue $24,637 $23,530 4.7%
--------------------------------------
Brokerage Commissions by Product Type
Mutual Funds $ 2,258 $ 2,236 1.0%
Equities, Bonds & UIT 658 594 10.8%
Annuities 9,424 9,277 1.6%
Trails 4,188 3,581 17.0%
All other products 600 705 -14.9%
--------------------------------------
Brokerage Commissions $17,128 $16,393 4.5%
======================================
The Company's total revenues for the six months ended December 31, 2007 were
$24.6 million compared to $23.5 million for the six months ended December 31,
2006, an increase of $1.1 million or 4.7%. The Company's total revenues for the
six months ended December 31, 2007 consisted of $23.8 million for financial
planning services and $0.9 million for tax preparation and accounting services.
Financial planning services represented approximately 97.0% and tax preparation
and accounting services represented approximately 3.0% of the Company's total
revenues during the six months ended December 31, 2007. The Company's total
revenues for the six months ended December 31, 2006 consisted of $22.8 million
for financial planning services and $0.7 million for tax preparation and
accounting services. Financial planning services represented approximately 97.0%
and tax preparation fees represented approximately 3.0% of the Company's total
revenues during the six months ended December 31, 2006.
For the six months ended December 31, 2007, financial planning revenue was $23.8
million compared to $22.8 million for the same period last year. This increase
is mostly attributable to increases in trails, insurance 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 $0.8
million for the six months ended December 31, 2007 over the same period last
year.
Tax preparation and accounting services revenue increased $0.1 million for the
six months ended December 31, 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 five tax preparation and accounting
businesses that the Company acquired in January and February 2007.
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For the six months ended December 31, 2007, revenues from recurring revenue
sources (advisory and trails) increased to $9.4 million, up $0.8 million from
$8.5 million for the six months ended December 31, 2006, representing a 9.4%
increase in recurring revenue. The increase in recurring revenues is mostly
attributable to higher assets under management and assets under custody at June
30, 2007 and September 30, 2007, at which point fees are determined and revenue
is recognized during the six months ended December 31, 2007, compared to the
same period last year.
The Company's total operating expenses for the six months ended December 31,
2007 were $25.5 million, up $1.5 million or 6.2%, compared to $24.0 million for
the six months ended December 31, 2006. This increase is primarily due to
increases in all expense categories except commission expense, which declined.
Commission expense was $15.2 million for the six months ended December 31, 2007,
compared with $15.3 million for the same period last year. Commission expense as
a percentage of revenue was 65.0% and 69.0% for the six months ended December
31, 2007 and December 31, 2006, respectively. This decrease as a percentage of
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.
Salaries increased by $0.5 million, or 14.0% in the six months ended December
31, 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 $0.9 million or 39.5% in the six
months ended December 31, 2007 compared with the same period last year. This
increase is primarily attributable to an increase in bad debt expense of $0.3
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, $0.6 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.
Advertising increased $0.1 million for the six months ended December 31, 2007
compared with the same period last year. This increase is mostly due to
increased marketing efforts related to media advertisement.
Brokerage fees and licenses increased $0.1 million for the six months ended
December 31, 2007 compared with the same period last year. This increase is due
to the increase in financial planning revenue.
Rent increased $39.8 thousand for the six months ended December 31, 2007
compared with the same period last year. This increase is mostly due to annual
rent increases, new offices related to acquisitions and the relocation of
existing offices to more prominent office locations, offset partially by the
consolidation of office locations.
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Depreciation and amortization expense increased $27.2 thousand for the six
months ended December 31, 2007 compared with the same period last year. This
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 six months ended
December 31, 2007 was $0.9 million compared to a loss of $0.5 million for the
same period last year. This increase in loss was primarily attributable to
increased operating expenses partially offset by increased financial planning
revenue.
Total other income/(expense) for the six months ended December 31, 2007 was $4.6
million compared to $0.2 million for the six months ended December 31, 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 six months ended December 31, 2007 was $3.7
million, or $0.05 per diluted share, compared with a net loss of $0.3 million,
or ($0.03) per diluted share for the six months ended December 31, 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
At the Investment Purchase Closing on August 20, 2007, the Company sold 40.0
million shares of Company common stock to certain investment purchasers and at
the Private Placement Closing on such date the Company sold an additional 40.0
million shares of Company common stock to certain private placement purchasers.
From a portion of the proceeds 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.
As of December 31, 2007, the Company was in default of certain covenants under
its term loan/revolving letter of credit financing with 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
February 1, 2008, the Company was current with its monthly payments to Wachovia
and the outstanding principal balance was $0.4 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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During the six months ended December 31, 2007, the Company had net income of
$3.7 million and at December 31, 2007 had a working capital deficit of $2.4
million. At December 31, 2007 the Company had $1.3 million of cash and cash
equivalents, $0.1 million in marketable securities and $3.1 million of trade
account receivables, net, to fund short-term working capital requirements. PCS
is subject to the SEC's Uniform Net Capital Rule 15c3-1, which requires that PCS
maintain minimum regulatory net capital of $100,000 and, in addition, that the
ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to one. At December 31, 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 December 31, 2007, the Company owed Prime Partners,
Inc. a total of $1.3 million in principal. A $1.0 million note to Prime
Partners, Inc. was due on January 31, 2008, but was extended to June 30, 2008.
On December 26, 2007, the Company entered into a promissory note in the amount
of $0.3 million with Prime Partners, Inc. to pay previously recorded related
party debt which was included in accrued expenses. The note pays interest at the
rate of 10.0% per annum and is payable over 31 months with the first payment of
approximately eleven thousand dollars paid in January 2008.
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 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. On December 21, 2007, the Company
filed a Form S-1 Registration Statement with the SEC seeking approval of a $2.0
million aggregate, 20,000,000 share, par value $0.01, common stock offering at
$0.10 per share (the "Stock Offering"). The Investment Purchasers and the
Private Placement Purchasers cannot participate in the Stock Offering. The
Registration Statement is still being reviewed by the SEC. Although the Company
cannot predict the outcome of the Stock Offering, the Company anticipates the
net proceeds received to be available during the fourth quarter of its fiscal
year.
The Company's net cash used in operating activities was $1.9 million for the six
months ended December 31, 2007, compared with net cash used in operating
activities of $1.0 million for the six months ended December 31, 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 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.
Net cash used in investing activities was $0.2 million for the six months ended
December 31, 2007 compared with net cash provided by investing activities of
$19.0 thousand for the six months ended December 31, 2006. This increase in cash
used in investing activities was mostly attributable to cash paid for
acquisitions and capital expenditures, partially offset by the collection of
employee receivables.
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Net cash provided by financing activities was $2.0 million for the six months
ended December 31, 2007 compared with net cash provided by financing activities
of $0.4 million for the six months ended December 31, 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 OBLIGATIONS AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to December 31, 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 $ 602,164 $ 402,643 $ 199,521 $ -- $ -- $ -- $ --
Related Party 1,412,551 1,071,790 154,762 170,968 15,031 -- --
Operating Leases 6,904,139 1,054,768 1,862,174 1,352,316 1,096,014 604,656 934,211
Acquisition Contingent
Liability 1,237,616 123,762 247,523 247,523 247,523 247,523 123,762
Capital Leases 481,301 130,235 154,234 125,405 44,796 19,362 7,269
-----------------------------------------------------------------------------------------------------
Total contractual cash
obligations $ 10,637,771 $ 2,783,198 $ 2,618,214 $1,896,212 $1,403,364 $ 871,541 $ 1,065,242
=====================================================================================================
Note: This Contractual Obligations schedule reflects the contractual payment
terms of the debt maturities, of which $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 includes
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 contingent payments are due in quarterly
installments between one and five years.
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.
MARKET FOR COMPANY'S COMMON EQUITY
The shares of the Company's common stock were delisted from The Nasdaq Stock
Market in 2002 and are currently traded on what is commonly referred to as the
"grey sheets". As a result, an investor may find it difficult to dispose of or
obtain accurate quotations as to the market value of the common stock. 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
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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. Not being listed on a national securities
exchange may make trading the Company's shares difficult for investors,
potentially leading to declines in the share price. It may also make it more
difficult for the Company to raise additional capital. 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. In addition, 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
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 December 31, 2007, the Company has accrued approximately $0.2
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.
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
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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 No. 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 adopted SFAS No. 157 effective September 30, 2007.
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
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Statements included in the Company's fiscal 2007 Form 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 six months ended December 31, 2007, had the interest
rate fluctuated plus or minus 1.0%, interest expense would have been higher or
lower by approximately $6,600.
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.
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 December 31, 2007, management concludes
that the Company's disclosure controls and procedures are effective.
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Changes in Internal Controls
During the three months ended December 31, 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 shareholders.
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 (a former employee), 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 shareholders agreement concerning the
voting of their shares of our common stock. These shareholders collectively own
approximately 69.0% of our issued and outstanding shares of common stock.
Pursuant to the shareholders agreement, these shareholders will have the ability
to influence certain actions requiring a shareholder vote, including, the
election of directors. This concentration of ownership and control by these
shareholders 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 shareholders.
Our staggered board may entrench management, could prevent or delay a change of
control of our Company and discourage unsolicited shareholder proposals or bids
for our common stock that may be in the best interests of our shareholders.
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
shareholders 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 shareholder proposals or unsolicited bids for our
common stock that may be in the best interests of our shareholders.
Our sale of 80,000,000 shares of common stock in August 2007 significantly
diluted the common stock ownership of our shareholders and could adversely
affect future prices of our stock.
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The significant dilution of the common stock ownership of existing shareholders
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 8 to Notes to Consolidated Financial Statements herein for a discussion
of the Company's defaults on debt.
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
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: February 14, 2008 By: /s/ Michael P. Ryan
-----------------------------
Chief Executive Officer
Dated: February 14, 2008 By: /s/ Karen Fisher
-----------------------------
Principal Financial and Chief
Accounting Officer
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