Gilman & Ciocia, Inc - Recent Material Event
<![CDATA[GILMAN + CIOCIA, INC.
REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2007
TABLE OF CONTENTS
PART I
Item 1. Business ........................................................ 3
Item 1A. Risk Factors .................................................... 8
Item 2. Properties ...................................................... 13
Item 3. Legal Proceedings................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders .............. 14
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities ................ 16
Item 6. Selected Financial Data........................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....... 27
Item 8. Financial Statements and Supplementary Data ..................... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................. 57
Item 9A. Controls and Procedures .......................................... 57
Item 9B. Other Information................................................. 57
PART III
Item 10. Directors, Executive Officers and Corporate Governance ........... 58
Item 11. Executive Compensation ........................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters ....................... 69
Item 13. Certain Relationships and Related Transactions and
Director Independence ............................................ 72
Item 14. Principal Accountant Fees and Services............................ 73
PART IV
Item 15. Exhibits and Financial Statement Schedules........................ 75
SIGNATURES................................................................... 77
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Gilman + Ciocia, Inc. (together with its wholly owned subsidiaries, the
"Company") was founded in 1981 and is incorporated under the laws of the State
of Delaware. The Company provides federal, state and local tax preparation
services to individuals, predominantly in the middle and upper income tax
brackets, accounting services to small and midsize companies and financial
planning services, including securities brokerage, investment management
services, insurance and financing services. As of June 30, 2007, the Company had
28 offices operating in four states (New York, New Jersey, Florida and
Pennsylvania).
The Company office financial planning clients generally are introduced to the
Company through the Company's tax return preparation services, accounting
services and educational workshops. The Company believes that its tax return
preparation and accountings services are inextricably intertwined with its
financial planning activities in the Company offices and that overall
profitability will depend, in part, on the two channels leveraging off each
other since many of the same processes, procedures and systems support sales
from both channels. Accordingly, management views and evaluates the Company as
one segment.
The Company also provides financial planning services through approximately 66
independently owned and operated offices in twelve states. The Company benefits
from economies of scale associated with the aggregate production of both Company
offices and independently owned offices.
All of the Company's financial planners are employees or independent contractors
of the Company and registered representatives of Prime Capital Services, Inc.
("PCS"), a wholly owned subsidiary of the Company. PCS conducts a securities
brokerage business providing regulatory oversight and products and sales support
to its registered representatives, who sell investment products and provide
services to their 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") formerly known as the
National Association of Securities Dealers, Inc. ("NASD"). The Company also has
a wholly owned subsidiary, Asset & Financial Planning, Ltd. ("AFP"), which is
registered with the SEC as an investment advisor. Almost all of the Company
financial planners are also authorized agents of insurance underwriters. The
Company has the capability of processing insurance business through PCS and
Prime Financial Services, Inc. ("PFS", a wholly owned subsidiary), which are
licensed insurance brokers, as well as through other licensed insurance brokers.
While the Company is also a licensed mortgage broker in the states of New York
and Pennsylvania and, through GC Capital Corporation, a wholly owned subsidiary
of the Company, is a licensed mortgage broker in the State of Florida, the
Company derived approximately 1.0% of its revenue in fiscal 2007* from
financing services.
In fiscal 2007, approximately 90.0% of the Company's revenues were derived from
commissions and fees from financial planning services, including the Company's
financing and insurance activities, and approximately 10.0% were derived from
fees for tax preparation and accounting services.
A majority of the financial planners located in Company offices are also tax
preparers and/or accountants. The Company's tax preparation business is
conducted predominantly in February, March and April. During the 2007 tax
season, the Company prepared approximately 22,900 United States tax returns.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K can be obtained, free of charge, on the Company's
web site at www.gilcio.com.
STRATEGY
Key elements to achieve the Company's corporate objectives include:
Overall Strategy. The Company believes that its recurring tax return preparation
and accounting services are inextricably intertwined with its financial planning
services. Clients often consider other aspects of their financial needs, such as
investments, insurance, retirement and estate planning, when having their tax
returns and business records prepared by the Company. The Company believes that
this combination of services to its recurring tax and accounting clients has
created, and will continue to create, optimum revenue for the Company.
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* Fiscal years are denominated by the year in which they end. Accordingly,
fiscal 2007 refers to the year ended June 30, 2007.
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Expand its client base through acquisitions. The Company is actively pursuing
acquisitions of tax preparation and accounting firms to increase its client base
and accounting business. In an effort to facilitate identifying potential
acquisitions, the Company has launched an advertising campaign involving
targeted direct mail, a customized web site and inbound and outbound
telemarketing to prospect for leads. The Company believes that in addition to
the tax preparation and accounting services revenue generated from the acquired
practices, there are additional opportunities to increase financial planning
revenue by providing financial planning services to many of the acquired
clients.
Recruiting financial planners. The Company is actively recruiting financial
planners. These efforts are supported by advertising, targeted direct mail, and
inbound and outbound telemarketing.
Increase brand awareness; expand business presence. The Company plans to
increase its brand recognition to attract new clients and financial planners.
The Company is executing a comprehensive marketing plan to attract more clients
and experienced financial planners, build market awareness, educate consumers
and maintain customer loyalty through direct marketing, advertising through its
marketing department, use of its web site, various public relations programs,
live seminars, print advertising, radio, and television.
Provide value-added services to its clients. The Company provides its clients
with access to a pool of well-trained financial planners and access to
up-to-date market and other financial information. The Company provides its
representatives with information and training regarding current financial
products and services.
Create technologically innovative solutions to satisfy client needs. The Company
continues to pursue additional technologies to service the rapidly evolving
financial services industry.
Build recurring revenue. Over the past three years, the Company has focused its
financial planning efforts on building its fee based investment advisory
business. The Company believes that fee based investment advisory services may
be better for certain clients. While these fees generate substantially lower
first year revenue than most commission products, the recurring nature of these
fees provides a platform for accelerating future revenue growth.
Provide technological solutions to its employee and independent representatives.
The Company believes that it is imperative that it continues to possess
state-of-the-art technology so that its employees and independent registered
representatives can effectively facilitate, measure and record business activity
in a timely, accurate and efficient manner. By continuing its commitment to
provide a highly capable technology platform to process business, the Company
believes that it can achieve economies of scale and potentially reduce the need
to hire additional personnel.
Expand its product and service offering through strategic relationships. The
Company continues to pursue business alliances, capitalize on cross-selling
opportunities, create operational efficiencies and further enhance its name
recognition.
TAX RETURN PREPARATION AND ACCOUNTING SERVICES
The Company prepares federal, state and local income tax returns for
individuals, predominantly in the middle and upper income tax brackets and
provides accounting services to small and midsize companies. The United States
Internal Revenue Service (the "IRS") reported that more than 132 million
individual 2006 federal income tax returns were filed in the United States
through July 27, 2007. According to the IRS, a paid preparer completes
approximately 71% of the tax returns e-filed in the United States each year.
Among paid preparers, H&R Block, Inc. ("H&R Block") dominates the low-cost tax
preparation business with approximately 12,500 offices located throughout the
United States. According to information released by H&R Block, H&R Block
prepared an aggregate of approximately 20.3 million United States tax returns
during the 2007 tax season. The remainder of the tax preparation industry is
highly fragmented and includes regional tax preparation services, accountants,
attorneys, small independently owned companies, and financial service
institutions that prepare tax returns as ancillary parts of their business. The
Company believes that H&R Block's dominance as the industry leader and the
fragmentation of the rest of the industry represents a very attractive growth
opportunity for the Company.
The Company believes that it offers clients a cost effective and proactive tax
preparation and tax planning service compared to services provided by H&R Block,
accountants and many independent tax preparers. The Company's volume allows it
to provide uniform services at competitive prices. In addition, as compared to
certain of its competitors that are open only during tax season, all of the
Company's offices are open year round to provide financial planning and other
services to its clients.
Almost all of the Company's professional tax preparers have tax preparation
experience or are trained by the Company to meet the required level of expertise
to properly prepare tax returns.
The Company's tax preparers are generally not certified public accountants,
attorneys or enrolled agents. Therefore, they are limited in the representation
that they can provide to clients of the Company in the event of an audit by the
IRS. However, through the Company's acquisition of accounting firms, the Company
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expects the percentage of its tax preparers who are certified public accountants
to increase. Only an attorney, a certified public accountant or a person
specifically enrolled to practice before the IRS can represent a taxpayer in an
audit.
FINANCIAL PLANNING
A majority of the Company's tax preparers and accountants also perform financial
planning services. The Company provides financial planning services, including
securities brokerage, investment management services, insurance and financing
services. Most middle and upper income individuals require a variety of
financial planning services. Clients often consider other aspects of their
financial needs, such as insurance, investments, retirement and estate planning,
while having their tax returns prepared by the Company. The Company offers every
client the opportunity to complete a questionnaire that is designed to ascertain
if the client needs services for other aspects of the client's financial
situation. These questionnaires are reviewed to determine whether the client may
benefit from the Company's financial planning services.
All of the Company's financial planners are registered representatives of PCS.
PCS conducts a securities brokerage business providing regulatory oversight and
products and sales support to its registered representatives, who provide
investment products and services to their clients. PCS is a registered
securities broker-dealer with the SEC and a member of FINRA.
To become a registered representative, a person must pass one or more of a
series of qualifying exams administered by FINRA that test the person's
knowledge of securities and related regulations. Thereafter, PCS supervises the
registered representatives with regard to all regulatory matters. In addition to
certain mandatory background checks required by FINRA, the Company also requires
that each registered representative respond in writing to a background
questionnaire. PCS has been able to recruit and retain experienced and
productive registered representatives who seek to establish and maintain
personal relationships with their clients. The Company believes that continuing
to add experienced, productive registered representatives is an integral part of
its growth strategy.
The Company provides a variety of services and products to its financial
planners to enhance their professionalism and productivity.
Approved Investment Products. The Company's financial planners offer a wide
variety of approved investment products to their clients that are sponsored by
well-respected, financially sound companies. The Company believes that this is
critical to the success of its financial planners and the Company. The Company
follows a selective process in determining approved products to be offered to
clients by its financial planners, and it periodically reviews the product list
for continued maintenance or removal of approved status.
Marketing. The Company provides advertising and public relations assistance to
its financial planners that enhance their profile, public awareness, and
professional stature in the public's eye, including FINRA-approved marketing
materials, corporate and product brochures and client letters.
Supervision/Compliance. The Company's financial planners seek and value
assistance in the area of compliance. Keeping in step with the latest industry
regulations, the Company's compliance department provides to its
representatives, among other things:
o Advertising and sales literature review
o Field inspections, followed up with written findings and
recommendations
o Assistance with customer complaints and regulatory inquiries
o Workshops, seminars and in-house publications on various compliance
matters
o Regional and national meetings
o Interpretation of rules and regulations and general compliance
training
Clearing. The Company utilizes the services of National Financial Services, LLC,
which is a wholly owned subsidiary of Fidelity Investments, to clear its
transactions. Engaging the processing services of a clearing firm exempts the
Company from the application of certain capital reserve requirements and other
complex regulatory requirements imposed by federal and state securities laws.
MARKETING
The Company markets its services principally through referrals from customers,
media, direct mail, promotions and workshops. The majority of clients in each
office return to the Company for tax preparation services during the following
year.
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Media
The Company advertises on television, radio, newspapers, magazines and outdoor
media.
Sports Marketing
The Company advertises and does special promotions with the New York Mets at
Shea Stadium during the regular season and with other major league baseball
teams during spring training.
Direct Mail
The Company regularly sends direct mail advertisements to residences in the
areas surrounding the Company's offices. The direct mail advertising solicits
business for the Company's tax preparation and financial planning services. Many
of the Company's new clients each year are first introduced to the Company
through its direct mail advertising.
Workshops
The Company promotes local tax planning workshops. At these workshops,
prospective new clients can learn about easy to follow strategies for reducing
their taxes and for accumulating, preserving and transferring their wealth.
Online
The Company has a web site on the internet at www.gilcio.com for Company
information, including financial information and its latest news releases. In
addition, the Company utilizes search engine marketing tools and advertising to
attract interest to its site.
TRADEMARK
The Company has registered its "Gilman Ciocia Tax and Financial Planning"
trademark with the U.S. Patent and Trademark Office. The trademark is registered
through 2017.
EMPLOYEES
As of June 30, 2007, the Company employed 227 persons on a permanent full-time
basis. During tax season, the Company typically employs seasonal employees who
do only tax return preparation or provide support functions. The minimum
requirements for a tax preparer at the Company are generally some tax
preparation experience and the completion of the Company's proprietary tax
preparation training course or equivalent education experience.
Each of the registered representatives licensed with PCS and insurance agents
licensed through the Company has entered into a commission sharing agreement
with the Company. Each such agreement generally provides that a specified
percentage of the commissions earned by the Company are paid to the registered
representative or insurance agent. In the commission sharing agreements, the
employee registered representatives also agree to maintain certain Company
information as confidential and not to compete with the Company.
REGULATION (COMPLIANCE AND MONITORING)
PCS, AFP and the securities industry in general, are subject to extensive
regulation in the United States at both the federal and state levels, as well as
by self-regulatory organizations ("SROs") such as FINRA.
The SEC is the federal agency primarily responsible for the regulation of
broker-dealers and investment advisers doing business in the United States.
Certain aspects of broker-dealer regulation have been delegated to securities
industry SROs, principally FINRA and the New York Stock Exchange ("NYSE"). These
SROs adopt rules (subject to SEC approval) that govern the industry, and, along
with the SEC, conduct periodic examinations of the operations of PCS. PCS is a
member of FINRA and the NYSE. The Board of Governors of the Federal Reserve
System also promulgates regulations applicable to securities credit transactions
involving broker-dealers. Securities firms are also subject to regulation by
state securities administrators in those states in which they conduct business.
PAGE 6
Broker-dealers are subject to regulations covering all aspects of the securities
industry, including sales practices, trade practices among broker-dealers,
capital requirements, the use and safekeeping of clients' funds and securities,
recordkeeping and reporting requirements, supervisory and organizational
procedures intended to ensure compliance with securities laws and to prevent
unlawful trading on material nonpublic information, employee related matters,
including qualification and licensing of supervisory and sales personnel,
limitations on extensions of credit in securities transactions, clearance and
settlement procedures, requirements for the registration, underwriting, sale and
distribution of securities and rules of the SROs designed to promote high
standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations is the relationship between
broker-dealers and their clients. As a result, many aspects of the relationship
between broker-dealers and clients are subject to regulation, including, in some
instances, requirements that brokers make "suitability" determinations as to
certain customer transactions, limitations on the amounts that may be charged to
clients, timing of proprietary trading in relation to client's trades, and
disclosures to clients.
Additional legislation, changes in rules promulgated by the SEC, state
regulatory authorities or SROs, or changes in the interpretation or enforcement
of existing laws and rules may directly affect the mode of operation and
profitability of broker-dealers. The SEC, SROs and state securities commissions
may conduct administrative proceedings that can result in censure, fines, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulating
and disciplining broker-dealers is for the protection of customers and the
securities markets, not the protection of creditors or shareholders of
broker-dealers.
As a registered broker-dealer, PCS is required to, and has established and
maintains a system to supervise the activities of its retail brokers, including
its independent contractor offices and other securities professionals. The
supervisory system must be reasonably designed to achieve compliance with
applicable securities laws and regulations, as well as SRO rules. The SROs have
established minimum requirements for such supervisory systems; however, each
broker-dealer must establish procedures that are appropriate for the nature of
its business operations. Failure to establish and maintain an adequate
supervisory system may result in sanctions imposed by the SEC or an SRO, which
could limit PCS' ability to conduct its securities business. Moreover, under
federal law and certain state securities laws, PCS may be held liable for
damages resulting from the unauthorized conduct of its account executives to the
extent that PCS has failed to establish and maintain an appropriate supervisory
system.
REGULATORY AND LEGAL MATTERS
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by the Company's registered representatives
during the period January 1, 2002 through August 1, 2005. On June 22, 2006, the
SEC entered a formal order of investigation. The Company is cooperating fully
with the SEC in connection with this inquiry. At this stage of the formal
investigation, the Company cannot predict whether an enforcement action will
result from the SEC's investigation.
On February 4, 2004, the Company was served with a Summons and a Shareholder's
Class Action and Derivative Complaint with the following caption: "Gary Kosseff,
Plaintiff, against James Ciocia, Thomas Povinelli, Michael Ryan, Kathryn Travis,
Seth A. Akabas, Louis P. Karol, Edward H. Cohen, Steven Gilbert and Doreen
Biebusch, Defendants and Gilman & Ciocia, Inc., Nominal Defendant". The nature
of the action is that the Company, its board of directors and its management,
breached their fiduciary duty of loyalty in connection with the sale of certain
of the Company's offices. The action was filed in the Court of Chancery of the
State of Delaware in and for New Castle County under Civil Action No. 188-N. The
case was scheduled for trial on June 4, 2007. The trial was postponed without a
new date pending settlement negotiations. While the Company will vigorously
defend itself in this matter, there can be no assurance that this lawsuit will
not have a material adverse impact on its financial position.
The Company's tax preparation business subjects it to potential civil
liabilities under the Internal Revenue Code for knowingly preparing a false
return or not complying with all applicable laws and regulations relating to
preparing tax returns. Although the Company believes that it complies with all
applicable laws and regulations in all material respects, no assurance can be
given that the Company will not incur any material fines or penalties. In
addition, the Company does not maintain professional liability or malpractice
insurance policies for its tax preparation business. No assurance can be given
that the Company will not be subject to professional liability or malpractice
suits. The Company has never incurred any material fines or penalties from the
IRS and has never been the subject of a material malpractice lawsuit.
See Item 3. "Legal Proceedings", and Note 13 to Notes to Consolidated Financial
Statements for a discussion of the SEC investigation and litigation pending
against the Company.
EQUITY FINANCING
On August 20, 2007, the Company closed the sale (the "Investment Purchase
Closing") of 40.0 million shares of its common stock, par value $.01 per share
(the "Common Stock"), at a price of $0.10 per share for proceeds of $4.0 million
(the "Investment Purchase") pursuant to an Investor Purchase Agreement dated
April 25, 2007 (the "Purchase Agreement") with Wynnefield Small Cap Value
Offshore Fund, Ltd., Wynnefield Partners Small Cap Value, L.P., Wynnefield
Partners Small Cap Value, L.P.I and WebFinancial Corporation (the "Investment
Purchasers").
PAGE 7
The Investment Purchase Closing was contingent upon the purchase of an
additional 40.0 million shares of Common Stock at a price of $0.10 per share in
cash or by the conversion of outstanding debt or other liabilities of the
Company (the "Private Placement") by other purchasers (the "Private Placement
Purchasers") including officers, directors and employees of the Company. The
closing of the Private Placement (the "Private Placement Closing") occurred on
August 20, 2007 simultaneously with the Investment Purchase Closing. At the
Private Placement Closing, the Company issued 16.9 million shares of Company
common stock for cash proceeds of $1.7 million and 23.1 million shares of
Company common stock for the conversion of $2.3 million of Company debt. See
Note 22 to Notes to Consolidated Financial Statements for a discussion of the
stock sales.
DEBT DEFAULTS
During fiscal 2007, 2006 and 2005 the Company was in default of certain
covenants under its term loan/revolving letter of credit financing with Wachovia
Bank, National Association ("Wachovia"). As a result of these defaults, the
Company entered into a debt forbearance agreement with Wachovia which was last
amended on April 1, 2006. As a result of these defaults, the Company's debt with
Wachovia has been classified as a current liability on its financial statements.
As of September 1, 2007, the Company was current with its monthly payments to
Wachovia and the outstanding principal balance was $0.7 million. See Note 11 to
Notes to Consolidated Financial Statement for a discussion of the Company's
debt.
As of June 30, 2007, the Company was in default on its $5.0 million distribution
financing with Met Life Insurance Company of Connecticut ("Met Life") which
purchased the Travelers Insurance Company who the original financing was
through. However, on August 20, 2007, as a result of the Investment Purchase
Closing and the Private Placement Closing, Met Life was paid $2.4 million in
full satisfaction of the approximately $6.8 million, including principal and
interest, owed to Met Life. See Note 22 to Notes to Consolidated Financial
Statements for a discussion of the stock sales.
Item 1A. RISK FACTORS
Certain private shareholders, including some Company directors and officers,
control a substantial interest in the Company and thus may influence certain
actions requiring a shareholder vote
On August 20, 2007, Michael Ryan (the Company's President and Chief Executive
Officer), Carole Enisman (the Company's Executive Vice President of Operations),
Ted Finkelstein (the Company's Vice President and General Counsel), Dennis
Conroy, Prime Partners, Inc. and Prime Partners II, LLC (holding companies owned
in part by Michael Ryan), Wynnefield Small Cap Value Offshore Fund, Ltd.,
Wynnefield Partners Small Cap Value, L.P., Wynnefield Partners Small Cap Value,
L.P.I and WebFinancial Corporation entered into a shareholders agreement
concerning the voting of their shares of Company stock. These shareholders own
approximately 69.0% of the Company's issued and outstanding shares of common
stock. Pursuant to the shareholders agreement, these shareholders will have the
ability to influence certain actions requiring a shareholder vote, for example,
the election of directors. See Note 22 to Notes to Consolidated Financials
Statements for a discussion of the shareholder agreement.
The Company's staggered board may entrench management and discourage unsolicited
shareholder proposals that may be in the best interests of shareholders
The Company's restated certificate of incorporation provides that the Company's
board of directors is divided into three classes. As a result, at any annual
meeting only a minority of the board of directors will be considered for
election. Since the Company's "staggered board" would prevent the Company's
shareholders from replacing a majority of the Company's board of directors at
any annual meeting, it may entrench management and discourage unsolicited
shareholder proposals that may be in the best interests of shareholders.
Making and integrating acquisitions could impair the Company's operating results
The Company's current strategy is to actively pursue acquisitions of tax
preparation and accounting firms. Acquisitions involve a number of risks,
including: diversion of management's attention from current operations;
disruption of the Company's ongoing business; difficulties in integrating and
retaining all or part of the acquired business, its customers and its personnel;
and the effectiveness of the acquired company's internal controls and
procedures. The individual or combined effect of these risks could have an
adverse effect on the Company's business. In paying for an acquisition, the
Company may deplete its cash resources. Furthermore, there is the risk that the
Company's valuation assumptions, customer retention expectations and its models
for an acquired product or business may be erroneous or inappropriate due to
foreseen or unforeseen circumstances and thereby cause the Company to overvalue
an acquisition target. There is also the risk that the contemplated benefits of
an acquisition may not materialize as planned or may not materialize within the
time period or to the extent anticipated.
PAGE 8
The Company's operations may be adversely affected if it is not able to expand
its financial planning business by hiring additional financial planners and
opening new offices
If the financial planners that the Company presently employs or recruits do not
perform successfully, the Company's operations may be adversely affected. The
Company plans to continue to expand in the area of financial planning, by
expanding the business of presently employed financial planners and by
recruiting additional financial planners. The Company's revenue growth will in
large part depend upon the expansion of existing business and the successful
integration and profitability of the recruited financial planners. The Company's
growth will also depend on the success of independent financial planners who are
recruited to join the Company. The financial planning channel of the Company's
business has generated an increasing portion of the Company's revenues during
the past few years, and if such channel does not continue to be successful, the
Company's revenue may not increase.
The Consolidated Financial Statements do not include any adjustments that might
result due the opening of new offices or from the uncertainties of a shift in
the Company's business
The Company may choose to open new offices. When the Company opens a new office,
the Company incurs significant expenses to build out the office and to purchase
furniture, equipment and supplies. The Company has found that a new office
usually suffers a loss in its first year of operation, shows no material profit
or loss in its second year of operation and does not attain profitability, if
ever, until its third year of operation. Therefore, the Company's operating
results could be materially adversely affected in any year that the Company
opens a significant number of new offices. If the financial markets deteriorate,
the Company's financial planning channel will suffer decreased revenues. The
Company's revenue and profitability may be adversely affected by declines in the
volume of securities transactions and in market liquidity, which generally
result in lower revenues from trading activities and commissions. Lower
securities price levels may also result in a reduced volume of transactions as
well as losses from declines in the market value of securities held in trading,
investment and underwriting positions. In periods of low volume, the fixed
nature of certain expenses, including salaries and benefits, computer hardware
and software costs, communications expenses and office leases, will adversely
affect profitability. Sudden sharp declines in market values of securities and
the failure of issuers and counterparts to perform their obligations can result
in illiquid markets in which the Company may incur losses in its principal
trading and market making activities.
The Company's sale of 80,000,000 shares on August 20, 2007 significantly diluted
the common stock ownership of existing shareholders
The significant dilution of the common stock ownership of existing shareholders
could have an adverse effect on the price of the shares and on the future volume
of the shares traded. See Note 22 to Notes to Consolidated Financial Statements
for a complete discussion of the stock sales.
The listing of Company shares on the "grey sheets" could make trading the
Company's shares difficult for investors
The shares of the Company's common stock are traded on what is commonly referred
to as the "grey sheets". As a result, an investor may find it difficult to
dispose of or obtain accurate quotations as to the market value of the
securities. In addition, trading on the "grey sheets" could make trading the
Company's shares difficult for investors. The Company is in full compliance with
all SEC and NASDAQ requirements including SEC Rule 15c2-11.
The low trading volume of the Company's common stock increases volatility, which
could impair the Company's ability to obtain equity financing
Low trading volume in the Company's common stock increases volatility, which
could result in the impairment of the Company's ability to obtain equity
financing. As a result, historical market prices may not be indicative of market
prices in the future. In addition, the stock market has recently experienced
extreme stock price and volume fluctuation. The Company's market price may be
impacted by changes in earnings estimates by analysts, economic and other
external factors and the seasonality of the Company's business. Fluctuations or
decreases in the trading price of the common stock may adversely affect the
shareholders' ability to buy and sell the common stock and the Company's ability
to raise money in a future offering of common stock.
The results of the Company's review of whether there has been a Section 382
limitation on the use of its net operating loss carryovers imposed due to the
equity transactions on August 20, 2007 could have a negative impact on its tax
liability
The Company's net operating loss carryovers of $19.0 million at June 30, 2007
expire generally from 2017 to 2027. As a result of the equity transactions
described in Note 22 to Notes to Consolidated Financial Statements, the Company
is reviewing whether its ability to utilize its net operating loss carryovers
may be restricted based on Internal Revenue Code Section 382 "changes in
ownership." If the Company is unable to utilize its net operating loss
carryovers, it would increase the Company's tax liability which would have a
material adverse effect on the Company's operating results.
PAGE 9
Changing laws and regulations have resulted in increased compliance costs for
the Company, which could affect its operating results
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, and newly enacted
SEC regulations have created additional compliance requirements for companies
such as ours. The Company is committed to maintaining high standards of internal
controls over financial reporting, corporate governance and public disclosure.
As a result, the Company intends to continue to invest appropriate resources to
comply with evolving standards, and this investment has resulted and will likely
continue to result in increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to
compliance activities. See Item 9A."Controls and Procedures."
The expense and diversion of management attention which result from litigation
could have an adverse effect on the Company's operating results and could harm
its ability to effectively manage its business
If the Company were to be found liable to clients for misconduct alleged in
civil proceedings, the Company's operations may be adversely affected. Many
aspects of the Company's business involve substantial risks of liability. There
has been an increase in litigation and arbitration within the Company's
securities industry in recent years, including class action suits seeking
substantial damages. Broker-dealers such as PCS are subject to claims by
dissatisfied clients, including claims alleging they were damaged by improper
sales practices such as unauthorized trading, churning, sale of unsuitable
securities, use of false or misleading statements in the sale of securities,
mismanagement and breach of fiduciary duty. Broker-dealers may be liable for the
unauthorized acts of their retail brokers and independent contractors if they
fail to adequately supervise their conduct. PCS is currently a
defendant/respondent in numerous such proceedings. PCS maintains securities
broker-dealer's professional liability insurance to insure against this risk,
but the insurance policy contains a deductible (presently $50,000) and a
cumulative cap on coverage (presently $3,000,000). In addition, certain
activities engaged in by brokers may not be covered by such insurance. The
adverse resolution of any legal proceedings involving the Company could have a
material adverse effect on its business, financial condition, and results of
operations or cash flows.
The outcome of the SEC investigation could have a material affect on the
Company's operating results
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by the Company's registered representatives
during the period January 1, 2002 through August 1, 2005. On June 22, 2006, the
SEC entered a formal order of investigation. The Company cannot predict whether
or not the investigation will result in an enforcement action. Further, if there
were an enforcement action, the Company cannot predict whether or not its
operating results would be affected.
Dependence on technology software and systems and the Company's inability to
provide assurance that its systems will be effective could adversely affect the
Company's operations
As an information-financial services company with a subsidiary broker-dealer,
the Company is greatly dependent on technology software and systems and on the
internet to maintain customer records, effect securities transactions and
prepare and file tax returns. In the event that there is an interruption to the
Company's systems due to internal systems failure or from an external threat,
including terrorist attacks, fire and extreme weather conditions, the Company's
ability to prepare and file tax returns and to process financial transactions
could be affected. The Company has offsite backup, redundant and remote failsafe
systems in place to safeguard against these threats but there can be no
assurance that such systems will be effective to prevent malfunction and adverse
effects on operations.
The Company's industries are highly competitive; if it fails to remain
competitive, the Company may lose customers and its results of operations would
be adversely affected
The financial planning and tax planning industries are highly competitive. If
the Company's competitors create new products or technologies, or are able to
take away its customers, the Company's results of operations may be adversely
affected. The Company's competitors include companies specializing in income tax
preparation as well as companies that provide general financial services. The
Company's principal competitors are H&R Block and Jackson Hewitt in the tax
preparation field and many well-known national brokerage and insurance firms in
the financial services field, including Merrill Lynch and Citigroup. Many of
these competitors have larger market shares and significantly greater financial
and other resources than the Company. The Company may not be able to compete
successfully with such competitors. Competition could cause the Company to lose
existing clients, impact the Company's ability to acquire new clients and
increase advertising expenditures, all of which could have a material adverse
effect on the Company's business or operating results.
PAGE 10
Additionally, federal and state governments may in the future become direct
competitors to the Company's tax offerings. If federal and state governments
provide their own software and electronic filing services to taxpayers at no
charge it could have a material adverse effect on the Company's business,
financial condition and results of operations. The federal government has
proposed legislation that could further this initiative.
Government initiatives that simplify tax return preparation could reduce the
need for the Company's services as a third party tax return preparer
Many taxpayers seek assistance from paid tax return preparers such as the
Company because of the level of complexity involved in the tax return
preparation and filing process. From time to time, government officials propose
measures seeking to simplify the preparation and filing of tax returns or to
provide additional assistance with respect to preparing and filing such tax
returns. The passage of any measures that significantly simplify tax return
preparation or otherwise reduce the need for a third party tax return preparer
could reduce demand for the Company's services, causing its revenues or
profitability to decline.
Changes in the tax law that result in a decreased number of tax returns filed or
a reduced size of tax refunds could harm the Company's business
From time to time, the United States Treasury Department and the IRS adopt
policy and rule changes and other initiatives that result in a decrease in the
number of tax returns filed or reduce the size of tax refunds. Similar changes
in the tax law could reduce demand for the Company's services, causing its
revenues or profitability to decline.
The highly seasonal nature of the Company's business presents a number of
financial risks and operational challenges which, if the Company fails to meet,
could materially affect its business
The Company's business is highly seasonal. The Company generates substantially
all of its tax preparation revenues during tax season, which is the period from
January 1 through April 30. The concentration of this revenue-generating
activity during this relatively short period presents a number of operational
challenges for the Company including: (i) cash and resource management during
the first eight months of its fiscal year, when the Company generally operates
at a loss and incurs fixed costs and costs of preparing for the upcoming tax
season; (ii) flexible staffing, because the number of employees at the Company's
offices during the peak of tax season is much higher than at any other time;
(iii) accurate forecasting of revenues and expenses; and (iv) ensuring optimal
uninterrupted operations during peak season, which is the period from late
January through April.
If the Company were unable to meet these challenges or was to experience
significant business interruptions during tax season, which may be caused by
labor shortages, systems failures, work stoppages, adverse weather or other
events, many of which are beyond its control, the Company could experience a
loss of business, which could have a material adverse effect on its business,
financial condition and results of operations.
Competition from departing employees and the Company's ability to enforce
contractual non-competition and non-solicitation provisions could adversely
affect the Company's operating results
If a large number of the Company's employees and financial planners departed and
began to compete with the Company, the Company's operations may be adversely
affected. Although the Company attempts to restrict such competition
contractually, as a practical matter, enforcement of contractual provisions
prohibiting small-scale competition by individuals is difficult. In the past,
departing employees and financial planners have competed with the Company. They
have the advantage of knowing the Company's methods and, in some cases, having
access to the Company's clients. No assurance can be given that the Company will
be able to retain its most important employees and financial planners or that
the Company will be able to prevent competition from them or successfully
compete against them. If a substantial amount of such competition occurs, the
corresponding reduction of revenue may materially adversely affect the Company's
operating results.
Departure of key personnel could adversely affect the Company's operations
If any of the Company's key personnel were to leave its employ, the Company's
operations may be adversely affected. The Company believes that its ability to
successfully implement its business strategy and operate profitably depends on
the continued employment of James Ciocia, its Chairman of the Board, Michael
Ryan, its President and Chief Executive Officer, Ted Finkelstein, its Vice
President and General Counsel, Kathryn Travis, its Secretary, Carole Enisman,
its Executive Vice President of Operations, and Karen Fisher, its Chief
Accounting Officer. Michael Ryan and Carole Enisman are married. If any of these
individuals become unable or unwilling to continue in his or her present
position, the Company's business and financial results could be materially
adversely affected.
PAGE 11
The decision not to pay dividends could impact the marketability of the
Company's common stock
The Company's decision not to pay dividends could negatively impact the
marketability of the Company's common stock. Since its initial public offering
of securities in 1994, the Company has not paid dividends and it does not plan
to pay dividends in the foreseeable future. The Company currently intends to
retain future earnings, if any, to finance the growth of the Company
The release of restricted common stock may have an adverse affect on the market
price of the common stock
The release of various restrictions on the possible future sale of the Company's
common stock may have an adverse affect on the market price of the common stock.
Based on information received from the Company's transfer agent, approximately
68.4 million shares of the common stock outstanding are "restricted securities"
under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act").
In general, under Rule 144, a person who has satisfied a one year holding period
may, under certain circumstances, sell, within any three month period, a number
of shares of "restricted securities" that do not exceed the greater of one
percent of the then outstanding shares of common stock or the average weekly
trading volume of such shares during the four calendar weeks prior to such sale.
Rule 144 also permits, under certain circumstances, the sale of shares of common
stock by a person who is not an "affiliate" of the Company (as defined in Rule
144) and who has satisfied a two-year holding period, without any volume or
other limitation.
The general nature of the securities industry as well as its regulatory
requirements could materially affect the Company's business
If a material risk inherent to the securities industry was to be realized, the
value of the Company's common stock may decline. The securities industry, by its
very nature, is subject to numerous and substantial risks, including the risk of
declines in price level and volume of transactions, losses resulting from the
ownership, trading or underwriting of securities, risks associated with
principal activities, the failure of counterparties to meet commitments,
customer, employee or issuer fraud risk, litigation, customer claims alleging
improper sales practices, errors and misconduct by brokers, traders and other
employees and agents (including unauthorized transactions by brokers), and
errors and failure in connection with the processing of securities transactions.
Many of these risks may increase in periods of market volatility or reduced
liquidity. In addition, the amount and profitability of activities in the
securities industry are affected by many national and international factors,
including economic and political conditions, broad trends in industry and
finance, level and volatility of interest rates, legislative and regulatory
changes, currency values, inflation, and the availability of short-term and
long-term funding and capital, all of which are beyond the control of the
Company.
Several current trends are also affecting the securities industry, including
increasing consolidation, increasing use of technology, increasing use of
discount and online brokerage services, greater self-reliance of individual
investors and greater investment in mutual funds. These trends could result in
the Company facing increased competition from larger broker-dealers, a need for
increased investment in technology, or potential loss of clients or reduction in
commission income. These trends or future changes could have a material adverse
effect on the Company's business, financial condition, and results of operations
or cash flows.
If new regulations are imposed on the securities industry, the operating results
of the Company may be adversely affected. The SEC, FINRA, the NYSE and various
other regulatory agencies have stringent rules with respect to the protection of
customers and maintenance of specified levels of net capital by broker-dealers.
The regulatory environment in which the Company operates is subject to change.
The Company may be adversely affected as a result of new or revised legislation
or regulations imposed by the SEC, FINRA, other U.S. governmental regulators or
SROs. The Company also may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by the SEC, other
federal and state governmental authorities and SROs.
PCS is subject to periodic examination by the SEC, FINRA, SROs and various state
authorities. PCS sales practice, operations, recordkeeping, supervisory
procedures and financial position may be reviewed during such examinations to
determine if they comply with the rules and regulations designed to protect
customers and protect the solvency of broker-dealers. Examinations may result in
the issuance of letters to PCS, noting perceived deficiencies and requesting PCS
to take corrective action. Deficiencies could lead to further investigation and
the possible institution of administrative proceedings, which may result in the
issuance of an order imposing sanctions upon PCS and/or their personnel.
The Company's business may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume and profitability of the Company's
or its clients' trading activities in a specific period could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities.
PAGE 12
The Company has a history of losses and may incur losses in the future
While, the Company reported a profit for the fiscal year ended June 30, 2007,
the Company incurred losses in fiscal years 2006, 2005, and 2004 and may incur
losses again in the future. As of June 30, 2007, the Company's accumulated
deficit was $33.5 million. If the Company fails to continue to earn profits, the
value of a shareholders investment may decline.
System or network failures or breaches in connection with the Company's services
and products could reduce its sales, impair its reputation, increase costs or
result in liability claims, and seriously harm its business
Any disruption to the Company's services and products, its own information
systems or communications networks or those of third-party providers upon whom
the Company relies as part of its own product offerings, including the internet,
could result in the inability of its customers to receive its products for an
indeterminate period of time. The Company's services may not function properly
for any of the following reasons:
o System or network failure;
o Interruption in the supply of power;
o Virus proliferation;
o Security breaches;
o Earthquake, fire, flood or other natural disaster; or
o An act of war or terrorism.
Although the Company has made significant investments, both internally and with
third-party providers, in redundant and back-up systems for some of its services
and products, these systems may be insufficient or may fail and result in a
disruption of availability of its products or services to its customers. Any
disruption to the Company's services could impair its reputation and cause it to
lose customers or revenue, or face litigation, customer service or repair work
that would involve substantial costs and distract management from operating its
business.
Failure to comply with laws and regulations that protect customers' personal
information could result in significant fines and harm the Company's brand and
reputation
The Company manages highly sensitive client information in all of its operating
segments, which is regulated by law. Problems with the safeguarding and proper
use of this information could result in regulatory actions and negative
publicity, which could adversely affect the Company's reputation and results of
operations.
ITEM 2. PROPERTIES
As of June 30, 2007, the Company provided financial services to its clients at
28 local offices in four states: 13 in New York, 11 in Florida, three in New
Jersey, and one in Pennsylvania. In May 2007 the Company sold its office in
Melbourne, Florida; in November 2006, the Company sold its office in
Connecticut, and in August 2005, the Company sold its office in Colorado. A
majority of the offices are located in commercial office buildings and are
leased. The remaining terms of the leases vary from one to ten years. The
Company's rental expense during fiscal 2007 was approximately $2.0 million. The
Company believes that any of its rental spaces could be replaced with comparable
office space, however, location and convenience is an important factor in
marketing the Company's services to its clients.
ITEM 3. LEGAL PROCEEDINGS
The Company and PCS are defendants and respondents in lawsuits and FINRA
arbitrations in the ordinary course of business. On June 30, 2007, there were 22
pending lawsuits and arbitrations, of which 8 are settled and pending payment,
and of which 13 were against PCS or its registered representatives. As of
September 15, 2007 there were 19 pending lawsuits and arbitrations remaining, of
which 7 were settled and pending payment. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 5 "Accounting for Contingencies,"
the Company has established liabilities for potential losses from such
complaints, legal actions, investigations and proceedings. In establishing these
liabilities, the Company's management uses its judgment to determine the
probability that losses have been incurred and a reasonable estimate of the
amount of the losses. In making these decisions, the Company bases its judgments
on its knowledge of the situations, consultations with legal counsel and its
historical experience in resolving similar matters. In many lawsuits,
arbitrations and regulatory proceedings, it is not possible to determine whether
a liability has been incurred or to estimate the amount of that liability until
the matter is close to resolution. However, accruals are reviewed regularly and
PAGE 13
are adjusted to reflect the Company's estimates of the impact of developments,
rulings, advice of counsel and any other information pertinent to a particular
matter. Because of the inherent difficulty in predicting the ultimate outcome of
legal and regulatory actions, the Company cannot predict with certainty the
eventual loss or range of loss related to such matters. If its judgments prove
to be incorrect, its liability for losses and contingencies may not accurately
reflect actual losses that result from these actions, which could materially
affect results in the period other expenses are ultimately determined.
Management accrued $0.5 million as a reserve for potential settlements,
judgments and awards. PCS has errors and omissions coverage that will cover a
portion of such matters. In addition, under the PCS registered representatives
contract, each registered representative is responsible for covering costs in
connection with these claims. While the Company will vigorously defend itself in
these matters and will assert insurance coverage and indemnification to the
maximum extent possible, there can be no assurance that these lawsuits and
arbitrations will not have a material adverse impact on its financial position.
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by the Company's registered representatives
during the period January 1, 2002 through August 1, 2005. On June 22, 2006, the
SEC entered a formal order of investigation. The Company is cooperating fully
with the SEC in connection with this inquiry. At this stage of the formal
investigation, the Company cannot predict whether an enforcement action will
result from the SEC's investigation.
On February 4, 2004, the Company was served with a Summons and a Shareholder's
Class Action and Derivative Complaint with the following caption: "Gary Kosseff,
Plaintiff, against James Ciocia, Thomas Povinelli, Michael Ryan, Kathryn Travis,
Seth A. Akabas, Louis P. Karol, Edward H. Cohen, Steven Gilbert and Doreen
Biebusch, Defendants and Gilman & Ciocia, Inc., Nominal Defendant". The nature
of the action is that the Company, its board of directors and its management,
breached their fiduciary duty of loyalty in connection with the sale of certain
of the Company's offices. The action was filed in the Court of Chancery of the
State of Delaware in and for New Castle County under Civil Action No. 188-N. The
case was scheduled for trial on June 4, 2007. The trial was postponed without a
new date pending settlement negotiations. While the Company will vigorously
defend itself in this matter, there can be no assurance that this lawsuit will
not have a material adverse impact on its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on July, 19, 2007. At this
meeting:
1. The stockholders approved the adoption of the Company's 2007 Stock Incentive
Plan (the "2007 Plan").
The 2007 Plan provides that it will be administered by the Company's board of
directors or a committee of two or more members of the board appointed by the
board (the "Committee"). The board or the Committee will generally have the
authority to administer the 2007 Plan, determine participants who will be
granted awards under the 2007 Plan, the size and types of awards, the terms and
conditions of awards and the form and content of the award agreements
representing awards.
The 2007 Plan provides for the grant of any or all of the following types of
awards: (a) common stock options, (b) restricted common stock, (c) deferred
common stock and (d) other common stock-based awards. Awards may be granted
singly, in combination, or in tandem. Subject to anti-dilution adjustments as
provided in the 2007 Plan, (i) the 2007 Plan provides for a total of 16.1
million shares of the Company's common stock to be available for distribution
pursuant to the 2007 Plan, and (ii) the maximum number of shares of the
Company's common stock with respect to which stock options, restricted stock,
deferred stock, or other stock-based awards may be granted to any participant
under the 2007 Plan during any calendar year or part of a year may not exceed
0.6 million shares.
Awards under the 2007 Plan may be granted to employees, directors, consultants
and advisors of the Company and its subsidiaries. However, only employees of the
Company and its subsidiaries will be eligible to receive options that are
designated as incentive stock options.
With respect to options granted under the 2007 Plan, the exercise price must be
at least 100% (110% in the case of an incentive stock option granted to a ten
percent stockholder within the meaning of Section 422(b)(6) of the Internal
Revenue Code of 1986) of the fair market value of the common stock subject to
the award, determined as of the date of grant. Restricted stock awards are
shares of common stock that are awarded subject to the satisfaction of the terms
and conditions established by the administrator. In general, awards that do not
require exercise may be made in exchange for such lawful consideration,
including services, as determined by the administrator.
2. The stockholders approved an amendment of the Company's Certificate of
Incorporation to increase the Company's authorized common stock to 500.0 million
shares (the "Amendment"). The Amendment was effected on July 20, 2007. Prior to
the Amendment, the Company's Certificate of Incorporation provided for 20.0
million shares of authorized common stock.
PAGE 14
3. The stockholders approved the sale of 40.0 million shares of Company common
stock to certain investment purchasers, and the sale of an additional 40.0
million shares of Company common stock to certain private placement purchasers.
See Note 22 to Notes to Consolidated Financial Statements for a discussion of
the stock sales.
4. The stockholders elected the following directors: Edward Cohen as a Class A
director (whose term expires at the annual meeting of stockholders to be held
for the fiscal year ending June 30, 2007), James Ciocia and Michael Ryan as
Class B directors (whose terms expire at the annul meeting of stockholders to be
held for the fiscal year ending June 30, 2008) and John Levy and Allan Page as
Class C directors (whose terms expire at the annual meeting of stockholders to
be held for the fiscal year ending June 30, 2009).
5. The stockholders ratified the appointment of Sherb & Co., LLP as the
Company's independent auditors for the fiscal year ending June 30, 2007.
The following table sets forth the results of votes of security holders related
to the above submission of matters:
<TABLE>
<CAPTION>
Submission of Matters to a Vote of Security Holders For Against Withheld Abstained
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Adoption of the Company's 2007 Stock Incentive Plan 5,204,874 75,491 -- 56,604
2. Increase the Company's authorized common stock to 500.0
million 5,223,711 49,771 -- 63,487
3. Approve sale of 40.0 million shares of Company common stock
to certain investment purchasers, and the sale of an
additional 40.0 million shares of Company common stock to
certain private placement purchasers 5,234,062 36,551 -- 66,356
4. Elect the following directors:
Edward Cohen as Class A Director 7,617,563 -- 316,909 --
James Ciocia as Class B Director 7,615,296 -- 319,176 --
Michael Ryan as Class B Director 7,616,763 -- 317,709 --
John Levy as Class C Director 7,617,363 -- 317,109 --
Allan Page as Class C Director 7,617,363 -- 317,109 --
5. Ratify the appointment of Sherb & Co., LLP as the Company's
independent auditors for the fiscal year ending June 30,
2007 7,645,119 214,325 -- 74,828
</TABLE>
PAGE 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The shares of the Company's common stock were delisted from the NASDAQ Stock
Market in August 2002 and now trade on what is commonly called the grey sheets
under the symbol "GTAX.PK". The following table sets forth the high and low
sales prices for the common stock during the periods indicated as reported on
the grey sheets:
SALES PRICES
QUARTER ENDED HIGH LOW
------------------ ----- -----
September 30, 2005 $0.50 $0.25
December 31, 2005 $0.30 $0.01
March 31, 2006 $0.35 $0.10
June 30, 2006 $0.36 $0.05
September 30, 2006 $0.35 $0.01
December 31, 2006 $0.25 $0.05
March 31, 2007 $0.25 $0.05
June 30, 2007 $0.20 $0.02
DIVIDENDS
Since its initial public offering of securities in 1994, the Company has not
paid dividends, and it does not plan to pay dividends in the foreseeable future.
The Company currently intends to retain any future earnings to finance the
growth of the Company.
HOLDERS OF COMMON STOCK
On June 30, 2007, there were approximately 400 registered holders of common
stock. This does not reflect persons or entities that hold common stock in
nominee or "street" name through various brokerage firms. On the closing of
trading on June 30, 2007, the price of the common stock was $0.05 per share.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended June 30, 2007 the Company issued the following
shares of common stock in privately negotiated transactions that were not
registered under the Securities Act pursuant to the exemption provided by
Section 4(2) of the Securities Act:
o On February 5, 2007, the Company issued 0.2 million shares to a
group of Company management and employees who purchased a loan owed
by the Company ("Purchasing Group"), and through June 30, 2007
accrued for the issuance of 0.1 million shares to the Purchasing
Group, as interest on this loan.
o On August 2, 2007 the Company issued 24,027 shares to an employee as
compensation pursuant to the terms of his financial planner
agreement.
No underwriters or brokers participated in any of these transactions. All such
sales were privately negotiated with the individuals with whom the Company had a
prior relationship.
On August 20, 2007, the Company sold 40.0 million shares of Company common stock
to certain investment purchasers, and sold an additional 40.0 million shares of
Company common stock to certain private placement purchasers. Total outstanding
shares of common stock on September 1, 2007 were 89.7 million. See Note 22 to
Notes to Consolidated Financial Statements for a discussion of the stock sales.
PAGE 16
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity Compensation Plan Information
<TABLE>
<CAPTION>
(c)
Number of Securities
Remaining Available for
(a) (b) Future Issuance Under
Number of Securities to Weighted-Average Equity Compensation
be Issued Upon Exercise Exercise Price of Plans (Excluding
of Outstanding Options, Options, Warrants Securities Reflected in
Plan Category Warrants and Rights and Rights Column (a) )
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Compensation Plans Approved by Security -- --
Holders --
Equity Compensation Plans not Approved
by Security Holders 788,500 $7.11 --
------- -------
Total --
788,500
</TABLE>
The Company maintains records of option grants by year, exercise price, vesting
schedule and grantee. In certain cases, the Company has estimated, based on all
available information, the number of such options that were issued pursuant to
each plan. The material terms of each option grant varied according to the
discretion of the board of directors. In addition, from time to time, the
Company has issued, and in the future may issue, additional non-qualified
options pursuant to individual option agreements, the terms of which vary from
case to case. See Note 14 to Notes to Consolidated Financial Statements.
The Company's 2007 Stock Incentive Plan was adopted at the Company's
stockholders meeting on July 19, 2007. Subject to anti-dilution adjustments as
provided in the 2007 Plan, (i) the 2007 Plan provides for a total of 16.1
million shares of the Company's common stock to be available for distribution
pursuant to the 2007 Plan, and (ii) the maximum number of shares of the
Company's common stock with respect to which stock options, restricted stock,
deferred stock, or other stock-based awards may be granted to any participant
under the 2007 Plan during any calendar year or part of a year may not exceed
0.6 million shares. See Item 4. "Submission of Matters to a Vote of Security
Holders" for a discussion of the 2007 Stock Incentive Plan.
PERFORMANCE PRESENTATION
The following graph shows the annual cumulative total shareholder return for the
five years ending June 30, 2007, on an assumed investment of $100 on June 30,
2002 and assumes dividends reinvested in the Company, NASDAQ Market Index and
the Company's Peer Group Index which includes H&R Block Inc. and Jackson Hewitt
Tax Services.
[PERFORMANCE CHART]
[This following table was depicted as a line chart in the printed material.]
2002 2003 2004 2005 2006 2007
---- ---- ---- ---- ---- ----
GILMAN & CIOCIA, INC. 100.00 14.02 46.73 40.19 18.69 4.67
PEER GROUP INDEX 100.00 95.30 106.81 133.94 116.96 116.22
NASDAQ MARKET NDEX 100.00 111.20 141.42 141.27 150.36 180.25
PAGE 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data with respect to the Company's
Consolidated Balance Sheets as of June 30, 2007 and 2006 and the related
Consolidated Statements of Operations for the years ended June 30, 2007, 2006
and 2005 have been derived from the Company's Consolidated Financial Statements
which are included herein. The following Selected Consolidated Financial Data
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and the information contained in Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Years Ended June 30,
<TABLE>
<CAPTION>
2003
2007 2006 2005 2004 Restated (1)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues $ 53,051,566 $ 53,621,438 $ 56,243,677 $ 60,385,177 $ 54,177,962
Commissions 32,747,937 33,104,344 34,242,568 34,361,368 32,018,741
Other Operating Expenses 19,864,809 22,433,731 23,100,587 26,026,494 28,178,971
Income/(Loss) from Continuing
Operations 807,950 (2,555,320) (1,825,576) (1,020,073) (7,741,173)
Income/(Loss) from
Discontinued Operations -- -- -- 6,088,225 (6,162,743)
Income Taxes 15,000 -- -- 16,617 93,000
Net Income/(Loss) 792,950 (2,555,320) (1,825,576) 5,051,535 (13,996,916)
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Working Capital (Deficit) $ (14,137,279) $ (14,596,011) $ (13,832,676) $ (13,781,609) $ (19,493,533)
Total Assets 16,493,425 16,636,292 17,135,712 18,927,580 21,481,114
Long Term Debt and Capital Lease
Obligations 243,376 814,902 282,424 212,248 661,622
Total Shareholders' (Deficit) (4,362,002) (5,179,582) (2,732,347) (1,218,938) (6,192,983)
-----------------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK
Earnings Per Share:
Income/(Loss)Loss Per Share from
Continuing Operations $ 0.08 $ (0.28) $ (0.20) $ (0.11) $ (0.83)
Income/(Loss) from
Discontinued Operations $ -- $ -- $ -- $ 0.65 $ (0.65)
Net Income/(Loss) $ 0.08 $ (0.28) $ (0.20) $ 0.54 $ (1.48)
Weighted Average Number of Common
Shares Outstanding:
Basic Shares 9,614,506 9,221,745 9,008,400 9,388,764 9,440,815
Diluted Shares 9,614,506 9,221,745 9,008,400 9,412,564 9,440,815
Cash Dividends -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
OTHER COMPANY DATA
AFP Assets under Management (2) $ 629,602,100 $ 610,005,200 $ 518,448,600 $ 505,667,100 $ 358,021,950
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In January 2004, subsequent to the filing of the 10-K for the year ended
June 30, 2003, management discovered and informed the auditors that
revenues and related commission expenses for asset management services,
billed and incurred in the quarter ended September 30, 2003 for services
to be rendered in that quarter, had been recorded as of June 30, 2003.
Further, it was ascertained that this error in revenue and expense
recognition had been occurring since the 1999 acquisition of AFP and had
gone undetected for four years. The receivables and commissions originally
prematurely recorded at each quarter end were received and paid by the
Company during the subsequent quarter. As the error applied to both
beginning and ending balances of each quarter, the effect on any
individual quarter was immaterial. As a result, the financial statements
for the three years ended June 30, 2003 (including fiscal 2001) have been
restated to correct the timing error and the related accrual for
commission liabilities relating to asset management services. As a result
of the restatement, revenues for the year ended June 30, 2003 increased by
$60,009 and commission expense increased by $28,765. Losses for the year
ended June 30, 2003 decreased by $31,334.
(2) The increase in asset values is attributable to increased assets under
management as well as market fluctuations.
PAGE 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Form 10-K and the exhibits hereto may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act").
Such statements, including statements regarding the Company's expectations about
its ability to raise capital, its strategy to achieve its corporate objectives,
including its strategy to pursue growth through acquisitions, to increase
revenues through its registered representative recruiting program and expand its
brand awareness and business presence, its liquidity, its expectations regarding
the payment of dividends, the outcome of litigation, arbitration and regulatory
investigations and others, are based upon current information, expectations,
estimates and projections regarding the Company, the industries and markets in
which the Company operates, and management's assumptions and beliefs relating
thereto. Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of laws, legislation, regulations, supervision and licensing
by federal, state and local authorities and their impact on the lines of
business in which the Company and its subsidiaries are involved; unforeseen
compliance costs; changes in economic, political or regulatory environments;
changes in competition and the effects of such changes; the inability to
implement the Company's strategies; changes in management and management
strategies; the Company's inability to successfully design, create, modify and
operate its computer systems and networks; litigation involving the Company; and
risks described in Item1A. "Risk Factors" of the Form 10-K and from time to time
in reports and registration statements filed by the Company and its subsidiaries
with the SEC. Readers should take these factors into account in evaluating any
such forward-looking statements. The Company undertakes no obligation to update
publicly or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes thereto set forth in Item 8.
"Financial Statements and Supplementary Data".
OVERVIEW
Company Model
The Company provides federal, state and local income tax return preparation for
individuals predominantly in middle and upper income brackets and accounting
services to small and midsize companies and financial planning services,
including securities brokerage, investment management services, insurance and
financing services. Clients often consider other aspects of their financial
needs such as investments, insurance, pension and estate planning, while having
their tax returns prepared by the Company. The Company believes that its tax
return preparation and accounting services are inextricably intertwined with its
financial planning activities. Neither channel would operate as profitably by
itself and the two channels leverage off each other, improving profitability and
client retention. The financial planners who provide such services are employees
of the Company and/or independent contractors of the Company's Prime Capital
Services, Inc. ("PCS") subsidiary. The Company and PCS earn a share of
commissions (depending on what service is provided) from the services that the
financial planners provide to the clients in transactions for securities,
insurance and related products. The Company also earns substantial revenue from
asset management services provided through Asset & Financial Planning, Ltd.
("AFP"), a wholly owned subsidiary. The Company also earns revenues from
commissions for acting as an insurance agent and as a broker for financing
services. PCS also earns revenues ("PCS Marketing") from its strategic marketing
relationships with certain product sponsors which enables PCS to efficiently
utilize its training, marketing and sales support resources.
For the fiscal year ended June 30, 2007, approximately 10.0% of the Company's
revenues were earned from tax preparation and accounting services and 90.0% were
earned from all financial planning and related services of which approximately
74.0% was earned from mutual funds, annuities and securities transactions, 21.0%
from asset management, 2.0% from insurance, 2.0% from PCS Marketing, and 1.0%
from financing services.
PAGE 19
Managed Assets
The following table presents the market values of assets under management by
AFP:
Market Value as of June 30,
2007 2006 2005
-------------------------------------------
Annuities $354,658,685 $348,284,622 $317,998,504
Brokerage 274,943,420 261,720,566 200,450,081
-------------------------------------------
Total Assets Under AFP Management $629,602,105 $610,005,188 $518,448,585
Note: The increase in asset values is attributable to increased assets under
management as well as market fluctuations.
The following table presents the market values of total Company assets under
custody:
Total Company
Market Value as of Assets Under Custody
------------------ --------------------
06/30/2007 $4,961,358,100
06/30/2006 $4,463,245,700
06/30/2005 $4,098,175,100
Debt
As of June 30, 2007, the Company was in default on its $5.0 million distribution
financing with Met Life Insurance Company of Connecticut ("Met Life") which
purchased the Travelers Insurance Company who the original financing was
through. On August 20, 2007, the Company sold 40.0 million shares of Company
common stock to certain investment purchasers (the "Investment Purchase
Closing") and sold an additional 40.0 million shares of Company common stock to
certain private placement purchasers (the "Private Placement Closing"). As a
result of the Investment Purchase Closing and the Private Placement Closing, on
August 20, 2007, Met Life was paid $2.4 million in full satisfaction of the
approximately $6.8 million, including principal and interest, owed to Met Life.
See Note 22 to Notes to Consolidated Financial Statements for a discussion of
the stock sales.
During fiscal 2007, 2006 and 2005 the Company was in default of certain
covenants under its term loan/revolving letter of credit financing with Wachovia
Bank, National Association ("Wachovia"). As a result of these defaults, the
Company entered into a debt forbearance agreement with Wachovia which was last
amended on April 1, 2006. However, the Company does not believe that Wachovia
will issue a notice of default for any of these defaults. As a result of these
defaults, the Company's debt with Wachovia has been classified as a current
liability on its financial statements. On August 20, 2007, as a result of the
Investment Purchase Closing and the Private Placement Closing, a $50,000
principal payment was made to Wachovia. As of September 1, 2007, the Company was
current with its monthly payments to Wachovia and the outstanding principal
balance was $0.7 million.
A $1.0 million loan (the "Purchasing Group Loan") owed by the Company and 0.8
million shares of Company common stock were sold to a group of Company
management and employees (the "Purchasing Group") on April 29, 2005 for the
amount of $0.8 million. The $0.3 million debt reduction agreed to by the
Purchasing Group was recorded to paid-in-capital, as the Purchasing Group is a
related party. Pursuant to the terms of the Purchasing Group Loan, the
Purchasing Group was entitled to receive, in the aggregate, as interest, 0.2
million shares of the Company's common stock annually while the debt remains
unpaid. On August 20, 2007, as part of the Private Placement Closing, $0.7
million of the Purchasing Group Loan was converted to 7.1 million shares of
Company common stock, leaving a de minimis debt balance to a member of the
Purchasing Group, who continues to be entitled to receive shares as interest
while the debt remains unpaid.
See Note 11 to Notes to Consolidated Financial Statements for a discussion of
the Company's debt.
Acquisitions
The Company is actively pursuing acquisitions of tax preparation and accounting
firms to increase its client base and accounting business. In an effort to
facilitate identifying potential acquisitions, the Company has launched an
advertising campaign involving targeted direct mail, a customized web site and
inbound and outbound telemarketing to prospect for leads. In fiscal 2007, the
Company entered into five agreements to purchase tax preparation and accounting
businesses.
PAGE 20
Regulatory Investigations
On September 6, 2005, the Company received an informal inquiry from the SEC
regarding variable annuity sales by the Company's registered representatives
during the period January 1, 2002 through August 1, 2005. On June 22, 2006, the
SEC entered a formal order of investigation. The Company is cooperating fully
with the SEC in connection with this inquiry. At this stage of the formal
investigation the Company cannot predict whether an enforcement action will
result from the SEC's investigation.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statements of
operations expressed as a percentage of revenue for fiscal years 2007, 2006 and
2005. The trends illustrated in the following table are not necessarily
indicative of future results.
For Fiscal Years Ended June 30,
2007 2006 2005
--------------------------------
Revenues
Financial Planning Services 89.9% 89.7% 88.4%
Tax Preparation and Accounting Fees 10.1% 10.3% 11.6%
--------------------------------
Total Revenue 100.0% 100.0% 100.0%
--------------------------------
Operating Expenses
Commissions 61.7% 61.7% 60.9%
Salaries 16.6% 17.4% 18.5%
General and Administrative Expense 9.9% 11.4% 11.2%
Advertising 3.3% 4.6% 4.2%
Brokerage Fees & Licenses 2.1% 2.1% 2.0%
Rent 3.8% 4.3% 3.1%
Depreciation and Amortization 1.8% 2.1% 2.1%
--------------------------------
Total Operating Expenses 99.2% 103.6% 102.0%
--------------------------------
Income/(Loss) Before Other Income/(Expense) 0.8% -3.6% -2.0%
Other Income/(Expense) 0.7% -1.2% -1.3%
--------------------------------
Income/(Loss) Before Income Taxes 1.5% -4.8% -3.2%
Income Taxes/(Expense) 0.0% 0.0% 0.0%
--------------------------------
Net Income/(Loss) 1.5% -4.8% -3.2%
--------------------------------
The following table sets forth a summary of the Company's consolidated results
of operations for fiscal years ended 2007, 2006 and 2005:
<TABLE>
<CAPTION>
For Fiscal Years Ended June 30,
% Change
Consolidated Results of Operations 2007 2006 2005 07-06 06-05
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $53,051,566 $53,621,438 $56,243,677 -1.1% -4.7%
Commissions 32,747,937 33,104,344 34,242,568 -1.1% -3.3%
Other Operating Expenses 19,864,809 22,433,731 23,100,587 -11.5% -2.9%
Net Income/(Loss) 792,950 (2,555,320) (1,825,576) -131.0% 40.0%
Diluted EPS from Net Income/(Loss) $ 0.08 $ (0.28) $ (0.20) -128.6% 40.0%
-----------------------------------------------------------------------
</TABLE>
PAGE 21
The following two tables set forth a breakdown of the Company's consolidated
revenue detail by product line and brokerage product type for the fiscal years
ended 2007, 2006 and 2005:
<TABLE>
<CAPTION>
For Fiscal Years Ended June 30,
Consolidated Revenue Detail % Change
2007 2006 2005 07-06 06-05
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue by Product Line
Brokerage Commissions $35,056,720 $35,583,414 $36,492,662 -1.5% -2.5%
Insurance Commissions 1,056,125 1,821,945 3,105,128 -42.0% -41.3%
Advisory Fees 9,904,984 9,052,617 8,433,408 9.4% 7.3%
Tax Preparation and Accounting Fees 5,358,135 5,502,613 6,502,402 -2.6% -15.4%
Lending Services 672,460 684,143 834,502 -1.7% -18.0%
Marketing Revenue 1,003,142 976,706 875,575 2.7% 11.6%
-----------------------------------------
Total Revenue $53,051,566 $53,621,438 $56,243,677 -1.1% -4.7%
=========================================
<CAPTION>
Brokerage Commissions by Product Type
<S> <C> <C> <C> <C> <C>
Mutual Funds $ 5,410,322 $ 5,133,360 $ 4,468,242 5.4% 14.9%
Equities, Bonds & UIT 1,378,616 1,251,194 1,175,492 10.2% 6.4%
Annuities 19,564,215 20,914,200 22,954,770 -6.5% -8.9%
Limited Partnerships 191,641 243,145 209,473 -21.2% 16.1%
Variable Life 370,148 278,811 296,910 32.8% -6.1%
Trails 7,438,144 6,634,433 5,879,249 12.1% 12.8%
Miscellaneous Income 30,798 105,658 105,090 -70.9% 0.5%
Gain on Firm Trading 669,498 990,439 1,351,564 -32.4% -26.7%
Unrealized Gain/(Loss) on Firm Trading 3,338 32,174 51,872 -89.6% -38.0%
-----------------------------------------
Brokerage Commissions $35,056,720 $35,583,414 $36,492,662 -1.5% -2.5%
=========================================
</TABLE>
FISCAL 2007 COMPARED WITH FISCAL 2006
The Company's revenues for the fiscal year ended June 30, 2007 were $53.1
million, down 1.1%, compared with $53.6 million for the fiscal year ended June
30, 2006. This decrease was primarily attributable to a decline in the Company's
revenues from annuity and insurance services. The Company's tax preparation
business also declined due to tax preparer attrition in several of its offices.
These declines were mostly offset by an increase in the Company's advisory
business. The Company continues to redefine its product mix, including sales of
financial products that generate recurring income.
The Company's total revenues for the fiscal year ended June 30, 2007 consisted
of $47.7 million for financial planning services and $5.4 million for tax
preparation services. Financial planning services represented approximately
90.0% and tax preparation and accounting services represented approximately
10.0% of the Company's total revenues for the fiscal year ended June 30, 2007.
The Company's financial planning revenue is split approximately 37.0 % for
Company owned offices and 63.0% for independent offices. Thus within Company
offices, financial planning services represented approximately 77.0% of revenues
and tax preparation services represented approximately 23.0%. The Company's
total revenues for the fiscal year ended June 30, 2006 consisted of $48.1
million for financial planning services and $5.5 million for tax preparation and
accounting services. Financial planning represented approximately 90.0% and tax
preparation and accounting fees represented approximately 10.0% of the Company's
revenues for the fiscal year ended June 30, 2006. Within Company owned offices
approximately 80.0% of revenues for this time period came from financial
planning and 20.0% came from tax preparation and accounting services for the
fiscal year ended June 30, 2006.
The Company has placed a major focus on products and services that generate
recurring revenue. This focus is principally manifested in the growth of the
Company's investment advisory business through AFP. For the fiscal year ended
June 30, 2007, revenues from recurring revenues sources (advisory and trails)
increased to $17.3 million, up $1.7 million from $15.7 million for the fiscal
year ended June 30, 2006, representing a 10.6% increase in recurring revenue.
For the fiscal year ended June 30, 2007, recurring revenue (advisory and trails)
was 32.7% of the Company's total revenue compared to 29.3% for the fiscal year
ended June 30, 2006.
PAGE 22
For the fiscal year ended June 30, 2007, revenues from variable annuity sales
were $19.6 million compared with $20.9 million for the same period last year,
representing a 6.5% drop in annuity revenue.
The Company's total operating expenses for the fiscal year ended June 30, 2007
were $52.6 million compared to $55.5 million for the fiscal year ended June 30,
2006. Operating expenses decreased as a result of declines in every major
expense category year over year.
The Company's commission expense for the fiscal year ended June 30, 2007 was
$32.7 million, a decrease of $0.4 million from $33.1 million for the fiscal year
ended June 30, 2006. The decrease is mostly attributable to decreased financial
planning revenue resulting primarily from decreased sales of annuities and
insurance products and lower tax preparation revenue.
Salaries which consist primarily of salaries, related payroll taxes and employee
benefit costs, decreased by $0.5 million, or 5.6% for the fiscal year ended June
30, 2007 compared with the same period last year. The decrease is attributable
to staff reductions in the fourth quarter of fiscal 2006.
General and administrative expense consists primarily of expenses for general
corporate functions including outside legal and professional fees, insurance,
telephone, bad debt expenses and general corporate overhead costs. General and
administrative expenses decreased by $0.9 million in the fiscal year ended June
30, 2007 compared with the same period last year. This decrease is primarily
attributable to decreases in general office expense, as well as lower bad debt
expense resulting from the reversal of the established allowance related to
certain gross receivables transferred to Prime Partners, Inc. ("Prime Partners,
Inc.") and to certain receivables where collectibility is more favorable.
Michael Ryan, the Company's President and Chief Executive Officer, is a
director, an officer and a significant shareholder of Prime Partners, Inc.
Advertising expense decreased 27.8% to $1.8 million for the fiscal year ended
June 30, 2007 compared with $2.5 million for the same period last year. This
decrease is primarily attributable to the Company's efforts to find more
efficient advertising channels to grow brand awareness.
Brokerage fees and license expense for the fiscal year ended June 30, 2007 was
approximately $50,000 lower compared with the same period last year. The
decrease was mostly attributable to the decline in financial planning revenue.
Rent expense decreased 11.3% to $2.0 million for the fiscal year ended June 30,
2007 compared with $2.3 million for the same period last year. This decrease is
due to the closing and consolidation of Company offices during the first and
second quarters of fiscal 2007.
Depreciation and amortization for the fiscal year ended June 30, 2007 was $0.9
million, a decrease from $1.1 million for the same period last year. The
decrease is attributable to lower depreciation expense due to assets reaching
their full depreciable lives, partially offset by increases due to capital
expenditures related to the opening of the Company's new offices in Bonita
Springs, Florida and the relocation of the New City, New York office to a more
prominent location in the same city.
The Company's income before other income and expense for the fiscal year ended
June 30, 2007 was $0.4 million compared with a loss of $1.9 million for the same
period last year. This improvement of $2.3 million was primarily attributable to
decreased operating expenses, partially offset by decreases in financial
planning revenue mostly in annuities and the insurance product line and
decreased tax preparation revenue.
Total other income/(expense) for the fiscal year ended June 30, 2007 improved to
$0.4 million in income, net, up from $0.6 million net expense in the fiscal year
ended June 30, 2006. The improvement is the result of the recognition of
deferred income related to the Company's renewed clearing agreement of $0.6
million, the $0.4 million gain on the sale of the Company's Westport,
Connecticut and its Melbourne, Florida businesses during fiscal 2007, and the
write off of $0.2 million of historical accounts payable balances whereby the
statues of limitations had expired.
The Company's net income for the fiscal year ended June 30, 2007, was $0.8
million, or $0.08 per diluted earnings per share, compared to a net loss of $2.6
million, or ($0.28) per diluted earnings per share for the fiscal year ended
June 30, 2006, an improvement of $3.3 million. This improvement is mostly
attributable to the Company's efforts to reduce operating expenses, increases in
recurring revenue sources, its recognition of deferred income of $0.6 million
related to its renewed clearing agreement and its gain of $0.4 million on the
sale of its Westport, Connecticut and its Melbourne, Florida businesses, the
write off of $0.2 million of historical accounts payable balances whereby the
statues of limitations had expired, all partially offset by reduced financial
planning revenue mostly in annuities and insurance of $2.1 million.
PAGE 23
FISCAL 2006 COMPARED WITH FISCAL 2005
The Company's revenues for the fiscal year ended June 30, 2006 were $53.6
million, down 4.7%, compared with $56.2 million for the fiscal year ended June
30, 2005. This decrease was primarily attributable to a decline in the Company's
revenues from financial planning services, resulting principally from the
Company's annuity, insurance and financing services. The Company's tax
preparation business also declined mostly due to the closing of its Colorado
office. These declines were partially offset by an increase in the Company's
advisory business.
The Company's total revenues for the fiscal year ended June 30, 2006 consisted
of $48.1 million for financial planning services and $5.5 million for tax
preparation and accounting services. Financial planning services represented
approximately 90.0% and tax preparation and accounting services represented
approximately 10.0% of the Company's total revenues for the fiscal year ended
June 30, 2006. The Company's total revenues for the fiscal year ended June 30,
2005 consisted of $49.7 million for financial planning services and $6.5 million
for tax preparation services. Financial planning represented approximately 88.0%
and tax preparation and accounting services represented approximately 12.0% of
the Company's revenues for the fiscal year ended June 30, 2005.
The Company continued to redefine its product mix, placing a smaller emphasis on
annuities, while increasing sales of other financial products that generate
recurring income. For the fiscal year ended June 30, 2006, revenues from
recurring revenues sources (advisory and trails) increased to $15.7 million, up
$1.4 million from $14.3 million for the fiscal year ended June 30, 2005,
representing a 9.6% increase in recurring revenue. The increase in recurring
revenues is the result of higher assets under management and assets under
custody. For the fiscal year ended June 30, 2006, recurring revenue (advisory
and trails) was 29.3% of the Company's total revenue compared to 25.4% for the
fiscal year ended June 30, 2005.
For the fiscal year ended June 30, 2006, revenues from variable annuity sales
were $20.9 million compared with $23.0 million for the fiscal year ended June
30, 2005, representing an 8.9% drop in annuity revenue. The decline in revenue
from annuity sales is consistent with the Company's goal of having a higher
recurring revenue stream.
The Company's total operating expenses for the fiscal year ended June 30, 2006
were $55.5 million compared to $57.3 million for the fiscal year ended June 30,
2005. Operating expenses decreased mostly due to lower commissions and salary
expense, general and administrative expense, and depreciation and amortization
expense year over year, partially offset by increases in advertising, brokerage
fees and licenses and rent compared with the fiscal year ended June 30, 2005.
The Company's commission expense for the fiscal year ended June 30, 2006 was
$33.1 million, a decrease of $1.1 million from $34.2 million for the fiscal year
ended June 30, 2005. The decrease is mostly attributable to decreased financial
planning revenue resulting primarily from decreased sales of annuities and
insurance products and lower tax preparation revenue due to the closing of its
Colorado office.
Salaries which consist primarily of salaries, related payroll taxes and employee
benefit costs, decreased by $1.1 million, or 10.6% for the fiscal year ended
June 30, 2006 compared with the fiscal year ended June 30, 2005. This decrease
is attributable to outsourcing the telemarketing center, continued efforts to
reduce administrative salary costs and decreased contributions by the Company to
health care costs due to greater health care contributions from the Company's
representatives.
General and administrative expense consists primarily of expenses for general
corporate functions including outside legal and professional fees, insurance,
telephone, bad debt expenses and general corporate overhead costs. General and
administrative expenses decreased by $0.2 million in the fiscal year ended June
30, 2006 compared with the fiscal year ended June 30, 2005. This decrease is
primarily attributable to decreases in general office expense and professional
development.
Advertising expense increased 5.2% to $2.5 million for the fiscal year ended
June 30, 2006 compared with $2.3 million for the fiscal year ended June 30,
2005. This increase is primarily attributable to the outsourcing of the
Company's telemarketing efforts and increased marketing efforts related to media
advertisement. The increased expense from outsourcing the Company's
telemarketing, however, was partially offset by a decrease in salaries from the
reduction of telemarketing staff.
Brokerage fees and license expense for the fiscal year ended June 30, 2006 was
slightly higher compared with the fiscal year ended June 30, 2005. This increase
was mostly attributable to an increase in fees due to higher assets under
management.
Rent expense increased 29.3% to $2.3 million for the fiscal year ended June 30,
2006 compared with $1.8 million for the fiscal year ended June 30, 2005 This
increase is attributable to the relocation of an office to the Greenvale section
of Nassau County, Long Island, and the opening of new offices in Ft. Lauderdale,
Florida and Williamsville, New York, which are in larger more prominent retail
locations, and are generally more expensive to lease.
PAGE 24
Depreciation and amortization for the fiscal year ended June 30, 2006 was $1.1
million, a slight decrease from $1.2 million for the same period last year. The
decrease is attributable to lower depreciation expense due to assets reaching
their full depreciable lives, partially offset by increases due to capital
expenditures related to the opening of the Company's new offices in
Williamsville, New York, Greenvale, New York and Fort Lauderdale, Florida.
The Company's loss before other income and expense for the fiscal year ended
June 30, 2006 was $1.9 million compared with a loss of $1.1 million for the
fiscal year ended June 30, 2005, an increased loss of $0.8 million. This
increased loss was primarily attributable to decreased financial planning
revenue mostly in annuities and the insurance product line and decreased tax
preparation revenue, offset slightly by decreased commission and salary expense
and reduced general and administrative expenses.
Total other income/(expense) for the fiscal year ended June 30, 2006 improved
12.0% to $0.6 million net expense, down from $0.7 million net expense in fiscal
year ended June 30, 2005. The improvement is the result of lower interest
expense and higher interest income.
The Company's net loss for the fiscal year ended June 30, 2006, was $2.6 million
compared to a net loss of $1.8 million for the fiscal year ended June 30, 2005,
an increased loss of $0.7 million. This increase is mostly attributable to a
decline in revenue from financial planning services, mostly in annuity and
insurance sales and tax preparation, partially offset by decreases in commission
and salary expense and reduced general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2007, the Company was in default on its $5.0 million distribution
financing with Met Life Insurance Company of Connecticut ("Met Life") which
purchased the Travelers Insurance Company who the original financing was
through. On August 20, 2007, the Company sold 40.0 million shares of Company
common stock to certain investment purchasers (the "Investment Purchase
Closing") and sold an additional 40.0 million shares of Company common stock to
certain private placement purchasers (the "Private Placement Closing"). As a
result of the Investment Purchase Closing and the Private Placement Closing, on
August 20, 2007, Met Life was paid $2.4 million in full satisfaction of the
approximately $6.8 million, including principal and interest, owed to Met Life.
See Note 22 to Notes to Consolidated Financial Statements for a discussion of
the stock sales.
During fiscal 2007, 2006 and 2005 the Company was in default of certain
covenants under its term loan/revolving letter of credit financing with Wachovia
Bank, National Association ("Wachovia"). As a result of these defaults, the
Company entered into a debt forbearance agreement with Wachovia which was last
amended on April 1, 2006. However, the Company does not believe that Wachovia
will issue a notice of default for any of these defaults. As a result of these
defaults, the Company's debt with Wachovia has been classified as a current
liability on its financial statements. On August 20, 2007, as a result of the
Investment Purchase Closing and the Private Placement Closing, a $50,000
principal payment was made to Wachovia. As of September 1, 2007, the Company was
current with its monthly payments to Wachovia and the outstanding principal
balance was $0.7 million.
A $1.0 million loan (the "Purchasing Group Loan") owed by the Company and 0.8
million shares of Company common stock were sold to a group of Company
management and employees (the "Purchasing Group") on April 29, 2005 for the
amount of $0.8 million. The $0.3 million debt reduction agreed to by the
Purchasing Group was recorded to paid-in-capital, as the Purchasing Group is a
related party. Pursuant to the terms of the Purchasing Group Loan, the
Purchasing Group was entitled to receive, in the aggregate, as interest, 0.2
million shares of the Company's common stock annually while the debt remains
unpaid. On August 20, 2007 as part of the Private Placement Closing $0.7 million
of the Purchasing Group Loan was converted to 7.1 million shares of Company
common stock, leaving a de minimis debt balance to a member of the Purchasing
Group, who continues to be entitled to receive shares as interest while the debt
remains unpaid.
During the fiscal year ended June 30, 2007, the Company had net income of $0.8
million and at June 30, 2007 had a working capital deficit of $14.1 million.
However, as a result of the Investment Purchase Closing and the Private
Placement Closing on August 20, 2007, the working capital deficit was reduced by
$12.0 million to $2.1 million. At June 30, 2007 the Company had $1.4 million of
cash and cash equivalents, $0.2 million in marketable securities and $3.2
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 June 30, 2007 the Company was in
compliance with this regulation.
See Note 11 to Notes to Consolidated Financial Statements for a discussion of
the Company's debt.
On May 23, 2007, the Company sold its tax preparation and financial planning
office located in Melbourne, Florida for $0.4 million, which was received on
June 13, 2007.
PAGE 25
On November 30, 2006, the Company sold its tax preparation and financial
planning office located in Westport, Connecticut for $65,000. The Company
received $16,250 at the closing and a promissory note for $48,750.
At June 30, 2007 the Company had a working capital deficit of $14.1 million. The
Company had previously funded working capital commitments through loans from
Prime Partners, Inc. In fiscal 2007, Prime Partners, Inc. extended short-term
loans to the Company in the aggregate amount of $1.7 million for working capital
purposes. During fiscal 2007, the Company repaid $0.7 million and at June 30,
2007, the Company owed Prime Partners, Inc. $2.8 million. On August 16, 2007,
Prime Partners, Inc. sold to Prime Partners II, LLC. $1.5 million of the $2.8
million owed to it by the Company. Prime Partners II, LLC is a limited liability
company. Michael Ryan is a significant member and a manager of Prime Partners
II, LLC. On August 20, 2007, as part of the Private Placement Closing, Prime
Partners II, LLC converted the $1.5 million of Company debt into 15.4 million
shares of Company common stock.
In prior fiscal years, the Company had significant working capital deficiencies.
The Company's liquidity improved during fiscal 2007 as evidenced by positive
earnings and cash flow from operations. Additionally, the Company's debt was
significantly reduced as a result of the Investment Purchase Closing and the
Private Placement Closing.
The Company's cash flows provided by operating activities totaled $0.2 million
for the fiscal year ended June 30, 2007, compared with cash flows used in
operating activities of $0.3 million for the fiscal year ended June 30, 2006.
The increase of $0.5 million in cash provided by operating activities was
primarily due to higher net income at June 30, 2007 versus last year.
Net cash used in investing activities totaled $0.2 million for the fiscal year
ended June 30, 2007 compared to cash flows used in investing activities of $0.9
million for the fiscal year ended June 30, 2006. The improvement in cash used in
investing activities was primarily attributable to reduced capital expenditures
in fiscal 2007 versus fiscal 2006 where the Company opened new offices, as well
as the sale of its Melbourne, Florida office on May 23, 2007.
The Company's cash flows provided by financing activities totaled $0.2 million
for the fiscal year ended June 30, 2007, compared with cash flows provided by
financing activities of $1.6 million for the fiscal year ended June 30, 2006.
The reduction of $1.4 million in cash provided by financing activities is due
primarily to decreased borrowings in fiscal 2007 compared with fiscal 2006
mostly resulting from improved operating results, whereby the Company did not
have to borrow from related parties.
CONTRACTUAL OBLIGATION AND COMMERCIAL COMMITMENTS
The table below summarizes the Company's contractual obligations for the five
years subsequent to June 30, 2007, and thereafter. The amounts represent the
maximum future cash contractual obligations.
Contractual Obligations and Commercial Commitments
<TABLE>
<CAPTION>
Payment Due by Period
Contractual Obligations Total 2008 2009 2010 2011 2012 Thereafter
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt* $ 9,450,801 $ 9,201,280 $ 249,521 $ -- $ -- $ -- $ --
Operating Leases 7,895,905 2,119,366 1,800,983 1,340,675 1,096,014 604,656 934,211
Capital Leases 475,157 246,373 107,827 69,099 25,227 19,362 7,269
-----------------------------------------------------------------------------------------------------
Total contractual cash
obligations $17,821,863 $11,567,019 $ 2,158,331 $ 1,409,774 $ 1,121,241 $ 624,018 $ 941,480
=====================================================================================================
</TABLE>
* As a result of the sale of 40.0 million shares of Company common stock to
certain investment purchasers, and the sale of an additional 40.0 million shares
of Company common stock to certain private placement purchasers on August 20,
2007, the total debt reflected in the above table was reduced to $1.1 million.
See Note 22 to Notes to Consolidated Financial Statements for a discussion of
the stock sales.
Note: This Contractual Obligations schedule reflects the contractual payment
terms of the debt maturities, while $0.2 million related to the Wachovia debt
has been reclassified to current liabilities in the balance sheet since such
debt is in technical default.
The contractual obligations and commercial commitments schedule does not include
contingent payments related to several asset purchase agreements entered into by
the Company, which include contingent consideration based upon gross revenue
generated in future periods. The Company did not record a liability for these
contingent payments as they were deemed immaterial.
PAGE 26
Pursuant to Amendment No. 4 with Wachovia, the amortization schedule for the
Wachovia Loan was extended by approximately seven months and the Maturity Date
was extended to October 10, 2008. Under Amendment No. 4, the Company will pay
Wachovia principal on the loan of $50,000 monthly, plus interest.
The Company is also contractually obligated to certain employees and executives
pursuant to commission agreements and compensation agreements.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2007, the Company had no off-balance sheet arrangements.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's results of
operations in recent periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
To date, the Company's exposure to market risk has been limited and it is not
currently hedging any market risk, although it may do so in the future. The
Company does not hold or issue any derivative financial instruments for trading
or other speculative purposes. The Company is exposed to market risk associated
with changes in the fair market value of the marketable securities that it
holds. The Company's revenue and profitability may be adversely affected by
declines in the volume of securities transactions and in market liquidity, which
generally result in lower revenues from trading activities and commissions.
Lower securities price levels may also result in a reduced volume of
transactions, as well as losses from declines in the market value of securities
held by the Company in trading and investment positions. Sudden sharp declines
in market values of securities and the failure of issuers and counterparts to
perform their obligations can result in illiquid markets in which the Company
may incur losses in its principal trading activities.
Interest Rate Risk
The Company's obligations under its Wachovia loan agreement bears interest at
floating rates and therefore, the Company is impacted by changes in prevailing
interest rates. For fiscal 2007, had the interest rate fluctuated plus or minus
1.0%, interest expense would have been higher or lower by approximately $11,000.
PAGE 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ..................... 29
Consolidated Balance Sheets as of June 30, 2007 and 2006 .................... 31
Consolidated Statements of Operations for the years ended
June 30, 2007, 2006 and 2005 ................................................ 32
Consolidated Statements of Shareholders' Deficit for the years ended
June 30, 2007, 2006 and 2005 ................................................ 33
Consolidated Statements of Cash Flows for the years ended
June 30, 2007, 2006 and 2005 ................................................ 34
Notes to Consolidated Financial Statements .................................. 36
All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
PAGE 28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Gilman + Ciocia, Inc.
Poughkeepsie, New York
We have audited the accompanying consolidated balance sheets of Gilman + Ciocia,
Inc. and subsidiaries as of June 30, 2007 and 2006 and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
fiscal years ended June 30, 2007 and 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gilman + Ciocia, Inc. and
subsidiaries at June 30, 2007 and 2006 and the results of its operations and its
cash flows for the fiscal years ended June 30, 2007 and 2006, in conformity with
accounting principles generally accepted in the United States.
/s/ Sherb & Co., LLP
Sherb & Co., LLP
New York, New York
September 21, 2007
PAGE 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Gilman + Ciocia, Inc.
Poughkeepsie, New York
We have audited the accompanying statements of operations, shareholders' equity
(deficit) and comprehensive loss and cash flows of Gilman + Ciocia, Inc. and
subsidiaries for the fiscal year ended June 30, 2005. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gilman + Ciocia, I]]> |