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, 2009
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes |_| 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 May 6, 2009, 95,868,611 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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GILMAN CIOCIA, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Period Ending March 31, 2009
TABLE OF CONTENTS
Page
Forward-Looking Statements.......................................... 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2009 (unaudited) and
June 30, 2008....................................................... 4
Consolidated Statements of Operations for the Three Months and
Nine Months Ended March 31, 2009 and March 31, 2008 (unaudited)..... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2009 and March 31, 2008 (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................................. 19
Item 4 (T). Controls and Procedures ........................................ 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 34
Item 1A. Risk Factors....................................................... 35
Item 4. Submission of Matters to a Vote of Security Holders ............... 35
Item 6. Exhibits .......................................................... 36
SIGNATURES.................................................................. 37
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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,
revenues, the payment of legacy accounts payable, the outcome or effect of
litigation, arbitration and regulatory investigations, the impact of certain
accounting pronouncements, the effects of our cost-cutting measures, contingent
liability associated with acquisitions, the impact of the economic downturn, 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
March 31, June 30,
2009 2008 (1)
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Assets
Cash & Cash Equivalents $ 889 $ 1,373
Marketable Securities 22 35
Trade Accounts Receivable, Net 2,897 2,739
Receivables from Employees, Net 1,057 690
Prepaid Expenses 628 766
Other Current Assets 236 278
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Total Current Assets 5,729 5,881
Property and Equipment (less accumulated depreciation of $5,986
at March 31, 2009 and $5,638 at June 30, 2008) 1,716 1,555
Goodwill 3,990 3,954
Intangible Assets (less accumulated amortization of $6,724 at
March 31, 2009 and $6,229 at June 30, 2008) 4,702 4,751
Other Assets 484 536
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Total Assets $ 16,621 $ 16,677
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Liabilities and Shareholders' Equity
Accounts Payable $ 2,544 $ 1,669
Accrued Expenses 1,611 1,757
Commission Payable 2,278 3,061
Current Portion of Notes Payable and Capital Leases 417 943
Deferred Income 333 16
Due to Related Parties 1,250 1,155
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Total Current Liabilities 8,433 8,601
Long Term Portion of Notes Payable, Capital Leases and Other 1,489 468
Long Term Portion of Related Party Notes 278 186
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Total Liabilities 10,200 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; 95,869
and 93,819 shares issued at March 31, 2009 and June 30, 2008,
respectively 959 938
Additional Paid in Capital 36,430 36,286
Accumulated Deficit (30,968) (29,802)
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Total Shareholders' Equity 6,421 7,422
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Total Liabilities and Shareholders' Equity $ 16,621 $ 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 For the Nine Months Ended
March 31, March 31,
2009 2008 2009 2008
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Revenues
Financial Planning Services $ 7,321 $ 10,061 $ 25,624 $ 33,843
Tax Preparation and Accounting Fees 3,983 3,776 5,209 4,631
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Total Revenues 11,304 13,837 30,833 38,474
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Operating Expenses
Commissions 5,102 7,255 16,565 22,475
Salaries and Benefits 2,481 2,738 6,650 7,195
General and Administrative 1,235 1,390 3,244 4,111
Advertising 696 1,012 1,365 1,687
Brokerage Fees and Licenses 321 368 1,101 1,002
Rent 756 669 2,071 1,988
Depreciation and Amortization 282 280 845 780
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Total Operating Expenses 10,873 13,712 31,841 39,238
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Income/(Loss) from Operations
Before Other Income and Expenses 431 125 (1,008) (764)
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Other Income/(Expense)
Interest and Investment Income 3 4 14 28
Interest Expense (104) (112) (254) (287)
Other Income, Net 62 243 83 4,962
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Total Other Income/(Expense) (39) 135 (157) 4,703
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Income/(Loss) from Operations
Before Income Taxes 392 260 (1,165) 3,939
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Income Taxes -- -- -- --
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Net Income/(Loss) $ 392 $ 260 $ (1,165) $ 3,939
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Weighted Average Number of Common
Shares Outstanding:
Basic and Diluted Shares 95,869 89,800 94,961 75,206
Basic and Diluted Net
Income/(Loss) Per Share:
Net Income/(Loss) $ 0.00 $ 0.00 $ (0.01) $ 0.05
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,
2009 2008
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Cash Flows from Operating Activities:
Net income/(loss) $ (1,165) $ 3,939
Adjustments to reconcile net income/(loss) to net cash provided
by/(used in) operating activities:
Depreciation and amortization 845 780
Issuance of common stock for debt default penalties, interest and other 15 27
Stock-based compensation 3 --
Allowance for doubtful accounts 80 133
Gain on debt extinguishment and other -- (4,315)
Gain on fair value recognition on accounts payable (23) (384)
Changes in assets and liabilities:
Accounts receivable (194) (305)
Prepaid and other current assets 177 21
Change in marketable securities 13 99
Other assets 28 91
Accounts payable and accrued expenses (102) (1,411)
Deferred income 316 (101)
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Net cash used in operating activities: (7) (1,426)
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Cash Flows from Investing Activities:
Capital expenditures (279) (230)
Cash paid for acquisitions, net of cash acquired and debt incurred (412) (402)
Receivables from employees (316) 152
Due from office sales 23 (195)
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Net cash used in investing activities: (984) (675)
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Cash Flows from Financing Activities:
Proceeds from bank and other loans 1,210 299
Proceeds from capital stock issuance 170 5,668
Proceeds from related party loans 220 --
Payments of related party loans (124) (480)
Payments of bank loans and other loans (946) (3,526)
Payments related to offering costs (23) (227)
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Net cash provided by financing activities: 507 1,734
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Net change in cash and cash equivalents (484) (367)
Cash and cash equivalents at beginning of period 1,373 1,369
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Cash and cash equivalents at end of period $ 889 $ 1,002
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See Notes to 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,
2009 2008
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Cash Flow Information
Cash payments during the year for:
Interest $ 236 $ 411
Supplemental Disclosure of Non-Cash Transactions
Issuance of common stock for services, interest
and other $ 15 $ 27
Payment of debt by issuance of shares $ -- $ 2,309
Equipment acquired under capital leases $ 231 $ 304
Fair value recognition on legacy accounts payable $ (23) $ (384)
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 March 31, 2009, we had 26
company-owned offices operating in three states (New York, New Jersey, and
Florida) and 48 independently operated offices providing financial planning
services in 12 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 March 31, 2009, the
Consolidated Statements of Operations for the three months and nine months ended
March 31, 2009 and 2008 and the Consolidated Statements of Cash Flows for the
nine months ended March 31, 2009 and 2008 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 and nine months ended March 31, 2009 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, including the formal order of
investigation being conducted by the SEC (see Note 4), 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.
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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.
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 and nine
months ended March 31, 2009 and March 31, 2008 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 March 31, 2009 because
of the relatively short-term maturity of these instruments and their market
interest rates.
Contingent Consideration
We entered into four asset purchase agreements during fiscal 2008 and two asset
purchase agreements during fiscal 2009 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 larger portion of our trade receivables
are commissions earned from providing financial planning services that include
securities brokerage services, insurance and financing services. Our remaining
trade receivables consist of revenues recognized for accounting and tax services
provided to businesses and individual tax payers. 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.
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3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("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. We
adopted SFAS No. 157 effective September 30, 2007 and have recorded a $0.1
million allowance against our accounts payable balance as of March 31, 2009
representing our fair value assessment of that account. See also Note 6.
In April 2009, the FASB issued FASB Staff Position ("FSP") FAS 107-1 and APB
28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS
107-1"), which requires disclosure of the fair value of financial instruments
and significant assumptions used to estimate the fair value of financial
instruments in interim and annual financial statements. Previously the
disclosure was required only in annual financial statements. This FSP is
effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. We have adopted FSP
FAS 107-1 effective March 31, 2009.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and
Presentation of Other-Than-Temporary Impairments" ("FSP FAS 115-2 and FAS
124-2"), which makes existing other-than-temporary impairment guidance
pertaining to debt securities more operational, improves the presentation of
other-than-temporary impairments in the financial statements and requires that
the annual disclosures in SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", FSP FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments" be
made for interim periods. This FSP requires an entity to recognize the credit
component of an other-than-temporary impairment of a debt security in earnings
and any remaining portion in the other comprehensive income category of
stockholder's equity, if the entity does not intend to sell the security and it
is more than likely than not that the entity will not have to sell the security
before recovery of its cost basis. This FSP is effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. The adoption of this FSP will not have a material
impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly" ("FSP FAS 157-4"),
which provides guidance for determining fair value under SFAS No. 157 in
inactive or disorderly markets. This FSP is effective for interim periods and
annual periods ending after June 15, 2009 with early adoption permitted for
periods ending after March 15, 2009. The adoption of FSP FAS 157-4 will not have
a material impact on our consolidated financial statements.
In October 2008, the FASB issued 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 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.
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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 statements 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 under SFAS No. 141 until June 30, 2009. In April
2009, the FASB issued FSP FAS 141R-1, "Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies"
("FSP FAS 141R-1"), which amends and clarifies the accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies. We expect SFAS No. 141R and FSP FAS 141R-1 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 attorney's fees in the amount of $1.2 million together with
out-of-pocket costs in the amount of $0.1 million. We filed an exception
contesting the Master's Final Report with the Court of Chancery, which was
denied. The award of attorneys fees and out-of-pocket costs was then paid by our
Executive Liability and Organization Reimbursement Policy with National Union
Fire Insurance Company of Pittsburgh, PA, ending the lawsuit.
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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. On December 12, 2008 we received a Wells Notice from
the SEC in connection with this investigation. Wells Notices were also received
by Prime Capital Services, Inc., a wholly owned subsidiary of the Company,
Michael P. Ryan, our President, Rose M. Rudden, our Chief Compliance Officer and
certain other current and former employees. The Wells Notices provide
notification that the staff of the SEC is considering recommending that the SEC
bring a civil action against the recipients of the Wells Notices to determine
whether they committed possible violations of certain sections of the Securities
Act, the Exchange Act and certain Rules of the Exchange Act. Under the process
established by the SEC, we have the opportunity to seek meetings with SEC staff
to present our case to the SEC and we intend to pursue that opportunity. On
January 20, 2009, our attorneys submitted a response to the Wells Notices
received by the Company, Mr. Ryan, Ms. Rudden, certain other current employees
and one former employee. 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 and omissions insurance 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 March 31, 2009 we accrued $0.3 million for potential settlements, judgments
and awards.
5. EQUITY
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 the
"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 common stock were issued pursuant to the Public Stock
Offering.
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GILMAN CIOCIA INC - 10-Q
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The purchasers in the Investment Purchase 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 had 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. A total of 0.7 million shares
were purchased by the 2007 Investors during the extension period which expired
on December 31, 2008.
On October 31, 2008, we commenced a private offering of our securities pursuant
to SEC Regulation D (the "Offering"). The securities offered for sale in the
Offering were: $1.5 million of notes with interest at 10.0% due on July 1, 2010
(the "Notes") and $0.4 million, or 4.0 million shares of our $0.01 par value
common stock with a price of $0.10 per share (the "Shares"). Through May 6,
2009, $1.2 million of Notes and $0.1 million, or 1.0 million shares, of our
common stock were issued by us pursuant to the Offering.
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 March 31, 2009:
Fair Value Measurements at March 31, 2009
(in thousands) Using Significant Unobservable Inputs
Description (Level 3)
- --------------------------------------------------------------------
Accounts Payable:
Beginning Balance $ 2,637
Allowance (93)
-------
Ending Balance $ 2,544
=======
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 $0.15 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 nine months ended March
31, 2009 and March 31, 2008 was $23.4 thousand and $0.4 million, respectively,
and is recorded in other income, net on our Consolidated Statements of
Operations.
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7. GOODWILL AND OTHER INTANGIBLE ASSETS
A reconciliation of the change in the carrying value of goodwill for the nine
month period ended March 31, 2009 is as follows (in thousands):
Balance at June 30, 2008 $3,954
Adjustment to purchase accounting (1) 12
Fiscal year 2009 acquisitions (see Note 8) 24
------
Balance at March 31, 2009 $3,990
======
(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.
Other intangible assets subject to amortization are comprised of the following
at March 31, 2009 (in thousands):
Customer Lists $ 6,402
Broker-Dealer Registration 100
Non-Compete Contracts 724
House Accounts 600
Administrative Infrastructure 500
Independent Contractor Agreements 3,100
--------
Intangible Costs at Cost 11,426
Less: Accumulated Amortization and Impairment (6,724)
--------
Intangible Assets, Net $ 4,702
========
Amortization expense for each of the three month periods ended March 31, 2009
and March 31, 2008 was $0.2 million. Amortization expense for the nine months
ended March 31, 2009 and March 31, 2008 was $0.5 million and $0.4 million,
respectively.
8. ACQUISITIONS
In January and February 2009, we entered into asset purchase agreements to
purchase two tax preparation, accounting and financial planning businesses. In
each case, the purchase price is equal to a percentage of gross revenue
generated from the preparation of tax returns, accounting services and financial
planning revenues from clients generated during a one to four-year period.
Commencing on March 31, 2009 and each 90-day period thereafter, we will pay the
seller an installment payment based on a percentage of gross revenues generated
during a one to four-year period after the closing date less all prior payments
received. Payments made as of March 31, 2009 totaled $0.1 million in the
aggregate. In accordance with SFAS No. 141 "Business Combinations" no liability
will be recorded until the contingency is determinable beyond a reasonable
doubt. Based on an estimate of these future revenues, we expect we will have a
contingent liability of $0.7 million, subject to change based on actual future
revenues earned.
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9. DEBT
On March 31, 2009, our outstanding principal balance of $0.1 million with
Wachovia Bank, National Association ("Wachovia") was paid in full.
The securities offered for sale in the Offering on October 31, 2008 (see Note 5)
are: $1.5 million of Notes and $0.4 million, or 4.0 million Shares. Through May
6, 2009, $1.2 million of Notes and $0.1 million, or 1.0 million Shares were
issued by us pursuant to the Offering.
10. STOCK BASED COMPENSATION
We account for stock-based compensation in accordance with SFAS No. 123-R,
"Share-Based Payment" ("SFAS No. 123-R") using a modified prospective
application, as permitted under SFAS No. 123-R. 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 nine months ended March 31, 2009
were as follows:
Weighted
Average
Shares Exercise Price
---------------------------------
Outstanding, June 30, 2008 80,000 $ 1.04
Granted 2,235,500 0.17
Exercised -- --
Expired (70,000) 0.33
Canceled -- --
---------------------------------
Outstanding, March 31, 2009 2,245,500 $ 0.20
Exercisable, March 31, 2009 10,000 $ 6.00
The range of exercise prices for the outstanding options at March 31, 2009 is
between $0.10 and $6.00.
On October 3, 2008, pursuant to the Company's 2007 Stock Incentive Plan (the
"2007 Plan"), we granted to the independent members of our Board of Directors
and James Ciocia, Chairman of the Board, 50,000 common stock options each with
an exercise price of $0.10 and a five-year term which vest as to 20.0% of the
shares annually commencing one year after the date of grant and which have a
Black-Scholes value at the time of grant determined based on the closing price
of our common stock on the date of grant. Additionally, on October 10, 2008, we
issued to these same board members 50,000 shares each of restricted common
stock.
On February 20, 2009, pursuant to the 2007 Plan, we granted to certain of our
employees 1.9 million common stock options with an exercise price of $0.18 and a
five-year term which vest as to 20.0% of the shares annually commencing one year
after the date of grant and which have a Black-Scholes value at the time of
grant determined based on the closing price of our common stock on the date of
grant.
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11. ACCRUED EXPENSES
Accrued expenses consist of the following:
(in thousands) March 31, June 30,
2009 2008
-------------------
Accrued compensation $ 533 $ 237
Accrued bonus -- 96
Accrued related party compensation and bonus 101 196
Accrued vacation 111 128
Accrued settlement fees 116 122
Accrued audit fees & tax fees 178 160
Accrued interest 32 18
Accrued other 460 558
Accrued acquisitions short term 80 242
-------------------
Total Accrued Expenses $1,611 $1,757
===================
12. RELATED PARTY TRANSACTIONS
As of June 30, 2008, Prime Partners, Inc. ("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 a $1.0 million note from the Company to Prime
Partners dated January 31, 2008 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 10.0% 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 was amended on January 30,
2009. The New Trust Note provides for 10.0% 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 was to be paid to the
Trust as follows: $117.5 thousand on March 31, 2009, April 30, 2009, May 31,
2009, and June 30, 2009. As of May 8, 2009, the New Trust Note was amended to
extend the full principal payment of $0.5 million to 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 debt principal that we are permitted to pay until the
New Trust Note is paid in full is: the Wachovia debt which was paid in full on
March 31, 2009, 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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On October 30, 2008, Michael Ryan, our President and a Director, and Carole
Enisman, our Executive Vice President of Operations, each purchased 250,000
Shares of our common stock at $0.10 per Share pursuant to the Offering in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act and Rule 506 of Regulation D. See Note 5.
On November 28, 2008, we issued a promissory note in the amount of $50.0
thousand to Ted Finkelstein, our Vice President and General Counsel. The note
provides for 10.0% interest to be paid monthly with the principal balance to be
paid on or before June 30, 2009.
On December 3, 2008, three trusts, of which James Ciocia, our Chairman of the
Board of Directors, is a trustee, purchased an aggregate of $0.3 million of the
Notes issued pursuant to the Offering in reliance upon the exemption from
registration in Rule 506 of Regulation D. See Note 5.
On January 27, 2009, Carole Enisman, our Executive Vice President of Operations,
purchased a $0.2 million Note pursuant to the Offering. See Note 5.
At March 31, 2009, the aggregate amount we owed to related parties was $1.5
million.
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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. The two channels leverage off each other, improving economies of
scale 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 the 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 from its strategic marketing
relationships with certain product sponsors ("PCS Marketing") 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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GILMAN CIOCIA INC - 10-Q
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We also provide financial planning services through approximately 48
independently owned and operated offices in 12 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 three months ended March 31, 2009, approximately 35.0% of our revenues
were earned from tax preparation and accounting services and approximately 65.0%
were earned from all financial planning and related services, of which
approximately 71.0% were earned from brokerage commissions, 23.0% from asset
management, 3.0% from insurance, 2.0% from lending services and 1.0% from PCS
Marketing.
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 March 31, 2009, we had net income of $0.4 million
compared to net income of $0.3 million during the three months ended March 31,
2008. Although financial planning revenues were lower by $2.7 million versus the
same period last year, corresponding commission expense was also lower by $2.2
million as a result. Furthermore, to help mitigate the impact of lower financial
planning revenues, we have been able to reduce most of our other operating costs
by $0.7 million. We have also seen favorable increases in tax preparation and
accounting services revenue year over year due to an increase in average client
fees and due to two acquisitions that were made during the three months ended
March 31, 2009.
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.
We believe that the significant turmoil in the financial markets that began in
2008 and which is continuing and the related erosion of investor confidence will
continue to negatively impact our operating results for the remainder of fiscal
2009 and into fiscal 2010. 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. During the first
nine months of 2009, we continued to keep a tight control on operating expenses.
We remain committed, however, to investing in the continuing development of our
network of financial representatives and to acquiring additional 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 March 31, 2009, assets under AFP
management decreased 2.7%, or $12.6 million, to $449.2 million, from $461.8
million as of December 31, 2008. This decrease is mostly attributable to market
declines. As of March 31, 2009, total Company securities under custody were $3.1
billion, down 3.1%, or $98.4 million from December 31, 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
- ------------------ ------------------------------------------------
3/31/2009 $ 229,940 $ 219,233 $ 449,173
12/31/2008 $ 269,566 $ 192,235 $ 461,801
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 securities under
custody. The numbers do not include fixed annuities. In the current market
environment we are seeing an increase in fixed annuity transactions.
(in thousands) Total Company
Securities Under
Market Value as of Custody
- ------------------ ----------------
3/31/2009 $3,067,632
12/31/2008 $3,166,001
9/30/2008 $3,796,835
6/30/2008 $4,231,803
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RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2008
Revenue
The following table presents revenue by product line and brokerage revenue by
product type:
For the Three Months Ended March 31,
--------------------------------------------------------------
% of Total % of Total
(in thousands) % Change Revenue Revenue
Consolidated Revenue Detail 2009 2008 2009-2008 2009 2008
--------------------------------------------------------------
Revenue by Product Line
Brokerage Commissions Revenue $ 5,196 $ 7,040 -26.2% 46.0% 50.9%
Insurance Commissions Revenue 221 276 -19.9% 1.9% 2.0%
Advisory Fees 1,691 2,547 -33.6% 15.0% 18.4%
Tax Preparation and Accounting Fees 3,983 3,776 5.5% 35.2% 27.3%
Lending Services 109 30 263.3% 1.0% 0.2%
Marketing Revenue 104 168 -38.1% 0.9% 1.2%
--------------------------------------------------------------
Total Revenue $ 11,304 $ 13,837 -18.3% 100.0% 100.0%
==============================================================
Brokerage Commissions Revenue
by Product Type
Mutual Funds $ 667 $ 1,066 -37.4% 5.9% 7.7%
Equities, Bonds & Unit Investment Trusts 249 207 20.3% 2.2% 1.5%
Annuities 2,408 3,350 -28.1% 21.3% 24.2%
Trails 1,359 2,088 -34.9% 12.0% 15.1%
All Other Products 513 329 55.9% 4.6% 2.4%
--------------------------------------------------------------
Brokerage Commissions Revenue $ 5,196 $ 7,040 -26.2% 46.0% 50.9%
==============================================================
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 March 31, 2009 and 2008:
For Three Months Ended March 31,
-------------------------------------------------
% of % of
(in thousands) 2009 Total 2008 Total
- --------------------------------------------------------------------------
Company-Owned Offices $ 3,596 49.1% $ 4,183 41.6%
Independent Offices 3,725 50.9% 5,878 58.4%
--------- ---------
Total $ 7,321 $ 10,061
========= =========
Our total revenues for the three months ended March 31, 2009 were $11.3 million
compared to $13.8 million for the three months ended March 31, 2008, a decrease
of $2.5 million or 18.3%. Our total revenues for the three months ended March
31, 2009 consisted of $7.3 million for financial planning services and $4.0
million for tax preparation and accounting services. Financial planning services
represented approximately 65.0% and tax preparation and accounting services
represented approximately 35.0% of our total revenues during the three months
ended March 31, 2009. Our 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 fees and accounting services
represented approximately 27.0% of our total revenues during the three months
ended March 31, 2008.
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GILMAN CIOCIA INC - 10-Q
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For the three months ended March 31, 2009, financial planning revenue was $7.3
million compared to $10.0 million for the same period last year. This decrease
in financial planning revenue occurred mostly on the independent channel as a
result of continued market declines during the three months ended March 31,
2009. For the first time since the three months ended December 31, 2006, we have
realized a quarter over quarter decline in our recurring revenue (trails and
advisory fees) as a percentage of total financial planning revenue. For the
three months ended March 31, 2009, revenues from trails and advisory fees
decreased to $3.1 million, down $1.5 million from $4.6 million for the three
months ended March 31, 2008, representing a 34.2% decrease in recurring revenue.
The decrease in recurring revenues is mostly attributable to lower assets under
management and securities under custody at December 31, 2008, at which time fees
are determined and revenue is recognized during the three months ended March 31,
2009, compared with the same period last year. Most of the reduction of assets
under management and securities under custody is attributable to market declines
realized during the three months ended December 31, 2008. Although our assets
under management and securities under custody are lower at March 31, 2009, we
are committed to our strategy of growing our recurring revenues in an effort to
mitigate any negative impact a volatile market may have on our other revenue
streams.
Tax preparation and accounting services revenue was $4.0 million for the three
months ended March 31, 2009 compared to $3.8 million for the same period last
year. The majority of this increase in tax preparation and accounting services
revenue is attributable to the additional revenue generated from the two tax
preparation and accounting businesses acquired in the third quarter of fiscal
2009 and increases in average client fees, offset in part by net client
attrition.
Expenses
Our total operating expenses for the three months ended March 31, 2009 were
$10.9 million, down $2.8 million or 20.7%, compared to $13.7 million for the
three months ended March 31, 2008. This decrease is primarily due to decreased
commission expense resulting from the revenue declines, decreased salaries and
benefits, decreased advertising expenses and decreased general and
administrative expenses as we continue our efforts to control and reduce
expenses. These savings were offset slightly by increased rent as we incur
higher lease costs as a result of relocating a number of existing offices to
more prominent office locations.
Commission expense was $5.1 million for the three months ended March 31, 2009,
compared with $7.3 million for the same period last year. Commission expense
decreased $2.2 million 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 approximately 61.0% and 67.0% for the three
months ended March 31, 2009 and March 31, 2008, 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
41.6% of the total financial planning revenue.
Salaries, which consist primarily of salaries, related payroll taxes and
employee benefit costs, decreased by $0.3 million, or 9.4% for the three months
ended March 31, 2009 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.
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General and administrative expenses decreased $0.2 million or 11.2% in the three
months ended March 31, 2009 compared with the same period last year. This
decrease is primarily attributable to cost savings of $0.1 million in
professional expenses resulting from our effort to control expenses by
processing more customer claims in-house as well as an overall 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 control our operating
expenses.
Advertising expense decreased by $0.3 million, or 31.3%, for the three months
ended March 31, 2009 compared with the same period last year. This decrease is
primarily attributable to our efforts to find more cost effective advertising
channels to grow brand awareness.
Brokerage fees and licenses decreased $46.7 thousand for the three months ended
March 31, 2009 compared with the same period last year. This decrease is mostly
due to the decline in market values of accounts under management with third
party money managers in AFP.
Rent was 13.0% higher for the three months ended March 31, 2009 compared with
the same period last year. This is mostly the result of acquiring one stand
alone tax preparation, accounting and financial planning business and opening a
new location during fiscal 2009, along with higher lease costs as a result of
relocating a number of existing offices to more prominent office locations,
offset in part by the closing of two locations during fiscal 2009.
Depreciation and amortization expense was relatively unchanged for the three
months ended March 31, 2009 compared with the same period last year due to a
decline in depreciation expense, as certain assets became fully depreciated,
offset with higher amortization expense as a result of our four acquisitions
made during the fiscal year ended June 30, 2008.
Our income from operations before other income and expense increased $0.3
million for the three months ended March 31, 2009 compared to the three months
ended March 31, 2008. The increase in income from operations was primarily
attributable to increased tax preparation and accounting services revenue and
lower operating expenses. Financial planning revenues was also lower due to
market conditions and representative attrition, but was mostly offset by
corresponding declines in commission expense.
Total other income/(expense) for the three months ended March 31, 2009 was an
expense of $39.0 thousand compared to income of $0.1 million for the three
months ended March 31, 2008. This decrease in other income/(expense) was
primarily due to a reduction in income related to the fair value measurement of
our accounts payable.
Our net income for the three months ended March 31, 2009 was $0.4 million, or
$0.00 per basic and diluted share, compared with net income of $0.3 million, or
$0.00 per basic and diluted share for the three months ended March 31, 2008. The
increase in net income was primarily attributable to increased tax preparation
and accounting services revenue, decreased commission expense due to declines in
financial planning revenues, and lower operating expenses. Financial planning
revenue was down mostly due to declines in market conditions and representative
attrition.
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RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2009 COMPARED TO NINE MONTHS
ENDED MARCH 31, 2008
Revenue
The following table presents revenue by product line and brokerage revenue by
product type:
For the Nine Months Ended March 31,
--------------------------------------------------------------
% of Total % of Total
(in thousands) % Change Revenue Revenue
Consolidated Revenue Detail 2009 2008 2009-2008 2009 2008
--------------------------------------------------------------
Revenue by Product Line
Brokerage Commissions Revenue $ 18,173 $ 24,168 -24.8% 58.9% 62.8%
Insurance Commissions Revenue 914 1,120 -18.4% 3.0% 2.9%
Advisory Fees 6,018 7,711 -22.0% 19.5% 20.1%
Tax Preparation and Accounting Fees 5,209 4,631 12.5% 16.9% 12.0%
Lending Services 254 198 28.3% 0.8% 0.5%
Marketing Revenue 265 646 -59.0% 0.9% 1.7%
--------------------------------------------------------------
Total Revenue $ 30,833 $ 38,474 -19.9% 100.0% 100.0%
==============================================================
Brokerage Commissions Revenue
by Product Type
Mutual Funds $ 2,298 $ 3,323 -30.8% 7.4% 8.6%
Equities, Bonds & Unit Investment Trusts 760 865 -12.1% 2.5% 2.3%
Annuities 8,829 12,774 -30.9% 28.6% 33.2%
Trails 4,893 6,276 -22.0% 15.9% 16.3%
All Other Products 1,393 930 49.8% 4.5% 2.4%
--------------------------------------------------------------
Brokerage Commissions Revenue $ 18,173 $ 24,168 -24.8% 58.9% 62.8%
==============================================================
The following table sets forth a breakdown of our consolidated financial
planning revenue by company-owned offices and independent offices for the nine
months ended March 31, 2009 and 2008:
For Nine Months Ended March 31,
-------------------------------------------------
% of % of
(in thousands) 2009 Total 2008 Total
- --------------------------------------------------------------------------
Company-Owned Offices $ 12,658 49.4% $ 15,076 44.5%
Independent Offices 12,966 50.6% 18,767 55.5%
--------- ---------
Total $ 25,624 $ 33,843
========= =========
Our total revenues for the nine months ended March 31, 2009 were $30.8 million
compared to $38.5 million for the nine months ended March 31, 2008, a decrease
of $7.6 million or 19.9%. Our total revenues for the nine months ended March 31,
2009 consisted of $25.6 million for financial planning services and $5.2 million
for tax preparation and accounting services. Financial planning services
represented approximately 83.0% and tax preparation and accounting services
represented approximately 17.0% of our total revenues during the nine months
ended March 31, 2009. Our 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 fees and accounting services
represented approximately 12.0% of our total revenues during the nine months
ended March 31, 2008.
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For the nine months ended March 31, 2009, financial planning revenue was $25.6
million compared to $33.8 million for the same period last year. This decrease
in financial planning revenue is mostly the result of financial planner
attrition mostly on our independent channel and decreased production mostly on
the independent channel resulting from market declines during the nine months
ended March 31, 2009. 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 $5.2 million for the nine
months ended March 31, 2009 compared to $4.6 million for the same period last
year. The majority 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, the two tax preparation and accounting
businesses that we acquired in the third quarter of fiscal 2009 and from an
increase in average client fees, offset in part by net client attrition.
For the nine months ended March 31, 2009, revenues from trails and advisory fees
decreased to $10.9 million, down $3.1 million from $14.0 million for the nine
months ended March 31, 2008, representing a 22.0% decrease in recurring revenue
(trails and advisory fees). The decrease in recurring revenues is mostly
attributable to lower assets under management and securities under custody at
June 30, 2008, September 30, 2008, and December 31, 2008 at which time fees are
determined and revenue is recognized during the nine months ended March 31,
2009, compared with the same period last year. Most of the reduction of assets
under management and securities under custody is attributable to market declines
realized during the nine months ended December 31, 2008.
Expenses
Our total operating expenses for the nine months ended March 31, 2009 were $31.8
million, down $7.4 million or 18.8%, compared to $39.2 million for the nine
months ended March 31, 2008. 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 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, rent as we incur higher lease costs as a result of
relocating a number of existing offices to more prominent office locations, and
increased depreciation and amortization related to the intangible assets
acquired through acquisitions during our fiscal year ended June 30, 2008.
Commission expense was $16.6 million for the nine months ended March 31, 2009,
compared with $22.5 million for the same period last year. Commission expense
decreased $5.9 million 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 approximately 62.0% and 65.0% for the nine
months ended March 31, 2009 and March 31, 2008, respectively. This decrease as a
percentage of revenue is attributable to financial planning revenue generated
through our employee channel representing 49.4% 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
44.5% of the total financial planning revenue.
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Salaries, which consist primarily of salaries, related payroll taxes and
employee benefit costs, decreased by $0.5 million, or 7.6% in the nine months
ended March 31, 2009 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 $0.9 million or 21.1% in the nine
months ended March 31, 2009 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 $0.3
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 $0.2 million reduction in expenses resulted mostly from our continued
efforts to control operating expenses.
Advertising expense decreased by $0.3 million for the nine months ended March
31, 2009 compared with the same period last year. This decrease is primarily
attributable to our efforts to find more cost effective advertising channels to
grow brand awareness.
Brokerage fees and licenses increased $0.1 million for the nine months ended
March 31, 2009 compared with the same period last year. This increase is due to
more trades going through brokerage accounts versus direct applications,
partially offset by lower fees due to the decline in market values for accounts
under management with third party money managers in AFP.
Rent was 4.2% higher for the nine months ended March 31, 2009 compared with the
same period last year. This is mostly the result of acquiring one stand alone
tax preparation, accounting and financial planning business and opening a new
location during fiscal 2009, along with higher lease costs as a result of
relocating a number of existing offices to more prominent office locations,
offset in part by the closing of two locations during fiscal 2009.
Depreciation and amortization expense was 8.3% higher for the nine months ended
March 31, 2009 compared with the same period last year. This is mostly
attributable to increased amortization expense related to the intangible assets
acquired through acquisitions during our fiscal year ended June 30, 2008.
Our loss from operations before other income and expense increased $0.2 million
for the nine months ended March 31, 2009 compared to the nine months ended March
31, 2008. This increase in loss was primarily attributable to decreased
financial planning revenue due to declines in market conditions and
representative attrition, partially offset by increased tax preparation and
accounting services revenue, decreased commission expense due to declines in
financial planning revenues and by our efforts to control operating expenses.
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Total other income/(expense) for the nine months ended March 31, 2009 was an
expense of $0.2 million compared to income of $4.7 million for the nine months
ended March 31, 2008. 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 the sale of
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.
Our net loss for the nine months ended March 31, 2009 was $1.2 million, or
$(0.01) per basic and diluted share, compared with net income of $3.9 million,
or $0.05 per basic and diluted share for the nine months ended March 31, 2008.
This decline was primarily attributable to decreased financial planning revenue
due to declines in market conditions and representative attrition, and reduced
one-time other income realized in fiscal 2007 related to the extinguishment of
Company debt owed to Met Life and related parties, partially offset by increased
tax preparation and accounting services revenue, decreased commission expense
due to declines in financial planning revenues and by controlling expenses.
Weighted average shares outstanding increased by 19.8 million shares compared to
the prior period, mainly due to the sale of 80.0 million shares of common stock
in the Investment Purchase Closing and the Private Placement Closing on August
20, 2007.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 2009, we realized a net loss of $1.2
million and at March 31, 2009 we had a working capital deficit of $2.7 million.
At March 31, 2009 we had $0.9 million of cash and cash equivalents and $2.9
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 March 31, 2009 we were in compliance
with this regulation.
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 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.
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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. A total of 0.7 million shares were purchased by the 2007
Investors during the extension period which expired on December 31, 2008.
On October 31, 2008, we commenced a private offering of our securities pursuant
to SEC Regulation D (the "Offering"). The securities offered for sale in the
Offering were: $1.5 million of notes with interest at 10.0% due on July 1, 2010
(the "Notes") and $0.4 million, or 4.0 million shares of our $0.01 par value
common stock with a price of $0.10 per share (the "Shares"). Through May 6,
2009, $1.2 million of Notes and $0.1 million, or 1.0 million shares, of our
common stock were issued by us pursuant to the Offering.
As of June 30, 2008, Prime Partners, Inc. ("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 a $1.0 million note from the Company to Prime
Partners dated January 31, 2008 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 10.0% 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 was amended on January 30,
2009. The New Trust Note provides for 10.0% 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 was to be paid to the
Trust as follows: $117.5 thousand on March 31, 2009, April 30, 2009, May 31,
2009, and June 30, 2009. As of May 8, 2009, the New Trust Note was amended to
extend the full principal payment of $0.5 million to 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 debt principal that we are permitted to pay until the
New Trust Note is paid in full is: the Wachovia debt which was paid in full on
March 31, 2009, 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.
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 March 31, 2009 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 Offering and by pursuing financing by third
parties. As a result of concern about the stability of the markets, generally
many traditional lenders have reduced and, in some cases, ceased to provide
funding. We continue to actively pursue non-traditional financing. However,
there can be no assurance that we will be successful in raising this type of
capital. We are working to minimize the impact the current economic conditions
have on our revenues by aggressively recruiting and retaining sophisticated
representatives who can offer diversified products that continue to meet the
needs of their clients despite changing market conditions. Furthermore, we also
work to control our operating expenses.
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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.
Our net cash used in operating activities was $7.0 thousand for the nine months
ended March 31, 2009, compared with net cash used in operating activities of
$1.4 million for the nine months ended March 31, 2008. The decrease in net cash
used in operating activities was primarily attributable to paying down a large
portion of accounts payable in the nine months ended March 31, 2008 due to the
cash provided by the 2007 Investors.
Net cash used in investing activities was $1.0 million for the nine months ended
March 31, 2009 compared with net cash used in investing activities of $0.7
million for the nine months ended March 31, 2008. This increase in cash used in
investing activities was attributable to advances made to registered
representatives offset in part by cash collected for prior year's office sales.
Net cash provided by financing activities was $0.5 million for the nine months
ended March 31, 2009 compared with net cash provided by financing activities of
$1.7 million for the nine months ended March 31, 2008. This decrease in cash
provided by financing activities was due primarily to proceeds from the
Investment Purchasers Closing and Private Placement Closing on August 20, 2007,
partially offset by the proceeds of the Offering during fiscal year 2009.
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").
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Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("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. We
adopted SFAS No. 157 effective September 30, 2007 and have recorded a $0.1
million allowance against our accounts payable balance as of March 31, 2009
representing our fair value assessment of that account.
In April 2009, the FASB issued FASB Staff Position ("FSP") FAS 107-1 and APB
28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS
107-1"), which requires disclosure of the fair value of financial instruments
and significant assumptions used to estimate the fair value of financial
instruments in interim and annual financial statements. Previously the
disclosure was required only in annual financial statements. This FSP is
effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. We have adopted FSP
FAS 107-1 effective March 31, 2009.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and
Presentation of Other-Than-Temporary Impairments" ("FSP FAS 115-2 and FAS
124-2"), which makes existing other-than-temporary impairment guidance
pertaining to debt securities more operational, improves the presentation of
other-than-temporary impairments in the financial statements and requires that
the annual disclosures in SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", FSP FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments" be
made for interim periods. This FSP requires an entity to recognize the credit
component of an other-than-temporary impairment of a debt security in earnings
and any remaining portion in the other comprehensive income category of
stockholder's equity, if the entity does not intend to sell the security and it
is more than likely than not that the entity will not have to sell the security
before recovery of its cost basis. This FSP is effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. The adoption of this FSP will not have a material
impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly" ("FSP FAS 157-4"),
which provides guidance for determining fair value under SFAS No. 157 in
inactive or disorderly markets. This FSP is effective for interim periods and
annual periods ending after June 15, 2009 with early adoption permitted for
periods ending after March 15, 2009. The adoption of FSP FAS 157-4 will not have
a material impact on our consolidated financial statements.
In October 2008, the FASB issued 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 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.
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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 statements 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 under SFAS No. 141 until June 30, 2009. In April
2009, the FASB issued FSP FAS 141R-1, "Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies"
("FSP FAS 141R-1"), which amends and clarifies the accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies. We expect SFAS No. 141R and FSP FAS 141R-1 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 March 31, 2009, our Chief Executive Officer and Principal
Financial and Chief Accounting Officer conclude that our disclosure controls and
procedures are effective.
Changes in Internal Controls
During the three months ended March 31, 2009, 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 filed an exception
contesting the Master's Final Report with the Court of Chancery, which was
denied. The award of attorney fees and out-of-pocket costs was then paid by our
Executive Liability and Organization Reimbursement Policy with National Union
Fire Insurance Company of Pittsburgh, PA, ending the lawsuit.
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. On December 12, 2008 we received a Wells Notice from
the SEC in connection with this investigation. Wells Notices were also received
by Prime Capital Services, Inc., a wholly owned subsidiary of the Company,
Michael P. Ryan, our President, Rose M. Rudden, our Chief Compliance Officer and
certain other current and former employees. The Wells Notices provide
notification that the staff of the SEC is considering recommending that the SEC
bring a civil action against the recipients of the Wells Notices to determine
whether they committed possible violations of certain sections of the Securities
Act, the Exchange Act and certain Rules of the Exchange Act. Under the process
established by the SEC, we have the opportunity to seek meetings with SEC staff
to present our case to the SEC and we intend to pursue that opportunity. On
January 20, 2009, our attorneys submitted a response to the Wells Notices
received by the Company, Mr. Ryan, Ms. Rudden, certain other current employees
and one former employee. 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 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, including the formal order of investigation being
conducted by the SEC, 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
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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. PCS has errors and omissions
insurance 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS
The Company held its annual meeting of stockholders on January 22, 2009. At this
meeting:
1. The stockholders elected James Ciocia and Michael Ryan as Class B directors.
As Class B directors, Mr. Ciocia and Mr. Ryan will serve until the Annual
Meeting of Stockholders with respect to the fiscal year ending June 30, 2011,
and in each case until a successor is elected and qualified or until his earlier
death, resignation or removal. The following directors were not up for election
at the 2009 Annual Meeting of Stockholders and continue to serve on our board:
John Levy, Nelson Obus and Allan Page (Class C directors, each for a term
expiring in 2009) and Edward Cohen and Frederick Wasserman (Class A directors,
each for a term expiring in 2010).
2. The stockholders ratified the appointment of Sherb & Co., LLP as the
Company's independent auditors for the fiscal year ending June 30, 2009.
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:
James Ciocia as Class B Director 63,522,105 -- 12,871,590 --
Michael Ryan as Class B Director 63,522,906 -- 12,870,789 --
2. Ratify the appointment of Sherb & Co., LLP as the Company's
independent auditors for the fiscal year
ending June 30, 2009 75,706,339 348,536 -- 338,820
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GILMAN CIOCIA INC - 10-Q
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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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GILMAN CIOCIA INC - 10-Q
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SIGNATURES
Pursuant to the requirements 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, 2009 By: /s/ Michael Ryan
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Chief Executive Officer
Dated: May 15, 2009 By: /s/ Karen Fisher
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Principal Financial and Chief Accounting Officer
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