GILMAN CIOCIA INC - 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes |_| No |X|
As of November 3, 2008, 95,618,611 shares of the issuer's common stock, $0.01
par value, were outstanding.
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GILMAN CIOCIA, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Period Ending September 30, 2008
TABLE OF CONTENTS
Page
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Forward-Looking Statements.......................................... 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2008 (unaudited)
and June 30, 2008................................................... 4
Consolidated Statements of Operations for the Three Months
Ended September 30, 2008 and September 30, 2007 (unaudited)......... 5
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2008 and September 30, 2007 (unaudited).. 6
Supplemental Disclosures to Consolidated Statements of Cash
Flows (unaudited)................................................... 7
Notes to Consolidated Financial Statements (unaudited).............. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 17
Item 4 (T). Controls and Procedures ........................................ 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 27
Item 1A. Risk Factors...................... ............................... 28
Item 3. Defaults Upon Senior Securities .................................. 28
Item 6. Exhibits ......................................................... 29
SIGNATURES.................................................................. 30
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FORWARD LOOKING STATEMENTS
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 our expectations about our ability to raise capital, our strategy to
achieve our corporate objectives, including our strategy to pursue growth
through acquisitions, to increase revenues through our registered representative
recruiting program and expand our brand awareness and business presence, our
ability to be profitable, the cyclical nature of our business, our liquidity,
our expectations regarding no notice of default from Wachovia Bank, National
Association ("Wachovia"), revenues, the payment of legacy accounts payable, the
outcome or effect of litigation, arbitration and regulatory investigations, the
impact of certain accounting pronouncements, and others, are based upon current
information, expectations, estimates and projections regarding us, the
industries and markets in which we operate, 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 we and our subsidiaries are
involved; unforeseen compliance costs; changes in economic, political or
regulatory environments; the impact of the financial market turmoil and the
potential for an ongoing recession; changes in competition and the effects of
such changes; the inability to implement our strategies; changes in management
and management strategies; our inability to successfully design, create, modify
and operate our computer systems and networks; and litigation and regulatory
actions involving us. Readers should take these factors into account in
evaluating any such forward-looking statements. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law. The
reader should, however, consult further disclosures we may make in future
filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K.
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PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
GILMAN CIOCIA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
September 30, June 30,
2008 2008 (1)
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Assets
Cash & Cash Equivalents $ 618 $ 1,373
Marketable Securities 32 35
Trade Accounts Receivable, Net 2,614 2,739
Receivables from Employees, Net 754 690
Prepaid Expenses 628 766
Other Current Assets 189 278
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Total Current Assets 4,835 5,881
Property and Equipment (less accumulated depreciation of $5,749
at September 30, 2008 and $5,638 at June 30, 2008) 1,556 1,555
Goodwill 3,957 3,954
Intangible Assets (less accumulated amortization of $6,393 at
September 30, 2008 and $6,229 at June 30, 2008) 4,702 4,751
Other Assets 509 536
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Total Assets $ 15,559 $ 16,677
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Liabilities and Shareholders' Equity
Accounts Payable $ 2,155 $ 1,669
Accrued Expenses 1,557 1,757
Commission Payable 2,702 3,061
Current Portion of Notes Payable and Capital Leases 657 943
Deferred Income 15 16
Due to Related Parties 1,159 1,155
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Total Current Liabilities 8,245 8,601
Long Term Portion of Capital Leases and Other 433 468
Long Term Portion of Related Party Notes 144 186
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Total Liabilities 8,822 9,255
Shareholders' Equity
Preferred Stock, $0.001 par value; 100 shares authorized; none issued -- --
Common Stock, $0.01 par value 500,000 shares authorized; 94,069
and 93,819 shares issued at September 30, 2008 and June 30, 2008,
respectively 941 938
Additional Paid in Capital 36,295 36,286
Accumulated Deficit (30,499) (29,802)
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Total Shareholders' Equity 6,737 7,422
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Total Liabilities and Shareholders' Equity $ 15,559 $ 16,677
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(1) Derived from audited financial statements.
See Notes to Unaudited Consolidated Financial Statements
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GILMAN CIOCIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
For the Three Months Ended
September 30,
2008 2007
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Revenues
Financial Planning Services $ 9,761 $ 11,839
Tax Preparation and Accounting Fees 648 441
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Total Revenues 10,409 12,280
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Operating Expenses
Commissions 6,202 7,585
Salaries and Benefits 2,141 2,222
General & Administrative 1,005 1,545
Advertising 369 354
Brokerage Fees & Licenses 418 329
Rent 642 677
Depreciation & Amortization 277 245
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Total Operating Expenses 11,054 12,957
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Loss from Operations
Before Other Income and Expenses (645) (677)
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Other Income/(Expense)
Interest and Investment Income 6 9
Interest Expense (70) (111)
Other Income, Net 13 4,662
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Total Other Income/(Expense) (51) 4,560
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Income/(Loss) from Operations
Before Income Taxes (696) 3,883
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Income Taxes -- --
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Net Income/(Loss) $ (696) $ 3,883
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Weighted Average Number of Common
Shares Outstanding:
Basic and Diluted Shares 93,832 46,226
Basic and Diluted Net
Income/(Loss) Per Share:
Net Income/(Loss) $ (0.01) $ 0.08
See Notes to Unaudited Consolidated Financial Statements
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GILMAN CIOCIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months Ended
September 30,
2008 2007
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Cash Flows from Operating Activities:
Net income/(loss) $ (696) $ 3,883
Adjustments to reconcile net income/(loss) to net cash provided
by/(used in) operating activities:
Depreciation and amortization 277 245
Issuance of common stock for debt default penalties, interest and other 8 11
Allowance for doubtful accounts 10 95
Gain on debt extinguishment and other -- (4,599)
Gain on fair value recognition on accounts payable (13) (331)
Changes in assets and liabilities:
Accounts receivable 154 (401)
Prepaid and other current assets 299 239
Change in marketable securities 3 57
Other assets 19 44
Accounts payable and accrued expenses (44) (664)
Deferred income (1) (214)
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Net cash provided by/(used in) operating activities: 16 (1,635)
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Cash Flows from Investing Activities:
Capital expenditures (113) (114)
Cash paid for acquisitions, net of cash acquired and debt incurred (135) (1)
Receivables from employees (165) 140
Due from office sales 6 6
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Net cash provided by/(used in) investing activities: (407) 31
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Cash Flows from Financing Activities:
Proceeds from bank and other loans 30 40
Proceeds from capital stock issuance 20 5,668
Payments to related parties (37) --
Payments of bank loans and other loans (361) (2,820)
Payments related to offering costs (16) (228)
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Net cash provided by/(used in) financing activities: (364) 2,660
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Net change in cash and cash equivalents (755) 1,056
Cash and cash equivalents at beginning of period 1,373 1,369
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Cash and cash equivalents at end of period $ 618 $ 2,425
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See Notes to the Unaudited Consolidated Financial Statements and Supplemental
Disclosures to Consolidated Statements of Cash Flows
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GILMAN CIOCIA, INC.
Supplemental Disclosures to Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
For the Three Months Ended
September 30,
2008 2007
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Cash Flow Information
Cash payments during the year for:
Interest $ 70 $ 256
Supplemental Disclosure of Non-Cash Transactions
Issuance of common stock for services, interest
and other $ 8 $ 11
Payment of debt by issuance of shares $ -- $ 2,309
Equipment acquired under capital leases $ -- $ 21
Fair value recognition on legacy accounts payable $ (13) $ (331)
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, "we", "us",
"our" or the "Company") was founded in 1981 and is incorporated under the laws
of the State of Delaware. We provide federal, state and local tax preparation
services to individuals, predominantly in the middle and upper income tax
brackets, accounting services to small and midsize companies and financial
planning services, including securities brokerage, investment management
services, insurance and financing services. As of September 30, 2008, we had 25
company-owned offices operating in three states (New York, New Jersey, and
Florida) and 49 independently operated offices providing financial planning
services 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
("GAAP") have been omitted pursuant to such rules and regulations. However, we
believe that the disclosures are adequate to make the information presented not
misleading. The Consolidated Balance Sheet as of September 30, 2008, the
Consolidated Statements of Operations for the three months ended September 30,
2008 and 2007 and the Consolidated Statements of Cash Flows for the three months
ended September 30, 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 our financial position and results of operations. The operating
results for the three months ended September 30, 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
our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.
Fiscal years are denominated by the year in which they end. Accordingly, fiscal
2008 refers to the year ended June 30, 2008.
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, we, including our
wholly owned subsidiary Prime Capital Services, Inc. ("PCS"), have 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 us for
these claims. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 5 "Accounting for Contingencies," we have established liabilities
for potential losses from such complaints, legal actions, investigations and
proceedings. In establishing these liabilities, our 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, we base our
judgments on our knowledge of the situations, consultations with legal counsel
and our 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 our 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, we cannot predict with certainty the eventual loss or
range of loss related to such matters. If our judgments prove to be incorrect,
our 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. A majority of these claims
are covered by our errors and omissions insurance policy. While we will
vigorously defend 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 our
financial position.
Cash and Cash Equivalents
We consider 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. We test goodwill for impairment annually or more
frequently whenever events occur or circumstances change, which would more
likely than not reduce the fair value of a reporting unit below its carrying
amount.
Revenue Recognition
We recognize 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. Marketing
revenue associated with product sales is recognized quarterly based on
production levels. Marketing event revenues are recognized at the commencement
of the event offset by its cost.
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Net Income/(Loss) Per Share
In accordance with SFAS No. 128, "Earnings Per Share", basic net income/(loss)
per share is computed using the weighted average number of common shares
outstanding during each period. The computation for the three months ended
September 30, 2008 and September 30, 2007 did not include outstanding options
and warrants 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 September 30, 2008
because of the relatively short-term maturity of these instruments and their
market interest rates.
Contingent Consideration
We entered into several asset purchase agreements during fiscal 2008, which
include contingent consideration based upon gross revenue generated in future
periods. In accordance with SFAS No. 141 "Business Combinations" no liability
will be recorded until the contingency is determined beyond a reasonable doubt.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit
risk consist of trade receivables. The majority of our 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, we do not
consider ourselves to have any significant concentration of credit risk.
Segment Disclosure
Management believes the Company operates as one segment.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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. We adopted SFAS
No. 157 effective September 30, 2007 and have recorded a $0.1 million allowance
against our accounts payable balance as of September 30, 2008 representing our
fair value assessment of that account. See also Note 6 of the Notes to the
Consolidated Financial Statements describing fair value measurements.
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In October 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active" ("FSP FAS 157-3"). This FSP clarifies the application of FASB
SFAS No. 157 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. This FSP is effective
upon issuance, including prior periods for which financial statements have not
been issued. The adoption of FSP FAS 157-3 had no impact on our consolidated
financial position, cash flows or results of operations.
In April 2008, the FASB issued 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. We
are currently assessing the effects of FSP FAS 142-3 and have not yet determined
its impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
No. 141R"). SFAS No. 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. This statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statement to
evaluate the nature and financial effects of the business combination. SFAS No.
141R is effective for financial statements issued for fiscal years beginning
after December 15, 2008. Accordingly, any business combinations we engage in
will be recorded and disclosed following existing GAAP until July 1, 2009. We
expect SFAS No. 141R will have an impact on our consolidated financial
statements when effective, but the nature and magnitude of the specific effects
will depend upon the nature, terms and size of the acquisitions we consummate
after the effective date. We are still assessing the impact of this standard on
our future consolidated financial statements.
All other new accounting pronouncements issued but not yet effective or adopted
have been deemed not to be relevant to us, hence are not expected to have any
impact once adopted.
4. COMMITMENTS AND CONTINGENCIES
Litigation
On February 4, 2004, we were 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 members of our board of
directors in 2002 breached their fiduciary duty of loyalty in connection with
the sale of certain of our offices. On February 15, 2008, a written Settlement
Agreement was executed settling the lawsuit, subject to approval by the Court of
Chancery. At a hearing on September 22, 2008, the Court of Chancery approved the
Settlement Agreement and reserved decision on setting an award of attorney's
fees and expenses for plaintiff's counsel. On October 31, 2008, Master in
Chancery Sam Glasscock III issued a Master's Final Report awarding the
plaintiff's attorneys fees in the amount of $1.2 million together with
out-of-pocket costs in the amount of $0.1 million. We have filed an exception
contesting the Master's Final Report with the Court of Chancery. The award of
attorney fees and out-of-pocket costs will be paid by our Executive Liability
and Organization Reimbursement Policy with National Union Fire Insurance Company
of Pittsburgh, PA.
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On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by our registered representatives during the
period January 1, 2002 through August 1, 2005. On June 22, 2006, the SEC entered
a formal order of investigation. Pursuant to SEC subpoenas, we have supplied
documents to the SEC and several officers, employees and former employees have
testified before the SEC. We cannot predict whether or not the investigation
will result in an enforcement action. Further, if there were an enforcement
action, we cannot predict whether or not our 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. 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 awards, settlements and
costs in connection with these claims. While we will vigorously defend 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 our financial position. At September
30, 2008 we accrued $0.2 million for potential settlements, judgments and
awards.
5. EQUITY TRANSACTION
On April 14, 2008, the SEC declared effective our registration statement, which
included a prospectus filed with the SEC on April 14, 2008 for a public stock
offering (the "Public Stock Offering"). Pursuant to the Public Stock Offering,
we distributed, for no consideration to our holders of common stock,
non-transferable subscription rights to purchase shares of our common stock.
Each eligible shareholder received one subscription right for each share of
common stock owned at the close of business on April 14, 2008, the record date.
We distributed subscription rights exercisable for up to an aggregate of 20.0
million shares of our common stock.
Each subscription right entitled an eligible shareholder to purchase up to four
shares of common stock, subject to adjustment, at a subscription price of $0.10
per share. This is the same price at which we sold 80.0 million shares of common
stock in two private placements (the "Investment Purchase Closing" and "Private
Placement Closing" each of which closed on August 20, 2007). Shareholders who
exercised their basic subscription rights in full could over-subscribe for
additional shares to the extent additional shares were available. The Public
Stock Offering expired on June 20, 2008. A total of 3.9 million shares of the
common stock were issued pursuant to the Public Stock Offering.
The purchasers in the Investment Purchasers Closing and the Private Placement
Closing (collectively, the "2007 Investors") did not receive subscription
rights, but had the right until September 15, 2008 to purchase at $0.10 per
share the shares that remained unsold on June 20, 2008. On September 12, 2008,
we filed a supplement to our prospectus extending until December 31, 2008 the
period during which the 2007 Investors have a right to purchase up to the 16.1
million shares of common stock offered under the prospectus that remained unsold
at the expiration of the Public Stock Offering. Accordingly, until December 31,
2008 the 2007 Investors have the right, on a "first come, first served" basis,
to purchase these shares at the $0.10 per share subscription price. As of
November 3, 2008, 0.7 million shares have been purchased by the 2007 Investors.
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6. FAIR VALUE MEASUREMENTS
We elected early adoption of SFAS No. 157, beginning July 1, 2007, the first day
of our 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 FASB having previously concluded in those
accounting pronouncements that fair value is a relevant measurement attribute.
The following table sets forth the liabilities we have elected to fair value
under SFAS No. 157 as of September 30, 2008:
Fair Value Measurements at September 30,
2008
(in thousands) Using Significant Unobservable Inputs
Description (Level 3)
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Accounts Payable:
Beginning Balance $2,285
Allowance (130)
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Ending Balance $2,155
We have significant legacy accounts payable balances that are at least four
years old and that we believe will never require a financial payment for a
variety of reasons. Accordingly, under SFAS No. 157, we have established an
estimate of fifteen cents on the dollar on these legacy balances that we would
potentially pay out against these balances based on our historical pay out on
these legacy balances. The income recorded during the three months ended
September 30, 2008 and September 30, 2007 was $13.2 thousand and $0.3 million,
respectively and is recorded in other income, net on our Consolidated Statement
of Operations.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
A reconciliation of the change in the carrying value of goodwill for the three
month period ended September 30, 2008 is as follows (in thousands):
Balance at June 30, 2008 $3,954
Adjustment to purchase accounting (1) 3
------
Balance at September 30, 2008 $3,957
======
(1) During fiscal 2008, we purchased four tax preparation and accounting
practices. Initial purchase prices are adjusted based on contingency payments
made subsequent to the original purchase date.
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Other intangible assets subject to amortization are comprised of the following
at September 30, 2008 (in thousands):
Customer Lists $ 6,109
Broker-Dealer Registration 100
Non-Compete Contracts 686
House Accounts 600
Administrative Infrastructure 500
Independent Contractor Agreements 3,100
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Intangible Costs at Cost 11,095
Less: Accumulated Amortization and Impairment (6,393)
--------
Intangible Assets, Net $ 4,702
========
Amortization expense for the three months ended September 30, 2008 and September
30, 2007 was $0.2 million and $0.1 million, respectively.
8. DEBT
As of September 30, 2008, our outstanding principal balance with Wachovia Bank,
National Association ("Wachovia") was $0.2 million. As of September 30, 2008 we
were in default of certain covenants under our term loan/revolving letter of
credit financing with Wachovia. Our debt forbearance agreement with Wachovia was
last amended on April 1, 2006. We do not believe that Wachovia will issue a
notice of default for any of these defaults.
9. STOCK BASED COMPENSATION
On July 1, 2005 we adopted SFAS No. 123-R, "Share-Based Payment" using a
modified prospective application, as permitted under SFAS No. 123-R.
Accordingly, prior period amounts have not been restated. Under this
application, we are 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, we have adopted the policy to recognize compensation expense on a
straight-line attribution method.
Changes in our stock option activity during the three months ended September 30,
2008 were as follows:
Weighted
Average
Shares Exercise Price
--------------------------------
Outstanding, June 30, 2008 80,000 1.04
Granted -- --
Exercised -- --
Expired -- --
Canceled -- --
--------------------------------
Outstanding, September 30, 2008 80,000 1.04
Exercisable, September 30, 2008 80,000 1.04
The range of exercise prices for the outstanding options at September 30, 2008
is between $0.33 and $6.00.
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10. ACCRUED EXPENSES
Accrued expenses consist of the following:
(in thousands) September 30, June 30,
2008 2008
--------------------------
Accrued compensation $ 258 $ 237
Accrued bonus 96 96
Accrued related party compensation and bonus 166 196
Accrued vacation 134 128
Accrued settlement fees 139 122
Accrued audit fees & tax fees 121 160
Accrued interest 14 18
Accrued other 413 558
Accrued acquisitions short term 216 242
--------------------------
Total Accrued Expenses $1,557 $1,757
==========================
11. RELATED PARTY TRANSACTIONS
A $1.0 million note to Prime Partners, Inc. ("Prime Partners") dated as of
January 31, 2008 was due on June 30, 2008 (the "$1.0 Million Note"). Michael
Ryan is a director, an officer and a significant shareholder of Prime Partners,
Inc.
As of June 30, 2008, Prime Partners owed a trust, of which Ted Finkelstein, our
Vice President and General Counsel, is the trustee ("the Trust") $0.5 million in
principal pursuant to a promissory note dated January 31, 2008 (the "Old Note").
As of September 1, 2008, Prime Partners assigned $0.5 million from the $1.0
Million Note to the Trust in payment of the Old Note. As of September 1, 2008,
we entered into a new $0.5 million promissory note with Prime Partners at 10%
interest to be paid in arrears through the end of the previous month on the 15th
day of each month commencing on October 15, 2008 with the principal due on or
before July 1, 2009 (the "New Prime Partners Note").
As of September 1, 2008, we entered into a new $0.5 million promissory note with
the Trust (the "New Trust Note"). The New Trust Note provides for 10% interest
to be paid in arrears through the end of the previous month on the 15th day of
each month commencing on October 15, 2008. The principal of the New Trust Note
will be paid to the Trust as follows: $55.0 thousand on January 31, 2009 and
February 28, 2009; $90.0 thousand on March 31, 2009, April 30, 2009, May 31,
2009 and June 30, 2009. We gave the Trust a collateral security interest in all
of our assets, including the stock of PCS, subordinate only to the outstanding
security interest of Wachovia Bank. We agreed that the only loan debt principal
that we are permitted to pay until the New Trust Note is paid in full is: the
existing Wachovia debt, the scheduled principal payments on certain executive
notes with de minimis balances and the scheduled principal payments to Prime
Partners for a $0.3 million Promissory Note dated December 26, 2007. No payments
of loan principal can be paid to any other existing or future lenders, including
to Prime Partners on the New Prime Partners Note. Prime Partners and Ted
Finkelstein guaranteed the New Trust Note. The guarantee of Prime Partners is
secured by a collateral assignment of the promissory note dated January 23, 2004
between Daniel R. Levy and the Company in the original amount of $0.9 million
which was assigned to Prime Partners, Inc. on June 26, 2006.
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At September 30, 2008 the aggregate amount we owed to the related parties was
$1.3 million.
On October 30, 2008 Michael Ryan, our President and a Director, and Carole
Enisman, our Executive Vice President of Operations, each purchased 250,000
restricted shares of our common stock at $0.10 per share in reliance upon the
exemption from securities registration afforded by Section 4(2) of the
Securities Act and Rule 506 of Regulation D.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Item 2 contains forward-looking statements. Forward-looking statements in
this Quarterly Report on Form 10-Q are subject to a number of risks and
uncertainties, some of which are beyond our control. Our actual results,
performance, prospects, or opportunities could differ materially from those
expressed in or implied by the forward-looking statements. Additional risks of
which we are not currently aware or which we currently deem immaterial could
also cause our actual results to differ, including those discussed in the
sections entitled "Forward-Looking Statements" and "Risk Factors" included
elsewhere in this Quarterly Report as well as those risk factors discussed in
the section entitled "Risk Factors" in our annual report on Form 10-K.
Overview
We provide federal, state and local income tax return preparation for
individuals predominantly in middle and upper income brackets and accounting
services to small and midsize companies and financial planning services,
including securities brokerage, investment management services, insurance and
financing services. Clients often consider other aspects of their financial
needs such as investments, insurance, pension and estate planning, while having
their tax returns prepared by us. We believe that our tax return preparation and
accounting services are inextricably intertwined with our 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 our employees or
independent contractors and are registered representatives of Prime Capital
Services, Inc. ("PCS"), a wholly owned subsidiary. 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 clients. PCS earns a share of commissions from the services
that the financial planners provide to their clients in transactions for
securities, insurance and related products. PCS is a registered securities
broker-dealer with the Securities and Exchange Commission ("SEC") and a member
of Financial Industry Regulatory Authority ("FINRA"). We also have a wholly
owned subsidiary, Asset & Financial Planning, Ltd. ("AFP"), which is registered
with the SEC as an investment advisor. Almost all of our financial planners are
also authorized agents of insurance underwriters. We have 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. We are 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. 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 us
through our tax return preparation services, accounting services and educational
workshops. We believe that our tax return preparation and accounting services
are inextricably intertwined with our financial planning activities in our
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.
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We also provide financial planning services through approximately 49
independently owned and operated offices in twelve states. We benefit from
economies of scale associated with the aggregate production of both Company
offices and independently owned offices. Our 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 our web site at www.gtax.com.
For the quarter ended September 30, 2008, approximately 6.2% of our revenues
were earned from tax preparation and accounting services and 93.8% were earned
from all financial planning and related services of which approximately 70.5%
were earned from brokerage commissions, 23.6% from asset management, 3.9% from
insurance, 1.2% from lending services and 0.8% from PCS Marketing.
Although recurring revenue is down year over year, the decrease is less than
other financial planning products as evidenced by advisory fees and trails
representing 43.5% of the financial planning revenue, up from 39.3% for the
three months ended September 30, 2007. Additionally, we are attempting to
increase revenue by, among other things, continuing to put forth a strong
financial representative recruiting effort. 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 we
start to more significantly benefit from the effect of the greater sale of
products that generate recurring income. We expect that we will continue to
control overall operating expenses, while continuing to spend on marketing
efforts to build brand awareness and attract new clients. We cannot predict
whether our marketing efforts will have the desired effects.
The tax preparation business is a highly seasonal business. The first and second
quarters of our fiscal year are typically our weakest quarters and the third
quarter of our fiscal year is typically our strongest.
During the three months ended September 30, 2008, we had a net loss of $0.7
million compared to net income of $3.9 million during the three months ended
September 30, 2007. This decrease in net income is mostly attributable to having
recognized a gain from the extinguishment of debt during the first quarter of
fiscal 2007, resulting from the sale of our shares of common stock in two
private placements (the "Investment Purchase Closing" and the "Private Placement
Closing") on August 20, 2007.
We believe that the significant turmoil in the financial markets during 2008,
and related erosion of investor confidence, will negatively impact our operating
results for fiscal 2009. To help mitigate the negative impact on our operating
results, we implemented cost cutting strategies in the fourth quarter of our
fiscal year ending June 30, 2008, including staff reductions. We remain
committed, however, to investing in the continuing development of our network of
financial representatives and to acquire tax preparation and accounting firms to
increase our client base and accounting business as part of our long-term
strategy for growing our revenues and earnings.
Managed Assets
As indicated in the following table, as of September 30, 2008, assets under AFP
management decreased $36.3 million, to $560.1 million, from $596.4 million as of
June 30, 2008. This decrease can be mostly attributed to market declines. As of
September 30, 2008, total Company assets under custody were $3.8 billion, down
$435.0 million from June 30, 2008.
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The following table presents the market values of assets under AFP management:
(in thousands) Total Assets
Under
Market Value as of Annuities Brokerage Management
------------------ -----------------------------------------------
9/30/2008 $331,492 $228,581 $560,073
6/30/2008 $330,503 $265,850 $596,353
The following table presents the market values of total Company assets under
custody:
(in thousands) Total Company
Assets Under
Market Value as of Custody
------------------ -------------
9/30/2008 $3,796,835
6/30/2008 $4,231,803
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2007
Revenue
The following table presents revenue by product line and brokerage revenue by
product type:
For the Three Months Ended September 30,
--------------------------------------------------------------------------
(in thousands) % of Total % of Total
% Change Revenue Revenue
Consolidated Revenue Detail 2008 2007 08-07 2008 2007
- --------------------------- --------------------------------------------------------------------------
Revenue by Product Line
Brokerage Commissions Revenue $ 6,884 $ 8,533 -19.3% 66.1% 69.5%
Insurance Commissions Revenue 381 343 11.1% 3.7% 2.8%
Advisory Fees 2,305 2,551 -9.6% 22.2% 20.8%
Tax Preparation and Accounting Fees 648 441 46.9% 6.2% 3.6%
Lending Services 115 51 125.5% 1.1% 0.4%
Marketing Revenue 76 361 -78.9% 0.7% 2.9%
--------------------------------------------------------------------------
Total Revenue $10,409 $12,280 -15.2% 100.0% 100.0%
==========================================================================
Brokerage Commissions Revenue
by Product Type
Mutual Funds $ 864 $ 1,065 -18.9% 8.3% 8.7%
Equities, Bonds & UIT 271 307 -11.7% 2.6% 2.5%
Annuities 3,428 4,735 -27.6% 32.9% 38.6%
Trails 1,945 2,106 -7.6% 18.7% 17.1%
All other products 376 320 17.5% 3.6% 2.6%
--------------------------------------------------------------------------
Brokerage Commissions Revenue $ 6,884 $ 8,533 -19.3% 66.1% 69.5%
==========================================================================
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The following table sets forth a breakdown of our consolidated financial
planning revenue by company-owned offices and independent offices for the three
months ended September 30, 2008 and 2007:
For Three Months Ended September 30,
------------------------------------
% of % of
(in thousands) 2008 Total 2007 Total
- ------------------------------------------------------------------------------
Company-Owned Offices $ 4,792 49.1% $ 5,181 43.8%
Independent Offices 4,969 50.9% 6,658 56.2%
------------- -------------
Total $ 9,761 $ 11,839
============= =============
Our total revenues for the three months ended September 30, 2008 were $10.4
million compared to $12.3 million for the three months ended September 30, 2007,
a decrease of $1.9 million or 15.2%. Our total revenues for the three months
ended September 30, 2008 consisted of $9.8 million for financial planning
services and $0.6 million for tax preparation and accounting services. Financial
planning services represented 93.8% and tax preparation and accounting services
represented 6.2% of our total revenues during the three months ended September
30, 2008. Our total revenues for the three months ended September 30, 2007
consisted of $11.8 million for financial planning services and $0.4 million for
tax preparation and accounting services. Financial planning services represented
96.4% and tax preparation fees represented 3.6% of our total revenues during the
three months ended September 30, 2007.
For the three months ended September 30, 2008, financial planning revenue was
$9.8 million compared to $11.8 million for the same period last year. This
decrease in financial planning revenue is mostly the result of financial planner
attrition mostly from our independent channel and decreased production mostly
from the independent channel resulting from market declines during the three
months ended September 30, 2008. In addition, we had a decrease of $0.3 million
in PCS Marketing revenue due to the timing of our annual awards conference which
was held in May 2008, whereas the prior year's annual awards conference was held
in July 2007. This decrease in PCS Marketing revenue of $0.3 million was offset
by a savings in general and administrative expense of $0.4 million as we
recognize the marketing event revenues at the commencement of the event.
Tax preparation and accounting services revenue was $0.6 million for the three
months ended September 30, 2008 compared to $0.4 million for the same period
last year. Approximately 74.0% 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 we acquired in the
second and third quarters of our prior fiscal year, and the remaining increase
came from organic growth resulting from our strong advertising campaign,
increases in average client fees and client retention, offset slightly by client
attrition.
For the three months ended September 30, 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 decreased to $4.3 million, down $0.4 million
from $4.7 million for the three months ended September 30, 2007, representing a
8.7% decrease in recurring revenue (advisory and trails). The decrease in
recurring revenues is mostly attributable to lower assets under management and
assets under custody at June 30, 2008, at which time fees are determined and
revenue is recognized during the three months ended September 30, 2008, compared
with the same period last year. The lower assets under management and custody
can be mostly attributed to the overall market declines realized during 2008.
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Expenses
Our total operating expenses for the three months ended September 30, 2008 were
$11.1 million, down $1.9 million or 14.7%, compared to $13.0 million for the
three months ended September 30, 2007. This decrease is primarily due to
decreased commission expense resulting from the revenue declines, decreased
salaries and benefits, decreased general and administrative expenses as we moved
our annual awards conference into May 2008 of our prior fiscal year, as well as
our efforts to continue to control expenses. These savings were offset slightly
by increased brokerage fees and licenses and depreciation and amortization.
Commission expense was $6.2 million for the three months ended September 30,
2008, compared with $7.6 million for the same period last year. Commission
expense decreased $1.4 million mostly due to the declines in revenue as well as
due to the mix of financial planning revenue generated on the employee channel
compared with the independent channel. Financial planning commission expense as
a percentage of financial planning revenue was 62.9% and 65.6% for the three
months ended September 30, 2008 and September 30, 2007, respectively. This
decrease as a percentage of revenue is attributable to financial planning
revenue generated through our employee channel representing 49.1% of the total
financial planning revenue where commission pay out rates are lower than on the
independent channel compared with the same period last year when our employee
channel generated 43.8% of the total financial planning revenue.
Salaries, which consist primarily of salaries, related payroll taxes and
employee benefit costs, decreased by $0.1 million, or 3.6% in the three months
ended September 30, 2008 compared with the same period last year. This decrease
is mostly attributable to our efforts in March 2008 to reduce overhead costs to
help mitigate the impact of the downturn in the market which negatively affects
our revenues. Such cost reductions included the restructuring of departments,
eliminating open positions and layoffs.
General and administrative expenses decreased $0.5 million or 34.9% in the three
months ended September 30, 2008 compared with the same period last year. This
decrease is primarily attributable to the timing of our annual awards conference
which was held in May 2008 whereas the prior year's annual awards conference was
held in July 2007. This cost savings of $0.4 million has an offsetting revenue
decline in PCS Marketing revenues of $0.3 million as we recognize the marketing
event revenues at the commencement of the event. Additional cost savings of $0.1
million in legal and professional expenses and claim settlements resulted from
our effort to control expenses by processing more customer claims in-house as
well as a reduced number of claims versus the same period last year. The
remaining $0.1 million reduction in expenses resulted mostly from our continued
efforts to closely manage outstanding customer receivables, resulting in lower
bad debt expense.
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GILMAN CIOCIA INC - 10-Q
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Advertising expense increased by 4.2% for the three months ended September 30,
2008 compared with the same period last year. This is mostly the result of
increased seminar workshops due to the higher number of new representatives
resulting from our recruiting efforts.
Brokerage fees and licenses increased $0.1 million for the three months ended
September 30, 2008 compared with the same period last year. This increase is due
to more accounts under management with third party money managers in AFP, and
more trades going through brokerage accounts versus direct applications.
Rent was approximately 5.2% lower for the three months ended September 30, 2008
compared with the same period last year. This is mostly the result of occupying
less office space and the consolidation of some of our Company-owned offices.
Depreciation and amortization expense was 13.1% higher for the three months
ended September 30, 2008 compared with the same period last year. This is mostly
attributable to increased amortization expense related to the amortization of
intangible assets related to our acquisitions.
Typically we report a loss in the first quarter of our fiscal year. Our loss
from operations before other income and expense decreased 4.6% for the three
months ended September 30, 2008 compared to the three months ended September 30,
2007. This decrease was primarily attributable to increased tax preparation and
accounting services revenue and by our efforts to reduce operating expenses,
partially offset by decreased financial planning revenue due to declines in
market conditions and attrition.
Total other income/(expense) for the three months ended September 30, 2008 was
an expense of $0.1 million compared to income of $4.6 million for the three
months ended September 30, 2007. This decrease in other income/(expense) was
primarily due 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
Investment and Private Placement Closings on August 20, 2007.
Our net loss for the three months ended September 30, 2008 was $0.7 million, or
$(0.01) per diluted share, compared with net income of $3.9 million, or $0.08
per diluted share for the three months ended September 30, 2007. This decline
was primarily attributable to decreased financial planning revenue due to
declines in market conditions and attrition ($2.1 million), and reduced one-time
other income realized in fiscal 2007 related to the extinguishment of Company
debt owed to Met Life and related parties ($4.6 million), partially offset by
increased tax preparation and accounting services revenue ($0.2 million),
decreased commission expense due to declines in revenues ($1.4 million) and by
controlling expenses ($0.5 million).
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 2008, we realized a net loss of $0.7
million and at September 30, 2008 we had a working capital deficit of $3.4
million. At September 30, 2008 we had $0.6 million of cash and cash equivalents,
$32 thousand in marketable securities and $2.6 million of trade account
receivables, net, to fund short-term working capital requirements. PCS is
subject to the SEC's Uniform Net Capital Rule 15c3-1, which requires that PCS
maintain minimum regulatory net capital of $100,000 and, in addition, that the
ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to one. At September 30, 2008 we were in compliance with this
regulation.
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On April 14, 2008, the SEC declared effective our registration statement, which
included a prospectus filed with the SEC on April 14, 2008 for the Public Stock
Offering. Pursuant to the Public Stock Offering, we distributed, for no
consideration to our holders of common stock, non-transferable subscription
rights to purchase shares of our common stock. Each eligible shareholder
received one subscription right for each share of common stock owned at the
close of business on April 14, 2008, the record date. We distributed
subscription rights exercisable for up to an aggregate of 20.0 million shares of
our common stock.
Each subscription right entitled an eligible shareholder to purchase up to four
shares of common stock, subject to adjustment, at a subscription price of $0.10
per share. This is the same price at which we sold 80.0 million shares of common
stock in the Investment Purchase Closing and the Private Placement Closing.
Shareholders who exercised their basic subscription rights in full could
over-subscribe for additional shares to the extent additional shares were
available. The Public Stock Offering expired on June 20, 2008. A total of 3.9
million shares of the common stock were issued pursuant to the Public Stock
Offering.
The purchasers in the Investment Purchasers Closing and the Private Placement
Closing (collectively, the "2007 Investors") did not receive subscription
rights, but had the right until September 15, 2008 to purchase at $0.10 per
share the shares that remained unsold on June 20, 2008. On September 12, 2008,
we filed a supplement to our prospectus extending until December 31, 2008 the
period during which the 2007 Investors have a right to purchase up to the 16.1
million shares of common stock offered under the prospectus that remained unsold
at the expiration of the Public Stock Offering. Accordingly, until December 31,
2008 the 2007 Investors have the right, on a "first come, first served" basis,
to purchase these shares at the $0.10 per share subscription price. As of
November 3, 2008, 0.7 million shares have been purchased by the 2007 Investors.
Our ability to satisfy our obligations depends on our future performance, which
will be subject to prevailing economic, financial, and business conditions.
Capital requirements, at least in the near term, are expected to be provided by
cash flows from operating activities and cash on hand at September 30, 2008 or a
combination thereof. To the extent future capital requirements exceed cash on
hand plus cash flows from operating activities, we anticipate that working
capital will be financed by the sale of the remaining unsold shares from the
Public Stock Offering to the 2007 Investors (as described above) and by pursuing
financing from third parties. We are also controlling operating expenses and
continue to focus on implementing our acquisition strategy to increase earnings
and cash flow.
While we believe that payments to tax preparation and accounting practices which
we have acquired have been and will continue to be funded through cash flow
generated from those acquisitions, we need additional capital to fund initial
payments on future acquisitions. If we do not have adequate capital to fund
those future acquisitions, we may not be able to acquire all of the acquisitions
available to us which could result in our not fully realizing all of the revenue
which might otherwise be available to us.
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GILMAN CIOCIA INC - 10-Q
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Our net cash provided by operating activities was $16.0 thousand for the three
months ended September 30, 2008, compared with net cash used in operating
activities of $1.6 million for the three months ended September 30, 2007. The
increase in net cash provided by operating activities was primarily attributable
to increased collection efforts on outstanding accounts receivable during the
three months ended September 30, 2008 and as a result of paying down a large
portion of accounts payable in the three months ended September 30, 2007 due to
the cash provided by the 2007 Investors.
Net cash used in investing activities was $0.4 million for the three months
ended September 30, 2008 compared with net cash provided by investing activities
of $31.0 thousand for the three months ended September 30, 2007. This increase
in cash used in investing activities was attributable to cash paid for
acquisitions (contingency payments), advances made to registered representatives
and capital expenditures related to new office relocations.
Net cash used in financing activities was $0.4 million for the three months
ended September 30, 2008 compared with net cash provided by financing activities
of $2.7 million for the three months ended September 30, 2007. This decrease is
due primarily to proceeds from the Investment Purchasers Closing and Private
Placement Closing on August 20, 2007.
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. We are now trading on the OTC Bulletin Board under the symbol GTAX.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The preparation of our financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to adopt accounting
policies and make estimates and judgments that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates under different assumptions and judgments and
uncertainties, and potentially could result in materially different results
under different conditions. These critical accounting estimates are reviewed
periodically by our independent auditors and the audit committee of our board of
directors.
Our critical accounting estimates have not changed materially from those
disclosed in Management's Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K, for the year
ended June 30, 2008 as filed with the Securities and Exchange Commission
("SEC").
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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. We adopted SFAS
No. 157 effective September 30, 2007 and have recorded a $0.1 million allowance
against our accounts payable balance as of September 30, 2008 representing our
fair value assessment of that account. See also Note 6 of the Notes to the
Consolidated Financial Statements describing fair value measurements.
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In October 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active" ("FSP FAS 157-3"). This FSP clarifies the application of FASB
SFAS No. 157 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. This FSP is effective
upon issuance, including prior periods for which financial statements have not
been issued. The adoption of FSP FAS 157-3 had no impact on our consolidated
financial position, cash flows or results of operations.
In April 2008, the FASB issued 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. We
are currently assessing the effects of FSP FAS 142-3 and have not yet determined
its impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
No. 141R"). SFAS No. 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. This statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statement to
evaluate the nature and financial effects of the business combination. SFAS No.
141R is effective for financial statements issued for fiscal years beginning
after December 15, 2008. Accordingly, any business combinations we engage in
will be recorded and disclosed following existing GAAP until July 1, 2009. We
expect SFAS No. 141R will have an impact on our consolidated financial
statements when effective, but the nature and magnitude of the specific effects
will depend upon the nature, terms and size of the acquisitions we consummate
after the effective date. We are still assessing the impact of this standard on
our future consolidated financial statements.
All other new accounting pronouncements issued but not yet effective or adopted
have been deemed not to be relevant to us, hence are not expected to have any
impact once adopted.
ITEM 4 (T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our 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 us in the reports that we file or submit 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 we file or submit
under the Exchange Act is accumulated and communicated to the issuer's
management, including our principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure.
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We have carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and
Principal Financial and Chief Accounting Officer, of our disclosure controls and
procedures as defined in Exchange Act Rule 13(a)-15(e). In designing and
evaluating disclosure controls and procedures, we and our management recognize
that any disclosure controls and procedures, no matter how well designed and
operated, can only provide reasonable assurance of achieving the desired control
objective. As of September 30, 2008, management concludes that our disclosure
controls and procedures are effective.
Changes in Internal Controls
During the three months ended September 30, 2008, there were no changes in our
internal controls over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 4, 2004, we were 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 members of our board of
directors in 2002 breached their fiduciary duty of loyalty in connection with
the sale of certain of our offices. On February 15, 2008, a written Settlement
Agreement was executed settling the lawsuit, subject to approval by the Court of
Chancery. At a hearing on September 22, 2008, the Court of Chancery approved the
Settlement Agreement and reserved decision on setting an award of attorney's
fees and expenses for plaintiff's counsel. On October 31, 2008, Master in
Chancery Sam Glasscock III issued a Master's Final Report awarding the
plaintiff's attorneys fees in the amount of $1.2 million together with
out-of-pocket costs in the amount of $0.1 million. We have filed an exception
contesting the Master's Final Report with the Court of Chancery. The award of
attorney fees and out-of-pocket costs will be paid by our Executive Liability
and Organization Reimbursement Policy with National Union Fire Insurance Company
of Pittsburgh, PA.
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by our registered representatives during the
period January 1, 2002 through August 1, 2005. On June 22, 2006, the SEC entered
a formal order of investigation. Pursuant to SEC subpoenas, we have supplied
documents to the SEC and several officers, employees and former employees have
testified before the SEC. We cannot predict whether or not the investigation
will result in an enforcement action. Further, if there were an enforcement
action, we cannot predict whether or not our 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. In accordance with SFAS No. 5 "Accounting for Contingencies," we have
established liabilities for potential losses from such complaints, legal
actions, investigations and proceedings. In establishing these liabilities, our
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, we base our judgments on our knowledge of the situations,
consultations with legal counsel and our 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 our
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,
we cannot predict with certainty the eventual loss or range of loss related to
such matters. If our judgments prove to be incorrect, our 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
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expenses are ultimately determined. 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 awards, settlements and costs in connection with these claims. While we
will vigorously defend 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 our
financial position.
ITEM 1A. RISK FACTORS
Risk factors and uncertainties associated with our business have not changed
materially from those disclosed in Part I, Item 1A of our 2008 Annual Report on
Form 10-K as filed with the SEC on September 26, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Note 8 to Notes to Consolidated Financial Statements herein for a discussion
of the Company's defaults on debt.
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ITEM 6. EXHIBITS
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Principal Financial and Chief Accounting
Officer.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial and Chief Accounting Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GILMAN CIOCIA, INC.
Dated: November 14, 2008 By: /s/ Michael Ryan
------------------------------------------------
Chief Executive Officer
Dated: November 14, 2008 By: /s/ Karen Fisher
------------------------------------------------
Principal Financial and Chief Accounting Officer
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