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 March 31, 2008
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 May 1, 2008, 89,719,050 shares of the issuer's common stock, $0.01 par
value, were outstanding.
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GILMAN & CIOCIA INC - 10-Q
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of March 31, 2008 and June 30, 2007...........3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended March 31, 2008 and March 31, 2007 .....................................4
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2008 and March 31, 2007 ..............................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...................................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk............34
Item 4. Controls and Procedures ..............................................34
PART II - OTHER INFORMATION
Item 1A. Risk Factors .......................................................35
Item 3. Defaults Upon Senior Securities .....................................37
Item 4. Submission of Matters to a Vote of Securityholders...................37
Item 6. Exhibits ..................................................... ......38
SIGNATURES....................................................................39
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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
March 31, June 30,
2008 2007
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Assets
Cash & Cash Equivalents $ 1,002 $ 1,369
Marketable Securities 61 160
Trade Accounts Receivable, Net 3,479 3,243
Receivables from Employees, Net 629 766
Prepaid Expenses 512 655
Other Current Assets 346 282
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Total Current Assets 6,029 6,475
Property and Equipment (less accumulated depreciation of $6,493
at March 31, 2008 and $6,128 at June 30, 2007) 1,319 1,118
Goodwill 3,936 3,881
Intangible Assets (less accumulated amortization of $6,063 at
March 31, 2008 and $5,649 at June 30, 2007) 4,776 4,598
Other Assets 523 421
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Total Assets $ 16,583 $ 16,493
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Liabilities and Shareholders' Equity/(Deficit)
Accounts Payable $ 1,794 $ 2,349
Accrued Expenses 1,576 4,471
Commission Payable 3,254 3,871
Current Portion of Notes Payable and Capital Leases 652 6,052
Deferred Income 133 234
Due to Related Parties 1,151 3,635
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Total Current Liabilities 8,560 20,612
Long Term Portion of Notes Payable and Capital Leases 344 243
Long Term Portion of Related Party Notes 226 --
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Total Liabilities 9,130 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; 89,856,742
and 9,668,579 shares issued at March 31, 2008 and June 30, 2007,
respectively 899 97
Additional Paid in Capital 36,115 29,041
Accumulated Deficit (29,561) (33,500)
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Total Shareholders' Equity/(Deficit) 7,453 (4,362)
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Total Liabilities and Shareholders' Equity/(Deficit) $ 16,583 $ 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 March 31, For the Nine Months Ended March 31,
2008 2007 2008 2007
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Revenues
Financial Planning Services $ 10,061 $ 12,270 $ 33,843 $ 35,090
Tax Preparation and Accounting Fees 3,776 3,024 4,631 3,734
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Total Revenues 13,837 15,294 38,474 38,824
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Operating Expenses
Commissions 7,255 8,533 22,475 23,872
Salaries and benefits 2,738 2,416 7,195 6,330
General & Administrative 1,511 1,434 4,517 3,586
Advertising 1,012 688 1,687 1,287
Brokerage Fees & Licenses 368 298 1,002 857
Rent 548 505 1,582 1,499
Depreciation & Amortization 280 226 780 699
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Total Operating Expenses 13,712 14,100 39,238 38,130
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Income/(Loss) from Operations
Before Other Income and Expenses 125 1,194 (764) 694
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Other Income/(Expense)
Interest and Investment Income 4 6 28 34
Interest Expense (112) (215) (287) (662)
Other Income, Net 243 1 4,962 619
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Total Other Income/(Expense) 135 (208) 4,703 (9)
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Income from Operations
Before Income Taxes 260 986 3,939 685
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Income Taxes -- -- -- --
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Net Income $ 260 $ 986 $ 3,939 $ 685
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Weighted Average Number of Common
Shares Outstanding:
Basic and Diluted Shares 89,799,684 9,639,625 75,205,633 9,591,883
Basic and Diluted Net
Income Per Share:
Net Income $ 0.00 $ 0.10 $ 0.05 $ 0.07
See Notes to Unaudited Consolidated Financial Statements
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GILMAN CIOCIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Nine Months Ended March 31,
2008 2007
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Cash Flows from Operating Activities:
Net Income: $ 3,939 $ 685
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 780 699
Issuance of common stock for services, interest and other 27 23
Gain on sale of discontinued operations -- (65)
Allowance for doubtful accounts 133 (289)
Gain on debt extinguishment and other (4,699) --
Changes in assets and liabilities:
Accounts receivable (305) (419)
Prepaid and other current assets 21 (106)
Change in marketable securities 99 198
Other assets 91 16
Accounts payable and accrued expenses (1,411) (352)
Deferred income (101) (525)
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Net cash used in operating activities: (1,426) (135)
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Cash Flows from Investing Activities:
Capital expenditures (230) (203)
Cash paid for acquisitions, net of cash acquired and debt incurred (402) (208)
Receivables from employees 152 (253)
Due from office sales (195) 196
Proceeds from the sale of offices -- 16
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Net cash used in investing activities: (675) (452)
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Cash Flows from Financing Activities:
Proceeds from bank and other loans 299 593
Proceeds from related parties -- 1,664
Proceeds from capital stock issuance 5,668 --
Payments of bank loans and other loans (3,526) (1,115)
Payments to related parties (480) (664)
Payments related to offering costs (227) --
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Net cash provided by financing activities: 1,734 478
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Net change in cash and cash equivalents (367) (109)
Cash and cash equivalents at beginning of period 1,369 1,124
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Cash and cash equivalents at end of period $ 1,002 $ 1,015
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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 Nine Months Ended March 31,
2008 2007
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Cash Flow Information
Cash payments during the year for:
Interest $ 411 $ 178
Taxes $ -- $ --
Supplemental Disclosure of Non-Cash Transactions
Issuance of common stock for services, interest
and other $ 27 $ 23
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 $ 304 $ 75
Cancellation of treasury shares $ -- $ (451)
Fair value recognition on legacy accounts payable $ (384) $ --
(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 principal 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 changed its name from Gilman + Ciocia, Inc, to Gilman Ciocia, Inc.
on January 28, 2008. 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 March 31, 2008, the
Company had 26 offices operating in four states (New York, New Jersey, Florida
and Pennsylvania). The Company also provides financial planning services through
approximately 55 independently owned and operated offices in twelve states.
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 March 31, 2008, the
Consolidated Statements of Operations for the three and nine months ended March
31, 2008 and 2007 and the Consolidated Statements of Cash Flows for the nine
months ended March 31, 2008 and 2007 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 nine months ended March 31, 2008 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 March 31, 2008, the Company has accrued approximately $0.1
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.
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Revenue Recognition
The Company recognizes all revenues associated with income tax preparation,
accounting services and asset management fees upon completion of the services.
Financial planning services include securities and other transactions. The
related commission revenue and expenses are recognized on a trade-date basis.
Net Income/(Loss) Per Share
In accordance with SFAS No. 128, "Earnings Per Share", basic net income/(loss)
per share is computed using the weighted average number of common shares
outstanding during each period. The computation for the three and nine months
ended March 31, 2008 and March 31, 2007 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 March 31, 2008 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 April 2008, the Financial Accounting Standards Board (the "FASB") issued FASB
Staff Position ("FSP") FAS 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP FAS 142-3"). This position amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
"Goodwill and Other Intangible Assets." This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The guidance contained in this FSP
for determining the useful life of a recognized intangible asset shall be
applied prospectively to intangible assets acquired after the effective date.
The Company is currently assessing the effects of FSP FAS 142-3 and has not yet
determined its impact on the Company's consolidated financial statements.
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In December 2007, 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.
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, or (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 SFAS 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, "Fair Value Measurements"
("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. 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 March 31, 2008 representing its fair value
assessment of that account. See also Note 6 describing fair value measurements.
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All other new accounting pronouncements issued but not yet effective or adopted
have been deemed not to be relevant to the Company hence are not expected to
have any impact once adopted.
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. On February 5,
2008, a written Settlement Agreement was executed settling the lawsuit, subject
to approval by the Court of Chancery. A mediation has been scheduled for June
17, 2008 to attempt to settle the claim of plaintiff's attorneys for legal fees.
The Company does not believe that the final settlement of this lawsuit will have
a material adverse impact on its financial position.
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by the Company's registered representatives
during the period January 1, 2002 through August 1, 2005. On June 22, 2006, the
SEC entered a formal order of investigation. The Company 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 March 31, 2008, there were 13 pending lawsuits and arbitrations, of
which 3 are settled and pending payment, and of which 6 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. At March 31, 2008 management accrued $0.1
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million as a reserve for potential settlements, judgments and awards. PCS has
errors & omissions coverage that will cover a portion of such matters. In
addition, under the PCS registered representatives contract, each registered
representative is responsible for covering costs in connection with these
claims. While the Company will vigorously defend itself in these matters, and
will assert insurance coverage and indemnification to the maximum extent
possible, there can be no assurance that these lawsuits and arbitrations will
not have a material adverse impact on its financial position.
5. EQUITY TRANSACTION
On August 20, 2007, the Company closed the sale (the "Investment Purchase
Closing") of 40.0 million shares of its common stock, par value $0.01 per share
(the "Common Stock"), at a price of $0.10 per share (the "Investment Purchase")
for proceeds of $4.0 million pursuant to an Investor Purchase Agreement dated
April 25, 2007 (the "Purchase Agreement") with Wynnefield Small Cap Value
Offshore Fund, Ltd., Wynnefield Partners Small Cap Value, L.P., Wynnefield
Partners Small Cap Value, L.P.I and WebFinancial Corporation (the "Investment
Purchasers"). The 40.0 million shares of Common Stock were issued pursuant to an
exemption from the registration requirements of the Securities Act of 1933 under
Regulation D, Rule 506 ("Rule 506"). The proceeds from the Investment Purchase
Closing were used as follows: $2.4 million was paid to Met Life in full
satisfaction of the approximately $6.8 million, including principal and
interest, owed to Met Life by the Company; $50,000 was paid to Wachovia National
Association ("Wachovia") as a principal payment, which reduced the Company's
loan balance with Wachovia to approximately $0.7 million; $19,208 was paid to
Wachovia for a loan fee and legal fees; and the $1.6 million balance was
retained by the Company to be used as working capital.
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 March 31, 2008, the balance due affiliates
was $1.4 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").
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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,
redemption or purchase of equity or debt, the implementation 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 $0.1 million liability recorded for
liquidated damages as of December 31, 2007. The Registration Statement was
declared effective by the SEC on March 17, 2008.
As a result of the Investment Purchase Closing and the Private Placement
Closing, the Company is reviewing whether its ability to utilize its net
operating loss carryovers may be restricted based on Internal Revenue Code
Section 382 "changes in ownership."
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GILMAN & CIOCIA INC - 10-Q
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6. FAIR VALUE MEASUREMENTS
The Company elected early adoption of SFAS No. 157, beginning July 1, 2007, the
first day of its fiscal year 2008. SFAS No. 157 defines fair value, establishes
a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is a relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practices.
The following table sets forth the liabilities the Company has elected to fair
value under SFAS No. 157 as of March 31, 2008:
Fair Value Measurements at March 31, 2008
($ in thousands) Using Significant Unobservable Inputs
Description (Level 3)
- --------------------------------------------------------------------
Accounts Payable:
Beginning Balance $2,003
Allowance (209)
------
Ending Balance $1,794
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 nine
months ended March 31, 2008 was $0.2 million and is recorded in other income,
net on the Company's Consolidated Statement of Operations.
7. ACQUISITIONS
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 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 has a
contingent liability of $1.0 million, subject to change based on actual future
revenues earned.
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GILMAN & CIOCIA INC - 10-Q
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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 was 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 March 31, 2008 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 March 31, 2008. See also Note 5 describing the
equity transaction.
As of March 31, 2008 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. Due to the Company's recent cash flow requirements, on April 7,
2008, Wachovia agreed to waive its principal payments for the months of April,
May and June of 2008 and to extend the due date of the loan with the Company
from October 2008 to January 2009. The Company will continue to make its monthly
interest payments. As of May 1, 2008, the Company's outstanding principal
balance was $0.3 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 (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") 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.
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GILMAN & CIOCIA INC - 10-Q
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Changes in the Company's stock option activity during the nine months ended
March 31, 2008 were as follows:
Weighted Average
Shares Exercise Price
----------------------------
Outstanding, June 30, 2007 788,500 7.11
Granted -- --
Exercised -- --
Expired 519,000 5.62
Canceled -- --
----------------------
Outstanding, March 31, 2008 269,500 9.98
Exercisable March 31, 2008 269,500 9.98
The range of exercise prices for the outstanding options at March 31, 2008 is
between $0.33 and $13.75.
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.
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.
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GILMAN & CIOCIA INC - 10-Q
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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
March 31, 2008, 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 $11,000 was paid
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 March 31, 2008, 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 both
of these notes. At March 31, 2008 the balance due to James Ciocia and Kathryn
Travis is $54,250 and $45,704, respectively.
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GILMAN & CIOCIA INC - 10-Q
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12. ACCRUED EXPENSES
Accrued expenses consist of the following:
(in thousands) March 31, June 30,
2008 2007
------------------------
Accrued compensation 529 228
Accrued bonus 25 238
Accrued related party compensation and bonus 160 270
Accrued related party other(1) - 250
Accrued vacation 118 165
Accrued settlement fees 67 293
Accrued audit fees & tax fees 151 155
Accrued interest 15 2,403
Accrued other 232 469
Accrued acquisitions short term 279 --
----------------------
Total Accounts Payable and Accrued Expenses $1,576 $4,471
======================
(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
On April 23, 2008, FINRA cleared the request of vFinance Investments, Inc. for a
quotation on the OTC Bulletin Board for Gilman Ciocia, Inc. common stock
pursuant to NASD Rule 6640 and Rule 15c2-11 under the Securities Exchange Act of
1934. The Company is now trading under the symbol GTAX.
On April 14, 2008, the SEC declared effective the Company's registration
statement, pursuant to a prospectus filed with the SEC on April 14, 2008 for a
public stock offering. Pursuant to this offering, the Company is distributing,
for no consideration to its holders of common stock, non-transferable
subscription rights to purchase shares of its common stock. Each eligible
shareholder will receive one (1) subscription right for each share of common
stock owned at the close of business on April 14, 2008, the record date. The
Company is distributing subscription rights exercisable for up to an aggregate
of 20,000,000 shares of its common stock.
Each subscription right will entitle an eligible shareholder to purchase up to
four (4) shares of the Company's common stock, subject to adjustment, at a
subscription price of $0.10 per share. This is the same price at which the
Company sold in two private placements of a total of 80,000,000 shares of its
common stock to certain investors and certain officers, directors and employees
of the Company in August 2007 (the "2007 Investors"). Shareholders who exercise
their basic subscription rights in full may over-subscribe for additional shares
to the extent additional shares are available. The subscription rights will
expire if they are not exercised by 5:00 p.m., Eastern Time, on or before June
20, 2008, unless extended. The 2007 Investors did not receive any subscription
rights. After the expiration of the subscription rights, the 2007 Investors may
purchase at the $0.10 per share subscription price any shares that remain unsold
in the offering.
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GILMAN & CIOCIA INC - 10-Q
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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 the timing of
the receipt of proceeds from its stock offering, 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 forecasted in such
forward-looking statements. Such differences could be caused by a number of
factors including, but not limited to, the uncertainty of laws, legislation,
regulations, supervision and licensing by federal, state and local authorities
and their impact on the lines of business in which the Company and its
subsidiaries are involved; unforeseen compliance costs; changes in economic,
political or regulatory environments; 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 June 30, 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
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GILMAN & CIOCIA INC - 10-Q
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services to small and midsize companies and financial planning services,
including securities brokerage, investment management services, insurance and
financing services. Clients often consider other aspects of their financial
needs such as investments, insurance, pension and estate planning, while having
their tax returns prepared by the Company. The Company believes that its tax
return preparation and accounting services are inextricably intertwined with its
financial planning activities. Neither channel would operate as profitably by
itself, and the two channels leverage off each other, improving profitability
and client retention. The financial planners who provide such services are
employees of the Company or independent contractors of the Company and
registered representatives of Prime Capital Services, Inc. ("PCS"), a wholly
owned subsidiary of the Company. PCS conducts a securities brokerage business
providing regulatory oversight and products and sales support to its registered
representatives, who sell investment products and provide services to their
client. PCS earns a share of commissions from the services that the financial
planners provide to their clients in transactions for securities, insurance and
related products. PCS is a registered securities broker-dealer with the SEC and
a member of the FINRA. The Company also has a wholly owned subsidiary, Asset &
Financial Planning, Ltd. ("AFP"), which is registered with the SEC as an
investment advisor. Almost all of the Company financial planners are also
authorized agents of insurance underwriters. The Company has the capability of
processing insurance business through PCS and Prime Financial Services, Inc.
("PFS"), a wholly owned subsidiary, which are licensed insurance brokers, as
well as through other licensed insurance brokers. The Company is a licensed
mortgage broker in the states of New York and Pennsylvania. GC Capital
Corporation, a wholly owned subsidiary of the Company is a licensed mortgage
broker in the State of Florida. The Company derived only approximately 1.0% of
its revenue in fiscal 2007 from 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 55
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.gtax.com.
For the quarter ended March 31, 2008, approximately 27.0% of the Company's
revenues were earned from tax preparation and accounting services and 73.0% were
earned from all financial planning and related services of which approximately
70.0% were earned from brokerage commissions, 25.0% from asset management, 3.0%
from insurance and 2.0% from PCS Marketing.
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.
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GILMAN & CIOCIA INC - 10-Q
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During the three months ended March 31, 2008, the Company had net income of $0.3
million compared to net income of $1.0 million during the three months ended
March 31, 2007. This decrease in net income is mostly attributable to decreased
financial planning revenue, partially offset by decreased operating expenses and
increased tax preparation and accounting services and other income.
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 March 31, 2008 the Company had a working capital deficit of $2.5 million,
$1.0 million of cash and cash equivalents, $0.1 million in marketable securities
and $3.5 million of trade accounts receivables, net, to fund short-term working
capital requirements.
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In prior fiscal years, the Company had significantly higher working capital
deficiencies. On August 20, 2007 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, reducing 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.
The Company is offering a $2.0 million aggregate, 20,000,000 share, public sale
of its common stock at $0.10 per share (the "Stock Offering"). See Note 13 to
Notes to Consolidated Financial Statements for a discussion of the Stock
Offering. 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 current fiscal year, and the first quarter of fiscal 2009.
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.
The Company believes that the significant turmoil in the financial markets
during the first calendar quarter of 2008, and related erosion of investor
confidence, will negatively impact its operating results for 2008. To help
mitigate the negative impact on the Company's operating results, the Company has
implemented cost cutting strategies in the fourth quarter of its fiscal year
ending June 30, 2008, including staff reductions. The Company remains committed,
however, to investing in the continuing development of its network of financial
representatives and to acquire tax preparation and accounting firms to increase
its client base and accounting business as part of its long term strategy for
growing its revenues and earnings.
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GILMAN & CIOCIA INC - 10-Q
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RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2007
REVENUE
The following table presents revenue by product line and brokerage revenue by
product type:
(in thousands) For the Three Months Ended
March 31
Consolidated Revenue Detail % Change
2008 2007 08-07
--------------------------------------
Revenue by Product Line
Brokerage Commissions $ 7,040 $ 9,091 -22.6%
Insurance Commissions 276 234 17.9%
Advisory Fees 2,547 2,539 0.3%
Tax Preparation and Accounting Fees 3,776 3,024 24.9%
Lending Services 30 217 -86.2%
Marketing Revenue 168 189 -11.1%
----------------------------------
Total Revenue $13,837 $15,294 -9.5%
==================================
Brokerage Commissions by Product Type
Mutual Funds $ 1,066 $ 1,491 -28.5%
Equities, Bonds & UIT 207 481 -57.0%
Annuities 3,350 4,961 -32.5%
Trails 2,088 1,922 8.6%
All other products 329 236 39.4%
----------------------------------
Brokerage Commissions $ 7,040 $ 9,091 -22.6%
==================================
The Company's total revenues for the three months ended March 31, 2008 were
$13.8 million compared to $15.3 million for the three months ended March 31,
2007, a decrease of $1.5 million or 9.5%. The Company's total revenues for the
three months ended March 31, 2008 consisted of $10.0 million for financial
planning services and $3.8 million for tax preparation and accounting services.
Financial planning services represented approximately 73.0% and tax preparation
and accounting services represented approximately 27.0% of the Company's total
revenues during the three months ended March 31, 2008. The Company's total
revenues for the three months ended March 31, 2007 consisted of $12.3 million
for financial planning services and $3.0 million for tax preparation and
accounting services. Financial planning services represented approximately 80.0%
and tax preparation fees represented approximately 20.0% of the Company's total
revenues during the three months ended March 31, 2007.
For the three months ended March 31, 2008, financial planning revenue was $10.0
million compared to $12.3 million for the same period last year. This decrease
in financial planning revenue is the result of approximately $1.3 million in
financial planner attrition year over year and a $1.0 million decrease in
production mostly on the independent channel resulting from market declines
during the three months ended March 31, 2008.
Tax preparation and accounting services revenue was $3.8 million for the three
months ended March 31, 2008 compared to $3.0 million for the same period last
year. Approximately 61.0% of this increase in tax preparation and accounting
services revenue is attributable to the additional revenue generated from four
tax preparation and accounting businesses that the Company acquired in the
second and third quarters of its current fiscal year, and the remaining 39.0%
increase came from organic growth resulting from the Company's strong
advertising campaign, increases in average client fees and client retention,
offset slightly by client attrition and office sales.
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GILMAN & CIOCIA INC - 10-Q
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For the three months ended March 31, 2008, revenues from 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") and advisory fees increased to $4.6 million, up $0.1 million from
$4.5 million for the three months ended March 31, 2007, representing a 3.9%
increase in recurring revenue (advisory and trails). The increase in recurring
revenues is mostly attributable to higher assets under management and assets
under custody at December 31, 2007, at which time fees are determined and
revenue is recognized during the three months ended March 31, 2008, compared
with the same period last year.
As indicated in the following table, as of March 31, 2008, assets under AFP
management decreased $33.7 million, to $602.6 million, from $636.3 million as of
December 31, 2007. This decrease is mostly attributable to market declines of
$31.8 million and net decreases in assets under management of approximately $1.9
million. As of March 31, 2008, total Company assets under custody were $4.3
billion, down $393.0 million from December 31, 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
------------------------------------------------
3/31/2008 $336,309 $266,265 $602,574
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
Market Value as of Under Custody
- ------------------ --------------------
3/31/2008 $4,277,685
12/31/2007 $4,670,672
9/30/2007 $4,983,177
6/30/2007 $4,961,358
EXPENSES
The Company's total operating expenses for the three months ended March 31, 2008
were $13.7 million, down $0.4 million or 2.8%, compared to $14.1 million for the
three months ended March 31, 2007. The decrease is primarily due to decreased
commission expense resulting from the revenue declines, partially offset by
increases in all other expense categories.
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Commission expense was $7.3 million for the three months ended March 31, 2008,
compared with $8.5 million for the same period last year. Commission expense
decreased due to the declines in revenue as well as due to the increase of
revenue generated on the employee channel compared with the independent channel.
Commission expense as a percentage of revenue was 52.4% and 55.8% for the three
months ended March 31, 2008 and March 31, 2007, 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 $0.3 million, or 13.3% in the three months ended March 31,
2008 compared with the same period last year. This increase is mostly
attributable to increased staff from acquisitions, increased staff at the
Company's headquarters related to the Company's marketing and public relations
efforts and compliance needs, as well as increases in branch office staff. Due
to the economic downturn the industry experienced during the three months ended
March 31, 2008, the Company took a pro-active approach in March 2008 to reduce
overhead costs. Such cost reductions include the restructuring of departments,
eliminating open positions and layoffs. The Company anticipates an annual
savings from these reductions of $0.6 million.
General and administrative expenses increased $0.1 million or 5.4% in the three
months ended March 31, 2008 compared with the same period last year. This
increase is primarily attributable to 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, an increase in
computer supplies related to the four acquisitions during the second and third
quarter and increased professional development costs.
Advertising expense increased $0.3 million for the three months ended March 31,
2008 compared with the same period last year. This increase is attributable to
running ads earlier in the tax season this year versus the prior year when the
Company ran more ads in the last two weeks of the tax season and due to a
decision to spend more on tax season marketing in certain offices due to the
lower than planned acquisitions.
Brokerage fees and licenses increased $0.1 million for the three months ended
March 31, 2008 compared with the same period last year. This increase is due to
more accounts under management with third party money managers in AFP.
Rent increased $43,700 for the three months ended March 31, 2008 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 $54,000 for the three months
ended March 31, 2008 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 income before other income and expense decreased $1.0 million for
the three months ended March 31, 2008 compared to the three months ended March
31, 2007. This decline was primarily attributable to decreased financial
planning revenue due to declines in market conditions and attrition, increased
operating expenses, except for commission expense, which declined relative to
the declines in financial planning revenue, all partially offset by increased
tax preparation and accounting services revenue.
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GILMAN & CIOCIA INC - 10-Q
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Total other income/(expense) for the three months ended March 31, 2008 was
income of $0.1 million compared to expense of $0.2 million for the three months
ended March 31, 2007. 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 as well as the gain on the sale of the Company's
Brooklyn, New York office.
The Company's net income for the three months ended March 31, 2008 was $0.3
million, or $0.00 per diluted share, compared with net income of $1.0 million,
or $0.10 per diluted share for the three months ended March 31, 2007. This
decline was primarily attributable to decreased financial planning revenue due
to declines in market conditions and attrition, increased operating expenses,
except for commission expense, which declined relative to the declines in
financial planning revenue, all partially offset by increased tax preparation
and accounting services revenue and reduced interest expense related to the
extinguishment of Company debt owed to Met Life and related parties. The
decrease in earnings per diluted share also included the issuance of shares
related to the Investment Purchase and Private Placement on August 20, 2007.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2008 COMPARED TO NINE MONTHS
ENDED MARCH 31, 2007
REVENUE
The following table presents revenue by product line and brokerage revenue by
product type:
(in thousands) For the Nine Months Ended
March 31
Consolidated Revenue Detail % Change
2008 2007 08-07
-------------------------------------
Revenue by Product Line
Brokerage Commissions $24,168 $25,484 -5.2%
Insurance Commissions 1,120 831 34.8%
Advisory Fees 7,711 7,505 2.7%
Tax Preparation and Accounting Fees 4,631 3,734 24.0%
Lending Services 198 530 -62.6%
Marketing Revenue 646 740 -12.7%
-----------------------------------
Total Revenue $38,474 $38,824 -0.9%
===================================
Brokerage Commissions by Product Type
Mutual Funds $ 3,323 $ 3,727 -10.8%
Equities, Bonds & UIT 865 1,075 -19.5%
Annuities 12,774 14,238 -10.3%
Trails 6,276 5,503 14.0%
All other products 930 941 -1.2%
-----------------------------------
Brokerage Commissions $24,168 $25,484 -5.2%
===================================
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GILMAN & CIOCIA INC - 10-Q
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The Company's total revenues for the nine months ended March 31, 2008 were $38.5
million compared to $38.8 million for the nine months ended March 31, 2007, a
decrease of $0.4 million or 0.9%. The Company's total revenues for the nine
months ended March 31, 2008 consisted of $33.8 million for financial planning
services and $4.6 million for tax preparation and accounting services. Financial
planning services represented approximately 88.0% and tax preparation and
accounting services represented approximately 12.0% of the Company's total
revenues during the nine months ended March 31, 2008. The Company's total
revenues for the nine months ended March 31, 2007 consisted of $35.1 million for
financial planning services and $3.7 million for tax preparation and accounting
services. Financial planning services represented approximately 90.0% and tax
preparation fees represented approximately 10.0% of the Company's total revenues
during the nine months ended March 31, 2007.
For the nine months ended March 31, 2008, financial planning revenue was $33.8
million compared to $35.1 million, a decline of 3.6%, for the same period last
year. This decrease is mostly attributable to declines in mutual funds, equities
and bonds, annuities and lending services, partially offset by increased
advisory fees, trails and insurance. 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 $1.0 million, or 7.5%, for the nine
months ended March 31, 2008 over the same period last year.
Tax preparation and accounting services revenue increased $0.9 million for the
nine months ended March 31, 2008 compared with the same period last year.
Approximately 52.0% of this increase in tax preparation and accounting services
revenue is attributable to the additional revenue generated from four tax
preparation and accounting businesses that the Company acquired in the second
and third quarters of its current fiscal year, and the remaining 48.0% increase
came from organic growth resulting from the Company's strong advertising
campaign, increases in average client fees and client retention, offset slightly
by client attrition and office sales.
For the nine months ended March 31, 2008, revenues from recurring revenue
sources (advisory and trails) increased to $14.0 million, up $1.0 million from
$13.0 million for the nine months ended March 31, 2007, representing a 7.5%
increase in recurring revenue. The increase in recurring revenues is mostly
attributable to higher assets under management and assets under custody during
the nine month period ended December 31, 2007 during which time fees are
determined and revenue is recognized during the nine months ended March 31,
2008, compared to the same period last year.
EXPENSES
The Company's total operating expenses for the nine months ended March 31, 2008
were $39.2 million, up $1.1 million or 2.9%, compared to $38.1 million for the
nine months ended March 31, 2007. This increase is primarily due to increases in
all expense categories except commission expense, which declined.
Commission expense was $22.5 million for the nine months ended March 31, 2008,
compared with $23.9 million for the same period last year. Commission expense
decreased due to the declines in revenue as well as due to the increase of
revenues generated on the employee channel compared with the independent
channel. Commission expense as a percentage of revenue was 58.4% and 61.5% for
the nine months ended March 31, 2008 and March 31, 2007, 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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GILMAN & CIOCIA INC - 10-Q
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Salaries increased by $0.9 million, or 13.7% in the nine months ended March 31,
2008 compared with the same period last year. This increase is mostly
attributable to increased staff from acquisitions, increased staff at the
Company's headquarters related to the Company's marketing and public relations
efforts and compliance needs, as well as increases in branch office staff, new
recruits who receive salary as part of their transition financing and raises in
the home office and fields offices. Due to the economic downturn the industry
experienced during the three months ended March 31, 2008, the Company took a
pro-active approach in March 2008 to reduce overhead costs. Such cost reductions
include the restructuring of departments, eliminating open positions and
layoffs. The Company anticipates an annual savings from these reductions of $0.6
million.
General and administrative expenses increased $0.9 million or 26.0% in the nine
months ended March 31, 2008 compared with the same period last year. This
increase is primarily attributable to higher 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. The majority of the remaining increase is related to higher client
settlement expense of $0.1 million, 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 of $0.2 million,
and higher costs associated with professional development and training of $0.1
million. The remaining $0.2 million is mostly attributable to incremental
general and administrative costs associated with acquisitions acquired after
January 1, 2007.
Advertising expense increased $0.4 million for the nine months ended March 31,
2008 compared with the same period last year. This increase is attributable to
running ads earlier in the tax season this year versus the prior year when the
Company ran more ads in the last two weeks of the tax season and due to a
decision to spend more on tax season marketing in certain offices due to the
lower than planned acquisitions.
Brokerage fees and licenses increased $0.1 million for the nine months ended
March 31, 2008 compared with the same period last year. This increase is due to
more accounts under management with third party money managers in AFP.
Rent increased $0.1 million for the nine months ended March 31, 2008 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 $0.1 million for the nine months
ended March 31, 2008 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 income/(loss) before other income and expense for the nine months
ended March 31, 2008 was a loss of $0.8 million compared to income of $0.7
million for the same period last year. This decline was primarily attributable
to decreased financial planning revenue due to declines in market conditions and
attrition mostly on the independent channel and increased operating expenses,
except for commission expense, which declined relative to the decline in
financial planning revenue, partially offset by increased tax preparation and
accounting services revenue.
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GILMAN & CIOCIA INC - 10-Q
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Total other income/(expense) for the nine months ended March 31, 2008 was income
of $4.7 million compared to an expense of $9,500 for the nine months ended March
31, 2007. 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, which also resulted in
decreased interest expense, the adoption of Statement of Financial Accounting
Standards No. 157 "Fair Value Measurements" ("SFAS No. 157"), and from the gain
on the sale of the Company's Brooklyn, New York office.
The Company's net income for the nine months ended March 31, 2008 was $3.9
million, or $0.05 per diluted share, compared with net income of $0.7 million,
or $0.07 per diluted share for the nine months ended March 31, 2007. This
increase is mostly attributable to the extinguishment of Company debt owed to
Met Life, the adoption of SFAS No. 157 and increased tax preparation and
accounting services revenue, partially offset by decreased financial planning
revenue and increased operating expenses. The decrease in earnings per diluted
share also included the issuance of shares related to the Investment Purchase
and Private Placement on August 20, 2007.
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 March 31, 2008, 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. Due to the
Company's recent cash flow requirements, on April 7, 2008, Wachovia agreed to
waive its principal payments for the months of April, May and June of 2008 and
to extend the due date of the loan with the Company from October 2008 to January
2009. The Company will continue to make its monthly interest payments. As of May
1, 2008, the Company's outstanding principal balance was $0.3 million.
On August 20, 2007, as part of the Private Placement Closing, $0.7 million of a
loan owed by the Company to a group of Company management and employees was
converted to 7.1 million shares of Company common stock, leaving a de minimis
debt balance which was paid in full in October 2007.
During the nine months ended March 31, 2008, the Company had net income of $3.9
million and at March 31, 2008 had a working capital deficit of $2.5 million. At
March 31, 2008 the Company had $1.0 million of cash and cash equivalents, $0.1
million in marketable securities and $3.5 million of trade account receivables,
net, to fund short-term working capital requirements. PCS is subject to the
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GILMAN & CIOCIA INC - 10-Q
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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
March 31, 2008 the Company was in compliance with this regulation.
The Company had previously funded working capital commitments through loans from
Prime Partners, Inc. As of March 31, 2008, 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 $11,000 paid in January 2008.
In prior fiscal years, the Company had significantly higher working capital
deficiencies. 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, reducing 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 April 14, 2008, the SEC declared effective the Company's registration
statement, pursuant to a prospectus filed with the SEC on April 14, 2008 for a
public stock offering. Pursuant to this offering, the Company is distributing,
for no consideration to its holders of common stock, non-transferable
subscription rights to purchase shares of its common stock. Each eligible
shareholder will receive one (1) subscription right for each share of common
stock owned at the close of business on April 14, 2008, the record date. The
Company is distributing subscription rights exercisable for up to an aggregate
of 20,000,000 shares of its common stock.
Each subscription right will entitle an eligible shareholder to purchase up to
four (4) shares of the Company's common stock, subject to adjustment, at a
subscription price of $0.10 per share. This is the same price at which the
Company sold in two private placements of a total of 80,000,000 shares of its
common stock to certain investors and certain officers, directors and employees
of the Company in August 2007 (the "2007 Investors"). Shareholders who exercise
their basic subscription rights in full may over-subscribe for additional shares
to the extent additional shares are available. The subscription rights will
expire if they are not exercised by 5:00 p.m., Eastern Time, on or before June
20, 2008, unless extended. The 2007 Investors did not receive any subscription
rights. After the expiration of the subscription rights, the 2007 Investors may
purchase at the $0.10 per share subscription price any shares that remain unsold
in the offering.
The Company's net cash used in operating activities was $1.4 million for the
nine months ended March 31, 2008, compared with net cash used in operating
activities of $0.1 million for the nine months ended March 31, 2007. 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.
Net cash used in investing activities was $0.7 million for the nine months ended
March 31, 2008 compared with net cash used in investing activities of $0.5
million for the nine months ended March 31, 2007. 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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GILMAN & CIOCIA INC - 10-Q
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Net cash provided by financing activities was $1.7 million for the nine months
ended March 31, 2008 compared with net cash provided by financing activities of
$0.5 million for the nine months ended March 31, 2007. 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 March 31, 2008, and thereafter. The amounts represent the
maximum future cash contractual obligations.
Contractual Obligations and Commercial Commitments
Payment Due by Period
(in thousands)
Contractual Obligations Total 2008 2009 2010 2011 2012 Thereafter
---------------------------------------------------------------------------
Debt $ 426 $ 226 $ 200 $ -- $ -- $ -- $ --
Related Party 1,377 1,036 155 171 15 -- --
Operating Leases 6,986 560 1,996 1,488 1,236 748 958
Acquisition Contingent
Liability 2,374 298 1,048 408 248 248 124
Capital Leases 569 74 201 183 85 19 7
-------------------------------------------------------------------------
Total contractual cash obligations $11,732 $ 2,194 $ 3,600 $ 2,250 $ 1,584 $ 1,015 $ 1,089
=========================================================================
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. On April 7,
2008 an agreement was reached between the Company and Wachovia to extend the
Maturity Date of the loan to January 2009 with interest only payments due from
April 2008 through June 2008. Principal and interest payments will resume in
July 2008.
The Company is also contractually obligated to certain employees and executives
pursuant to commission agreements and compensation agreements.
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MARKET FOR COMPANY'S COMMON EQUITY
On April 23, 2008, FINRA cleared the request of vFinance Investments, Inc. for a
quotation on the OTC Bulletin Board for Gilman Ciocia, Inc. common stock
pursuant to NASD Rule 6640 and Rule 15c2-11 under the Securities Exchange Act of
1934. The Company is now trading on the OTC Bulletin Board under the symbol
GTAX.
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 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 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 March 31, 2008, the Company has accrued approximately $0.1
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
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
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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. As of March 31, 2008 the Company has fully reserved for its
deferred tax assets.
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
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.
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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 bear interest at
floating rates and therefore, the Company is impacted by changes in prevailing
interest rates. For the nine months ended March 31, 2008, had the interest rate
fluctuated plus or minus 1.0%, interest expense would have been higher or lower
by approximately $5,900.
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 and principal
financial officer, 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 March 31, 2008, 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 March 31, 2008, 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.
Our business could be harmed by market volatility and declines in general
economic conditions.
If the financial markets deteriorate, our financial planning channel will suffer
decreased revenues. Our revenue and profitability may be adversely affected by
declines in the volume of securities transactions and in market liquidity, which
generally result in lower revenues from trading activities and commissions.
Lower securities price levels may also result in a reduced volume of
transactions as well as losses from declines in the market value of securities
held in trading, investment and underwriting positions. In periods of low
volume, the fixed nature of certain expenses, including salaries and benefits,
computer hardware and software costs, communications expenses and office leases,
will adversely affect profitability. Sudden sharp declines in market values of
securities and the failure of issuers and counterparts to perform their
obligations can result in illiquid markets in which we may incur losses in
principal trading and market making activities.
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 (our former Chief Accounting
Officer), 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 68.4% 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.
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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, our sale of 20,000,000
shares of common stock in the Stock Offering will further dilute the common
stock ownership of our shareholders, both of which could adversely affect future
prices of our stock.
The significant dilution of the common stock ownership of existing shareholders
resulting from our August 2007 private placements, and the dilution of common
stock ownership resulting from our sale of 20,000,000 shares of common stock in
the Stock Offering, 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 $20.0 million at December 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.
We are not quoted on a national securities exchange, which would limit our
ability to raise capital and your ability to trade in our securities, and which
results in additional regulatory requirements.
On April 23, 2008, FINRA cleared the request of vFinance Investments, Inc. for a
quotation on the OTC Bulletin Board for Gilman Ciocia, Inc. common stock
pursuant to NASD Rule 6640 and Rule 15c2-11 under the Securities Exchange Act of
1934. The Company is now trading on the OTC Bulletin Board under the symbol
GTAX. If the Company fails to meet criteria set forth in Rule 15c2-11 (for
example, by failing to file periodic reports as required by the Exchange Act),
various practice requirements are imposed on broker-dealers who sell securities
governed by the Rule to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
Rule may have a material adverse effect on the ability of broker-dealers to sell
the Company's securities, which may materially affect the ability of
shareholders to sell the securities in the secondary market. 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.
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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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS
The Company held its annual meeting of stockholders on January 25, 2008. At this
meeting:
1. The stockholders elected the following directors: Edward Cohen and Frederick
Wasserman as a Class A directors. As Class A directors, Mr. Cohen and Mr.
Wasserman will serve until the Annual Meeting of Stockholders with respect to
the fiscal year ending June 30, 2010, and in each case until a successor is
elected and qualified or until his earlier death, resignation or removal.
2. The stockholders voted in favor of the proposal contained in the Proxy
Statement to amend the Company's Certificate of Incorporation to change the name
of the Company from Gilman + Ciocia, Inc. to Gilman Ciocia, Inc. The Amendment
was effected on January 28, 2008 by the filing of the Amendment with the
Secretary of State of the State of Delaware.
3. The stockholders ratified the appointment of Sherb & Co., LLP as the
Company's independent auditors for the fiscal year ending June 30, 2008.
The following table sets forth the results of votes of security holders related
to the above submission of matters:
Submission of Matters to a Vote of Security Holders For Against Withheld Abstained
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1. Elect the following directors:
Edward Cohen as Class A Director 69,365,789 -- 7,233 --
Frederick Wasserman as Class A Director 69,356,086 -- 16,936 --
2. Approve the proposed amendment to the Company's
Certificate of Incorporation to change the name of the
Company from Gilman + Ciocia, Inc. to Gilman Ciocia, Inc. 69,369,285 3,537 -- 200
3. Ratify the appointment of Sherb & Co., LLP as the
Company's independent auditors for the fiscal year ending
June 30, 2008 69,361,766 6,556 -- 4,700
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ITEM 6. EXHIBITS
3.1 Certificate of Amendment of the Certificate of Incorporation of the
Registrant dated January 28, 2008 filed with the State of Delaware
Secretary of State on January 28, 2008.
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: May 15, 2008 By: /s/ Michael P. Ryan
Chief Executive Officer
Dated: May 15, 2008 By: /s/ Karen Fisher
Principal Financial and Chief Accounting Officer
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