XOTC:GTAX Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------------------

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended March 31, 2012

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________

Commission File Number 000-22996

GILMAN CIOCIA, INC.

(Exact name of registrant as specified in its charter)
 
DELAWARE   11-2587324
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
 
11 RAYMOND AVENUE
POUGHKEEPSIE, NEW YORK 12603
(Address of principal executive offices)(Zip code)

(845) 486-0900
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

As of May 14, 2012, 97,486,546 shares of the issuer's common stock, $0.01 par value, were outstanding.

 
 



QUARTERLY REPORT ON FORM 10-Q
For the Period Ending March 31, 2012
 
 
TABLE OF CONTENTS

   
Page
     
 
3
     
PART I - FINANCIAL INFORMATION
 
     
 
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
16
     
24
     
24
     
PART II - OTHER INFORMATION
 
     
25
     
25
     
26
     
26
     
26
     
26
     
27
     
28
 




 
 
 











The information contained in this Quarterly Report on Form 10-Q and the exhibits hereto may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Such statements, including statements regarding our expectations about our ability to raise capital, our strategy to achieve our corporate objectives, including our strategy to pursue growth through acquisitions, to increase revenues through our registered representative recruiting program and expand our brand awareness and business presence, our ability to be profitable, our expectations that the number of tax preparers who are certified public accountants will increase, the cyclical nature of our business, our liquidity and our ability to fund and intentions for funding future operations, revenues, the outcome or effect of litigation, arbitration and regulatory investigations, the impact of certain accounting pronouncements, the effects of our cost-cutting measures and our intention to continue to closely control expenses, contingent liability associated with acquisitions, the impact of the current economic conditions, and others, are based upon current information, expectations, estimates and projections regarding us, the industries and markets in which we operate, and management's assumptions and beliefs relating thereto.  Words such as “will,” “plan,” “anticipate”, “expect,” “remain,” “intend,” “estimate,” “approximate,” “believe” and variations thereof and similar expressions are intended to identify such forward-looking statements. These statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecasted in such forward-looking statements. Such differences could be caused by a number of factors including, but not limited to, the uncertainty of laws, legislation, regulations, supervision and licensing by federal, state and local authorities and their impact on the lines of business in which we and our subsidiaries are involved; unforeseen compliance costs; changes in economic, political or regulatory environments; the impact of the economic downturn; changes in competition and the effects of such changes; our ability to raise additional capital and to service or extend the terms of our debt and other financial obligations; the inability to implement our strategies; changes in management and management strategies; our inability to successfully design, create, modify and operate our computer systems and networks; and litigation and regulatory actions involving us.  Readers should take these factors, as well as those risks contained in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q into account in evaluating any such forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.  The reader should, however, consult further disclosures we may make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.














FINANCIAL INFORMATION
 
 

 
CONSOLIDATED BALANCE SHEETS
 
(in thousands)
 
   
   
Unaudited
       
   
March 31,
   
June 30,
 
   
2012
   
2011 (1)
 
Assets
     
             
Cash & Cash Equivalents
  $ 401     $ 383  
Restricted Cash
    190       190  
Marketable Securities
    11       1  
Trade Accounts Receivable, Net
    2,874       2,387  
Receivables from Employees, Net
    932       1,096  
Prepaid Expenses
    499       332  
Other Current Assets
    78       119  
Total Current Assets
    4,985       4,508  
                 
Property and Equipment (less accumulated depreciation of $7,147
               
   at March 31, 2012 and $6,944 at June 30, 2011)
    845       995  
Goodwill
    4,015       4,012  
Intangible Assets (less accumulated amortization of $8,968 at
               
   March 31, 2012 and $8,352 at June 30, 2011)
    4,665       5,184  
Other Assets
    270       291  
Total Assets
  $ 14,780     $ 14,990  
                 
Liabilities and Shareholders' Equity
               
                 
Accounts Payable ($5 and $4 are valued at fair value at
               
  March 31, 2012 and June 30, 2011, respectively)
  $ 1,795     $ 1,996  
Accrued Expenses
    1,573       1,446  
Commission Payable
    2,710       2,626  
Current Portion of Notes Payable and Capital Leases
    4,252       1,289  
Deferred Income
    192       217  
Due to Related Parties
    1,095       203  
Total Current Liabilities
    11,617       7,777  
                 
Long Term Portion of Notes Payable and Capital Leases
    25       2,537  
Long Term Portion of Related Party Notes
    143       1,111  
Other Long Term Liabilities
    931       1,044  
Total Liabilities
    12,716       12,469  
                 
Shareholders' Equity
               
                 
Preferred Stock, $0.001 par value; 100 shares authorized; none issued
    -       -  
Common Stock, $0.01 par value 500,000 shares authorized; 97,487 shares and
               
  96,887 share issued at March 31, 2012 and June 30, 2011
    975       969  
Additional Paid in Capital
    36,616       36,562  
Accumulated Deficit
    (35,527 )     (35,010 )
Total Shareholders' Equity
    2,064       2,521  
Total Liabilities and Shareholders' Equity
  $ 14,780     $ 14,990  
 
 
(1) Derived from audited financial statements.
 
               
See Notes to Unaudited Consolidated Financial Statements
               




 
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
(in thousands, except per share data)
 
   
   
For the Three Months Ended
March 31,
   
For the Nine Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
                       
Financial Planning Services
  $ 8,206     $ 8,013     $ 24,281     $ 25,730  
Tax Preparation and Accounting Fees
    4,091       4,048       5,493       5,207  
Total Revenues
    12,297       12,061       29,774       30,937  
                                 
Operating Expenses
                               
Commissions
    5,528       5,667       15,222       17,199  
Salaries and Benefits
    2,630       2,615       6,902       6,657  
General and Administrative
    1,592       1,253       3,453       3,447  
Advertising
    327       662       680       1,033  
Brokerage Fees and Licenses
    317       342       934       1,009  
Rent
    621       676       1,889       2,056  
Depreciation and Amortization
    274       287       819       838  
Total Operating Expenses
    11,289       11,502       29,899       32,239  
                                 
Income / (Loss) Before Other Income and Expenses
 
­­1,008
   
­­ 559
      (125 )     (1,302 )
Other Income/(Expenses)
                               
Interest and Investment Income
    -       3       5       12  
Interest Expense
    (140 )     (127 )     (403 )     (356 )
Other Expense, Net
    10       32       7       (58 )
Total Other Income/(Expense)
    (130 )     (92 )     (391 )     (402 )
                                 
Income / (Loss) Before Income Taxes
    878       467       (516 )     (1,704 )
Income Tax Expense
    -       -       -       -  
Net Income / (Loss)
  $ 878     $ 467     $ (516 )   $ (1,704 )
                                 
Weighted Average Number of Common
                               
Shares Outstanding:
                               
Basic and Diluted Shares
    97,487       96,887       97,220       96,644  
                                 
Basic and Diluted Net Income / (Loss) Per Share:
                               
Net Income / (Loss) Per Common Share
  $ 0.01     $ 0.00     $ (0.01 )   $ (0.02 )
                                 
                                 
                                 
                                 
See Notes to Unaudited Consolidated Financial Statements
                         
 
 
 
 
 
 
 
 

 


 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
(in thousands)
 
   
   
For the Nine Months Ended
March 31,
 
   
2012
   
2011
 
Cash Flows from Operating Activities:
           
Net loss
  $ (516 )   $ (1,704 )
                 
Adjustments to reconcile net loss to net cash provided
               
   by/(used in) operating activities:
               
Depreciation and amortization
    819       838  
Issuance of common stock for stock-based compensation and other
    60       75  
Loss on sale of office
    -       82  
Allowance for doubtful accounts
    249       147  
Gain on fair value recognition on accounts payable
    (17 )     (9 )
                 
Changes in assets and liabilities:
               
Accounts receivable
    (616 )     (407 )
Prepaid and other current assets
    (126 )     (24 )
Change in marketable securities
    (10 )     3  
Other assets
    21       20  
Accounts payable and accrued expenses
    29       146  
Deferred income
    (25 )     48  
Net cash used in operating activities:
    (132 )     (785 )
                 
Cash Flows from Investing Activities:
               
Capital expenditures
    (30 )     (23 )
Cash paid for acquisitions, net of cash acquired and debt
  Incurred
    (221 )     (203 )
Receivables from employees
    44       165  
Due from office sales
    -       45  
Proceeds from sale of office
    -       100  
Net cash (used in) provided by investing activities:
    (207 )     84  
                 
Cash Flows from Financing Activities:
               
Proceeds from other loans
    342       405  
Proceeds from notes payable
    1,050       700  
Proceeds from related parties
    140       200  
Payments to related parties
    (215 )     (127 )
Payments of notes payable
    (555 )     (425 )
Payments of capital leases and other loans
    (405 )     (422 )
Net cash provided by financing activities:
    357       331  
                 
Net change in cash and cash equivalents
    18       (370 )
Cash and cash equivalents at beginning of period
    383       928  
Cash and cash equivalents at end of period
  $ 401     $ 558  
                 
See Notes to Unaudited Consolidated Financial Statements and Supplemental Disclosures to Consolidated Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental Disclosures to Consolidated Statements of Cash Flows
(unaudited)
 
(in thousands)
 
   
   
For the Nine Months Ended
March 31,
 
   
2012
   
2011
 
Cash Flow Information
           
Cash payments during the year for:
           
   Interest
  $ 412     $ 351  
   Taxes
  $ -     $ -  
                 
Supplemental Disclosure of Non-Cash Transactions
               
Issuance of common stock for services, interest
               
   and other
  $ 30     $ 30  
Fair value recognition on legacy accounts payable
  $ (17 )   $ (9 )



































See Notes to the Unaudited Consolidated Financial Statements



 
7

GILMAN CIOCIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Description of the Company

Gilman Ciocia, Inc. (together with its wholly owned subsidiaries, “we”, “us”, “our” or the “Company”) was founded in 1981 and is incorporated under the laws of the State of Delaware.  We provide federal, state and local tax preparation services to individuals, predominantly in the middle and upper income tax brackets, accounting services to small and midsize companies and financial planning services, including securities brokerage, investment management services, insurance and financing services.  As of March 31, 2012, we had 27 company-owned offices operating in the states of New York, New Jersey and Florida and 36 independently operated offices providing financial planning services in 11 states.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been omitted pursuant to such rules and regulations.  However, we believe that the disclosures are adequate to make the information presented not misleading.  The Consolidated Balance Sheet as of March 31, 2012, the Consolidated Statements of Operations for the three months and nine months ended March 31, 2012 and 2011 and the Consolidated Statements of Cash Flows for the nine months ended March 31, 2012 and 2011 are unaudited.  The Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations.  The operating results for the three months and nine months ended March 31, 2012 are not necessarily indicative of the results to be expected for any other interim period or any future year.  These Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

Fiscal years are denominated by the year in which they end.  Accordingly, fiscal 2011 refers to the year ended June 30, 2011.

The Consolidated Financial Statements include the accounts of the Company and all majority owned subsidiaries from their respective dates of acquisition.  All significant inter-company transactions and balances have been eliminated.  Where appropriate, prior years financial statements reflect reclassifications to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  We and our wholly owned subsidiary Prime Capital Services, Inc. (“PCS”) have been named as a respondent in customer arbitrations and as a defendant in customer lawsuits (“Customer Claims”). These Customer Claims result from the actions of brokers affiliated with PCS.  Under the PCS registered representatives contract, each registered representative has indemnified us for these claims.  Most of these Customer Claims are covered by our errors and omissions insurance policy.  As of March 31, 2012, PCS was named as a respondent in two (2) customer arbitrations which were settled in April 2012, and PCS and the Company were named as a defendant in one customer lawsuit which is still pending.  We establish liabilities for potential losses from Customer Claims.  In establishing these liabilities, management uses its judgment to determine the probability that losses have been incurred and a reasonable estimate of the amount of losses.  While we will vigorously defend ourselves in these matters, and we assert insurance coverage and indemnification to the maximum extent possible, there can be no assurance that these lawsuits and arbitrations will not have a material adverse impact on our financial position.





 
8

GILMAN CIOCIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
Cash and Cash Equivalents
 
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents include investments in money market funds and are stated at cost, which approximates market value.  Cash at times may exceed FDIC insurable limits.   Restricted cash consists of deposits with clearing firms.

Impairment of Intangible Assets
 
Impairment of intangible assets results in a charge to operations whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We test goodwill for impairment annually (our fourth quarter) or more frequently whenever events occur or circumstances change, which would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Revenue Recognition

Company Owned Offices - We recognize all revenues associated with income tax preparation, accounting services and asset management fees upon completion of the services.  Financial planning services include securities and other transactions. The related commission revenue and expenses are recognized on a trade-date basis.  Marketing revenue associated with product sales is recognized quarterly based on production levels.  Marketing event revenues are recognized at the commencement of the event offset by its cost.
 
Independent Offices - We recognize 100% of all commission revenues and expenses associated with financial planning services including securities and other transactions on a trade-date basis.   Our independent offices are independent contractors who may offer other products and services of other unrelated parties.  These same offices are responsible for paying their own operating expenses, including payroll compensation for their staff.

Earnings (Loss) Per Share (“EPS”)

Basic EPS is computed using the weighted average number of common shares outstanding during each period.  Options to purchase 3,247,646 common shares at an average price of $0.16 per share were outstanding during the three months and nine months ended March 31, 2012, but were not included in the computation of diluted earnings per share because to do so would be anti-dilutive and because the options’ exercise prices were greater than the average market price of the common shares.  Options to purchase 3,252,810 common shares at an average price of $0.18 per share were outstanding during the three months and nine months ended March 31, 2011, but were not included in the computation of diluted earnings per share because to do so would be anti-dilutive and because the options’ exercise prices were greater than the average market price of the common shares.

Fair Value of Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, marketable securities, accounts receivable, notes receivable, accounts payable and debt, approximated fair value as of March 31, 2012 because of the relatively short-term maturity of these instruments and their market interest rates.

Contingent Consideration

During fiscal 2011 we entered into one asset purchase agreement which includes contingent consideration based upon gross revenue generated in future periods.  At the time of acquisition we recognized a liability of $1.3 million representing anticipated future contingency payments.  See Note 8.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist of trade receivables. The larger portion of our trade receivables are commissions earned from providing financial planning services that include securities brokerage services, insurance and financing services. Our remaining trade receivables consist of revenues recognized for accounting and tax services provided to businesses and individual tax payers.  As a result of the diversity of services, markets and the wide variety of customers, we do not consider ourselves to have any significant concentration of credit risk.

Segment Disclosure

Management believes the Company operates as one segment.
 
 


 
9

GILMAN CIOCIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
3.  RECENT ACCOUNTING PRONOUNCEMENTS

In September 2011, the FASB issued new guidance on testing goodwill for impairment. Pursuant to the new guidance an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss. Under the new guidance, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The new guidance does not change the current guidance for testing other indefinite lived intangible assets for impairment. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011.  As of March 31, 2012, the Company has not elected to adopt the new guidance early, and when adopted, this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

In May 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance related to Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. generally accepted accounting principles (“U.S. GAAP”) and the International Financial Reporting Standards (“IFRS”), that results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value. The new guidance clarifies and changes some fair value measurement principles and disclosure requirements under U.S. GAAP.  Among them is the clarification that the concepts of highest and best use and valuation premise in a fair value measurement should only be applied when measuring the fair value of nonfinancial assets. Additionally, the new guidance requires quantitative information about unobservable inputs, and disclosure of the valuation processes used and narrative descriptions with regard to fair value measurements within the Level 3 categorization of the fair value hierarchy. The requirements of the amended accounting guidance are effective for us January 1, 2012 and early adoption is prohibited.  The adoption of the new accounting guidance did not have a material impact on our consolidated financial statements.

In December 2010, the FASB amended its guidance related to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more-likely-than-not that a goodwill impairment exists.  In determining whether it is more-likely-than-not that a goodwill impairment exists, consideration should be made as to whether there are any adverse qualitative factors indicating that an impairment may exist.  The requirements of the amended accounting guidance were effective for us July 1, 2011 and early adoption was prohibited.  The adoption of the new accounting guidance did not have a material impact on our consolidated financial statements. 

In December 2010, the FASB amended its guidance related to business combinations entered into by an entity that are material on an individual or aggregate basis.  These amendments clarify existing guidance that if an entity presents comparative financial statements that include a material business combination, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  The requirements of the amended guidance were effective for us July 1, 2011 and early adoption was permitted.  This disclosure-only guidance did not have a material impact on our consolidated financial statements.

All other new accounting pronouncements issued but not yet effective or adopted have been deemed not to be relevant to us, hence are not expected to have any impact once adopted.

4.  COMMITMENTS AND CONTINGENCIES

On April 6, 2012, the State of Florida Office of Financial Regulation commenced an Administrative Proceeding (the “OFR Proceeding”) against PCS, Asset & Financial Planning, Ltd. (“AFP”), a wholly owned subsidiary and a registered investment advisor, and three registered representatives of PCS.   The OFR Proceeding seeks the imposition of administrative fines in the amount of $575,000.00 from PCS, $238,500.00 from AFP and $323,500.00 from the registered representatives. The allegations in the OFR Proceeding concern the impact of management fees on the bonus provisions of a rider on 55 customer variable annuities between 2007 and 2010.  AFP has since instituted procedures to insure that no other variable annuities under management are similarly impacted.   PCS, AFP and the registered representatives believe that these transactions were an administrative error and that the customers did not suffer any economic harm or damage.  PCS, AFP and the registered representatives do not believe that the imposition of administrative fines is appropriate. Given these facts, we believe that the OFR Proceeding will be settled for less than $50,000.00.  If the OFR Proceeding does not settle, PCS, AFP and the registered representatives intend to vigorously defend against the OFR Proceeding and we believe that we will prevail.  However, there is no assurance that the OFR Proceeding will be settled and we cannot assure the outcome of the Proceeding.  We therefore cannot at this time estimate the financial outcome of the OFR Proceeding.


 
10

GILMAN CIOCIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
4. COMMITMENTS AND CONTINGENCIES - continued
 
Our insurance carrier has interrelated all claims involving the variable annuity sales practices of certain registered representatives of PCS that involve an SEC Administrative Proceeding commenced on June 30, 2009 which we settled on March 16, 2010 (the “Interrelated Claims”).  The total remaining insurance coverage for the Interrelated Claims was reduced from $1.0 million to $0.3 million after settling arbitrations commenced by customers.  On February 1, 2012, we settled the last pending Interrelated Claim customer arbitration for $0.4 million which was paid $0.3 million from insurance coverage and $0.1 million from us. As a result of this settlement, there is no remaining insurance coverage for arbitrations for Interrelated Claims which may be commenced by customers and we could be required to pay significant additional costs out of pocket, which would reduce our working capital and have a material adverse effect on our results of operations.  We continue to have insurance coverage for any claims that are not “interrelated claims” previously defined.

We and PCS have been named as a respondent in customer arbitrations and as a defendant in customer lawsuits (“Customer Claims”). These Customer Claims result from the actions of brokers affiliated with PCS.  Under the PCS registered representatives contract, each registered representative has indemnified us for these claims.  Most of these Customer Claims are covered by our errors and omissions insurance policy.  As of March 31, 2012, PCS was named as a respondent in two (2) customer arbitrations which were settled in April 2012, and PCS and the Company were named as a defendant in one customer lawsuit which is still pending.  We establish liabilities for potential losses from Customer Claims.  In establishing these liabilities, management uses its judgment to determine the probability that losses have been incurred and a reasonable estimate of the amount of losses.  While we will vigorously defend ourselves in these matters, and we assert insurance coverage and indemnification to the maximum extent possible, there can be no assurance that these lawsuits and arbitrations will not have a material adverse impact on our financial position.   At March 31, 2012 we have accrued $0.2 million for potential settlements, judgments and awards.

5.  EQUITY

On October 31, 2011, pursuant to the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), we granted to the independent members of our Board of Directors and Jim Ciocia, our Chairman of the Board, in the aggregate, $30.0 thousand in common stock options, or 626,304 common stock options each with an exercise price of $0.15 and a ten-year term which vest as to 20.0% of the shares annually commencing one year after the date of grant and which have a Black-Scholes value at the time of grant determined based on the closing price of our common stock on the date of grant.  Additionally, on October 31, 2011 we issued in the aggregate to these same board members $30.0 thousand in common stock, or 600,000 shares of restricted common stock.

On October 31, 2008 we commenced the Gilman Ciocia Common Stock and Promissory Note Offering, a private offering of our securities pursuant to SEC Regulation D (the “2008 Offering”).  The 2008 Offering was amended on December 8, 2008, September 3, 2009, December 16, 2009, February 11, 2010, March 29, 2010 and May 31, 2011.  The securities offered for sale in the 2008 Offering, as amended were:  $3.8 million of notes with interest at 10.0% (the “2008 Notes”) and $0.4 million, or 3.5 million shares of our $0.01 par value common stock with a price of $0.10 per share (the “Shares”).  As of March 31, 2012, $3.3 million of the 2008 Notes are outstanding and due July 1, 2012 and $0.1 million, or 1.0 million shares, of our common stock were issued pursuant to the 2008 Offering.

6.  FAIR VALUE MEASUREMENTS

Valuation techniques for fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our best estimate, considering all relevant information. These valuation techniques involve some level of management estimation and judgment. The valuation process to determine fair value also includes making appropriate adjustments to the valuation model outputs to consider risk factors.

The fair value hierarchy of our inputs used in the determination of fair value for assets and liabilities during the current period consists of three levels.  Level 1 inputs are comprised of unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.  Level 2 inputs include quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.  Level 3 inputs incorporate our own best estimate of what market participants would use in pricing the asset or liability at the measurement date where consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.   If inputs used to measure an asset or liability fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the asset or liability.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
 
11

GILMAN CIOCIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
6. FAIR VALUE MEASUREMENTS - continued
 
We have accounts payable balances that are at least four years old and that we believe will never require a financial payment for a variety of reasons.  Accordingly, we opted to use the cost approach as our valuation technique to measure the fair value of our legacy accounts payable.  Based on historical payouts we have established an estimate of fifteen cents on the dollar on these legacy balances that we would potentially pay out.  No income was recorded during the nine months ended March 31, 2012.

The following table sets forth the assets and liabilities as of March 31, 2012 which is recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy.  These are classified based on the lowest level of input that is significant to the fair value measurement:
 
   
Quoted Prices in Active
 
(in thousands)
Carrying
Markets for Identical
Significant Unobservable
Description
Value
Assets (Level 1)
Inputs (Level 3)
Cash equivalents
$  190
$  190
$     -
Marketable securities
$    11
$    11
$     -
Accounts payable greater than 4 years old
$     5
$      -
$     5
 
Cash and cash equivalents of $0.6 million includes money market securities of $0.2 million.  The carrying value of our cash and cash equivalents, accounts payable and other current liabilities approximates fair value because of their short-term maturity. All of our other significant financial assets, financial liabilities and equity instruments are either recognized or disclosed in the consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

7.  GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying value of goodwill remained unchanged at $4.0 million for the nine month period ended March 31, 2012.
 
Other intangible assets subject to amortization are comprised of the following at:
 
 
(in thousands)
 
March 31,
2012
   
June 30,
2011
 
Customer Lists
  $ 8,554     $ 8,457  
Broker-Dealer Registration
    100       100  
Non-Compete Contracts
    779       779  
House Accounts
    600       600  
Administrative Infrastructure
    500       500  
Independent Contractor Agreements
    3,100       3,100  
  Intangible Costs at Cost
    13,633       13,536  
Less: Accumulated Amortization and Impairment
    (8,968 )     (8,352 )
Intangible Assets, Net
  $ 4,665     $ 5,184  

Amortization expense for both the three months ended March 31, 2012 and March 31, 2011 was $0.2 million.  Amortization expense for both the nine months ended March 31, 2012 and March 31, 2011 was $0.6 million.

8.  ACQUISITIONS

On December 17, 2010 we acquired the assets of Hoffman, Levy, Bengio & Co., PL (“HLB”), a tax and accounting services firm.  The purchase price is equal to a percentage of gross revenue generated from the preparation of tax returns and accounting services revenue from existing clients generated during a five year period.  Commencing on March 31, 2011 and each 90-day period thereafter, we will pay the seller an installment payment based on a percentage of gross revenues generated during the five year period after the closing date less all prior payments received.  In addition, the agreement includes price reductions and price increases based on meeting or not meeting certain earning requirement thresholds.  A down payment of $80.0 thousand was made.  In accordance with the FASB’s amended guidance on business combinations we recorded a liability of $1.3 million representing the future contingency payments described above.  These anticipated payments have been discounted at a per annum rate of 10%.  The final anticipated payments are subject to change based on the actual gross revenues generated from this acquisition.  The business reason for this acquisition is that HLB fit our business model, has a sizeable client base for us to market financial products and we were able to merge HLB into a pre-existing office without significant expense.

Revenues and net loss of HLB for the nine months ended March 31, 2012 totaled $1.0 million and $(0.1) million.
 
 
12

GILMAN CIOCIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
8. ACQUISITIONS - continued
 
The following table provides unaudited pro forma results of operations as if the HLB acquisition had occurred on July 1, 2010.  The unaudited pro forma results were prepared using HLB’s current and prior year financial information, reflecting certain adjustments related to the acquisition, such as the elimination of select nonrecurring charges, and changes to administrative, interest and depreciation and amortization expenses.  These pro forma adjustments do not include any potential synergies related to combining the businesses.  Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of July 1, 2010 or of results that may occur in the future.

   
As of March 31,
 
(in thousands)
 
2012
   
2011
 
Net sales
  $ 29,774     $ 31,521  
Net loss
  $ (516 )   $ (1,822 )
 
9. DEBT
 
    March 31,     June 30,  
(in thousands)
  2012     2011  
2008 Notes (a)
  $ 2,502     $ 2,652  
2011 Notes (b)
    1,345       700  
Note Payable for Insurance (c)
    51       29  
Capitalized Lease Obligations (d)
    379       445  
Total
    4,277       3,826  
Less: Current Portion
    (4,252 )     (1,289 )
Total Long-Term Portion
  $ 25     $ 2,537  

(a) On October 31, 2008 we commenced the Gilman Ciocia Common Stock and Promissory Note Offering, a private offering of our securities pursuant to SEC Regulation D (the “2008 Offering”).  The 2008 Offering was amended on December 8, 2008, September 3, 2009, December 16, 2009, February 11, 2010, March 29, 2010 and May 31, 2011.  The securities offered for sale in the 2008 Offering, as amended were:  $3.8 million of notes with interest at 10% (the “2008 Notes”) and $0.4 million, or 3.5 million shares of our $0.01 par value common stock with a price of $0.10 per share (the “Shares”).  As of March 31, 2012, $3.3 million of the 2008 Notes are outstanding and due July 1, 2012 (inclusive of $848.0 thousand in related party notes, see Note 12 (b)(c)) and $0.1 million, or 1.0 million shares, of our common stock were issued pursuant to the 2008 Offering.

On January 27, 2009, Carole Enisman, Executive Vice President of Operations purchased a $0.2 million 2008 Note of the $3.8 million of 2008 Notes.  On November 24, 2009 Ms. Enisman purchased an additional $40.0 thousand 2008 Note and Michael Ryan, President and Chief Executive Officer purchased a $38.0 thousand 2008 Note of the $3.8 million 2008 Notes.  The 2008 Notes with Ms. Enisman were amended on March 2, 2010 extending the due date to July 1, 2011 and was again amended on May 31, 2011 extending the due date to July 1, 2012.  The 2008 Note with Mr. Ryan was amended on April 19, 2010 extending the due date to July 1, 2011 and was also amended on May 31, 2011 extending the due date to July 1, 2012.  On December 3, 2008 and August 19, 2009, three trusts, of which James Ciocia, Chairman of the Board is a trustee, purchased an aggregate of $0.6 million of 2008 Notes of the $3.8 million of the 2008 Notes.  The 2008 Notes with the trusts were amended on April 19, 2010 extending the due date to July 1, 2011 and was also amended on May 31, 2011 extending the due date to July 1, 2012.  The Carole Enisman, Michael Ryan and James Ciocia as trustee purchases are included in related party debt.

(b) On June 10, 2011, we commenced the Gilman Ciocia $0.9 million Promissory Note Offering, a private offering of our debt securities pursuant to SEC Regulation D (the “2011 Offering”).  The securities offered for sale in the 2011 Offering were $0.9 million of promissory notes with interest payable at 10.0% (the “2011 Notes”).  The 2011 Notes are collateralized by a security interest in our gross receipts from the preparation of income tax returns received by us from January 1, 2012 through June 30, 2012 (the “2012 Gross Receipts”).  The principal of the 2011 Notes was to be paid to the Note holders from the 2012 Gross Receipts on March 15, April 15, May 15, and June 15, 2012, with the balance of principal, if any, paid July 1, 2012.   The 2011 Offering was increased to $1.3 million on July 13, 2011 and to $1.8 million on November 15, 2011, collateralized by a 35% security interest in the 2012 Gross Receipts.  On March 15, 2012, we made total principal payments on the 2011 Notes of $0.4 million. On April 15, 2012, we made total principal payments on the 2011 Notes of $0.7 million.  On March 31, 2012, $1.3 million principal of the 2011 Notes was outstanding.

(c) We have historically financed our insurance premiums over a short-term period of time.

(d) We are the lessee of certain equipment and leasehold improvements under capital leases expiring through 2014. The assets and liabilities under capital leases are carried at the lower of the present value of minimum lease payments or the fair market value of the asset. The assets are depreciated over the shorter of their estimated useful lives or their respective lease terms. Depreciation of assets under capital leases is included in depreciation expense.

10.  STOCK BASED COMPENSATION
 
We account for stock-based compensation using a modified prospective application.  Under this application, we are required to record compensation expense using a fair-value-based measurement method for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.  We have adopted the policy to recognize compensation expense on a straight-line attribution method.
 
 
13

GILMAN CIOCIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
10. STOCK BASED COMPENSATION - continued
 
Changes in our stock option activity during the nine months ended March 31, 2012 were as follows:
 
 
 
Shares
   
Weighted Average Exercise Price
 
Outstanding, June 30, 2011
    3,097,950     $ 0.16  
Granted
    626,304       0.15  
Exercised
    -       -  
Expired
    -       -  
Canceled
    476,609       0.15  
Outstanding, March 31, 2012
    3,247,645     $ 0.16  
                 
Exercisable, March 31, 2012
    1,311,718     $ 0.16  

The range of exercise prices for the outstanding options at March 31, 2012 is between $0.10 and $0.18.

On October 31, 2011, pursuant to the 2007 Plan, we granted to the independent members of our Board of Directors and Jim Ciocia, our Chairman of the Board, in aggregate, $30.0 thousand in common stock options, or 626,304 common stock options each with an exercise price of $0.15 and a ten-year term which vest as to 20.0% of the shares annually commencing one year after the date of grant and which have a Black-Scholes value at the time of grant determined based on the closing price of our common stock on the date of grant.  Additionally, on October 31, 2011 we issued in the aggregate to these same board members $30.0 thousand in common stock, or 600,000 shares of restricted common stock.

11.  ACCRUED EXPENSES
 
Accrued expenses consist of the following:
 
(in thousands)
 
March 31,
   
June 30,
 
   
2012
   
2011
 
       
Accrued compensation
  $ 503     $ 307  
Accrued bonus
    10       121  
Accrued related party compensation and bonus
    31       69  
Accrued vacation
    133       157  
Accrued settlement fees
    65       57  
Accrued audit fees & tax fees
    148       143  
Accrued interest
    81       89  
Accrued other
    275       185  
Accrued acquisitions short term
    327       318  
    Total Accrued Expenses
  $ 1,573     $ 1,446  

12.  RELATED PARTY TRANSACTIONS
 
   
March 31,
   
June 30,
 
(in thousands)
 
2012
   
2011
 
             
Prime Partners Note (a)
  $ 300     $ 416  
Ciocia as Trustee 2008 Notes  (b)
    600       600  
Enisman and Ryan 2008 Notes  (c)
    248       248  
Other Officer’s Notes (d)
    90       50  
        Total
    1,238       1,314  
Less: Current Portion
    (1,095 )     (203 )
        Total Long-Term Portion
  $ 143     $ 1,111  

 
14

GILMAN CIOCIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
12. RELATED PARTY TRANSACTIONS - continued
 
(a) As of September 1, 2008, we entered into a $0.5 million promissory note with Prime Partners, Inc. (the “Prime Partners Note”).  The Prime Partners Note provided for 10% interest to be paid in arrears through the end of the previous month on the 15th day of each month commencing on October 15, 2008.  The principal of the Prime Partners Note was to be paid on or before July 1, 2009.  Michael Ryan is a director, an officer and a significant shareholder of Prime Partners.  The Prime Partners Note was amended as of June 30, 2009 to extend the due date of principal to July 1, 2010.  The Prime Partners Note was again amended as of May 5, 2010 to extend the due date of principal to July 1, 2011.  The Prime Partners Note was again amended as of August 1, 2010 to provide for 42 monthly payments of $15.0 thousand comprised of principal and interest at 10% on the 15th day of each month commencing on August 15, 2010 and ending on January 15, 2014.  Up to and including June 30, 2011, in the event that we determined that we could not make a  payment on the monthly due date, we could defer the payment by sending written notice to Prime Partners.  Any payment so deferred, was to be paid by adding each such deferred payment to the 42 month amortization schedule as an increased monthly payment commencing on August 15, 2011.  No payments were deferred by us.  In the event that we are in default on any of the promissory notes issued in our Regulation D Private Placement, within 30 days from written notice by us, Prime Partners shall repay to us all principal payments requested in the notice.  This repayment obligation is secured by Prime Partner’s execution of a collateral assignment of a promissory note owed by Daniel R. Levy to Prime Partners dated January 23, 2004 in the original principal amount of $0.9 million and with a present outstanding principal balance of $0.4 million.  There shall be no fees owed by us to Prime Partners for any late payments and no acceleration of the Prime Partners Note as a result of any late payments.

On December 26, 2007, we entered into a promissory note in the amount of $0.3 million with Prime Partners for related party debt which was previously included in accrued expenses.  The note paid interest at 10.0% per annum.  The note was payable over 31 months and was paid in full in September 2011.

(b) On December 3, 2008, three trusts of which James Ciocia is a trustee, purchased an aggregate of $0.3 million of the 2008 Notes.  On August 19, 2009, these trusts purchased an additional $0.3 million of the 2008 Notes.  The 2008 Notes with the three trusts were amended on April 19, 2010 extending the due date to July 1, 2011 and was also amended on May 31, 2011 extending the due date to July 1, 2012.  See Note 9.

(c) On January 27, 2009, Carole Enisman, Executive Vice President of Operations purchased a $0.2 million 2008 Note of the $3.8 million of the 2008 Notes.  On November 24, 2009 Ms. Enisman purchased an additional $40.0 thousand 2008 Note and Michael Ryan, President and Chief Executive Officer purchased a $38.0 thousand 2008 Note of the $3.8 million 2008 Notes.  The 2008 Notes with Ms. Enisman were amended on March 2, 2010 extending the due date to July 1, 2011 and was also amended on May 31, 2011 extending the due date to July 1, 2012.  The 2008 Note with Mr. Ryan was amended on April 19, 2010 extending the due date to July 1, 2011 and was also amended on May 31, 2011 extending the due date to July 1, 2012.  See Note 9.

(d) On November 3, 2011 we issued an unsecured promissory note in the amount of $40.0 thousand to Michael Ryan, our President and Chief Executive Officer, payable on demand by Mr. Ryan at an interest rate of 10.0% per annum.  On September 23, 2011 we issued an unsecured promissory note in the amount of $50.0 thousand to Carole Enisman, our Executive Vice President of Operations, payable on demand by Ms. Enisman at an interest rate of 10.0% per annum.   On September 21, 2011 we issued an unsecured promissory note in the amount of $50.0 thousand to Mr. Finkelstein, payable on demand by Mr. Finkelstein at an interest rate of 10.0% per annum which was paid in full on November 1, 2011.  On May 26, 2011 we issued an unsecured promissory note in the amount of $50.0 thousand to Ted Finkelstein, our Vice President, General Counsel and Secretary payable on demand by Mr. Finkelstein at an interest rate of 10.0% per annum which was paid in full on July 1, 2011.

At March 31, 2012, the aggregate amount we owed to related parties was $1.2 million.

13.  SUBSEQUENT EVENTS

On May 2, 2012, we commenced the Gilman Ciocia $1.8 million Promissory Note Offering, a private offering of our debt securities pursuant to SEC Regulation D (the “2012 Offering”).  The securities offered for sale in the 2012 Offering are $1.8 million of promissory notes with interest payable at 10.0% (the “2012 Notes”).  The 2012 Notes will be collateralized by a  33.33% security interest in our gross receipts from the preparation of 2013 income tax returns (the “2013 Gross Receipts”).  The principal of the 2012 Notes will be paid to the Note holders from the 2013 Gross Receipts on March 31, April 30, May 31, and June 30, 2013, with the balance of principal, if any, paid July 1, 2013.





This Item 2 contains forward-looking statements.  Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control.  Our actual results, performance, prospects, or opportunities could differ materially from those expressed in or implied by the forward-looking statements.  Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the sections entitled “Forward-Looking Statements” and “Risk Factors” included elsewhere in this Quarterly Report as well as those risk factors discussed in the section entitled “Risk Factors” in our annual report on Form 10-K.

Overview

Gilman Ciocia, Inc. (together with its wholly owned subsidiaries, “we”, “us”, “our”, or the “Company”) was founded in 1981 and is incorporated under the laws of the State of Delaware.  We provide federal, state and local 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, insurances and financing services.  Our financial planning clients generally are introduced to us through our tax return preparation services, accounting services and educational workshops. We believe that our tax return preparation and accounting services are inextricably intertwined with our financial planning activities in our Company offices and that overall profitability will depend, in part, on the two channels leveraging off each other since many of the same processes, procedures and systems support sales from both channels.  Accordingly, management views and evaluates the Company as one segment.

The financial planners who provide such services are either employees of the Company or independent contractors, all of whom are registered representatives of Prime Capital Services, Inc. (“PCS”), our wholly owned subsidiary.  PCS conducts a securities brokerage business that provides regulatory oversight and products and sales support to its registered representatives, who sell investment products and provide services to their clients.  PCS receives a share of commissions earned 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”).   Asset & Financial Planning, Ltd. (“AFP”), a wholly owned subsidiary, is registered with the SEC as an investment advisor.  Almost all of our financial planners are also authorized agents of insurance underwriters.  We have the capability of processing insurance business through PCS and Prime Financial Services, Inc. (“PFS”), a wholly owned subsidiary, which are licensed insurance brokers, as well as through other licensed insurance brokers.  We are a licensed mortgage broker in the States of New York and Pennsylvania.  GC Capital Corporation, a wholly owned subsidiary, is a licensed mortgage broker in the State of Florida.  PCS also earns revenues from its strategic marketing relationships with certain product sponsors (“PCS Marketing”) which enables PCS to efficiently utilize its training, marketing and sales support resources.

We also provide financial planning services through approximately 36 independently owned and operated offices in 11 states.  We believe that we benefit from economies of scale associated with the aggregate production of both Company offices and independently owned offices.

The tax preparation business is a highly seasonal business.  The first and second quarters of our fiscal year are typically our weakest quarters and the third quarter of our fiscal year is typically our strongest.

We continue to control our overall operating expenses, and we remain committed to investing in the continuing development of our network of financial representatives and to acquiring additional tax preparation and accounting firms to increase our client base and accounting business as part of our long-term strategy for growing revenues and earnings.  In an effort to facilitate identifying potential acquisitions, we are engaged in an advertising campaign involving targeted direct mail, a customized website and inbound and outbound telemarketing to prospect for leads. We cannot predict whether our advertising campaign will have the desired effects, and if we do not have adequate capital to fund those future acquisitions, we may not be able to acquire all of the acquisitions available to us. We are continuing to put forth a strong financial representative recruiting effort.  The financial impact of new recruits could take several months for revenue on new accounts to become recognizable.  If these strategies are not successful in generating additional revenue, the result will be continued downward pressure on total revenues in future quarters until we start to more significantly benefit from the effect of the greater sale of products that generate recurring income.




 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Managed Assets

As indicated in the following table, as of March 31, 2012, assets under AFP management decreased 0.5%, or $2.4 million, to $498.8 million, from $501.2 million as of December 31, 2011.  This decrease is mostly attributable to a net removal of $49.2 million of our money under management due to attrition amongst our independent financial planners, offset in part by improved market conditions.  As of March 31, 2012, total Company securities under custody were $3.3 billion, up 5.6%, or $172.6 million from December 31, 2011.

The following table presents the market values of assets under AFP management:
 
(in thousands)
 
Market Value as of
 
Annuities
   
Brokerage
   
Total Assets Under Management
 
                   
3/31/2012
  $ 165,216     $ 333,583     $ 498,799  
12/31/2011
  $ 149,906     $ 351,275     $ 501,181  
9/30/2011
  $ 159,787     $ 347,559     $ 507,346  
6/30/2011
  $ 200,892     $ 389,207     $ 590,099  

The following table presents the market values of total Company securities under custody.  The numbers do not include fixed annuities.
 
(in thousands)
 
Market Value as of
 
Total Company Securities Under Custody
 
       
3/31/2012
  $ 3,273,957  
12/31/2011
  $ 3,101,331  
9/30/2011
  $ 3,036,131  
6/30/2011
  $ 3,323,404  

RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011

Revenue

The following table presents revenue by product line and brokerage revenue by product type:
 
   
For the Three Months Ended March 31,
 
(in thousands)
             
% Change
   
% of Total Revenue
   
% of Total Revenue
 
Consolidated Revenue Detail
 
2012
   
2011
    2012-2011     2012     2011  
       
Revenue by Product Line
                                   
Brokerage Commissions Revenue
  $ 5,657     $ 5,412       4.5 %     46.0 %     44.9 %
Insurance Commissions & Fixed Annuities
    616       340       81.2 %     5.0 %     2.8 %
Advisory Fees (1)
    1,653       2,112       -21.7 %     13.5 %     17.5 %
Tax Preparation and Accounting Fees
    4,091       4,047       1.1 %     33.3 %     33.5 %
Lending Services
    41       31       32.3 %     0.3 %     0.3 %
Marketing Revenue
    239       119       100.8 %     1.9 %     1.0 %
    Total Revenue
  $ 12,297     $ 12,061       2.0 %     100.0 %     100.0 %
 
Brokerage Commissions Revenue by Product Type
                             
Mutual Funds
  $ 698     $ 1,022       -31.7 %     5.7 %     8.5 %
Equities, Bonds & Unit Investment Trusts
    559       653       -14.4 %     4.5 %     5.4 %
Variable Annuities
    1,608       1,568       2.6 %     13.1 %     13.0 %
Trails (1)
    2,488       2,127       17.0 %     20.2 %     17.6 %
All Other Products
    304       42       623.8 %     2.5 %     0.4 %
    Brokerage Commissions Revenue
  $ 5,657     $ 5,412       4.5 %     46.0 %     44.9 %

(1) Advisory fees represent the fees charged by the Company’s investment advisors on client’s assets under management and is calculated as a percentage of the assets under management, on an annual basis.  Trails are commissions earned by PCS as the broker dealer each year a client’s money remains in a mutual fund or in a variable annuity account, as compensation for services rendered to the client.  Advisory fees and trails represent recurring revenue.  While these fees generate substantially lower first year revenue than most commission products and are more susceptible to fluctuations in the financial markets, the recurring nature of these fees provides a platform for accelerating future revenue growth.
 
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
The following table sets forth a breakdown of our consolidated financial planning revenue by company-owned offices and independent offices for the three months ended March 31, 2012 and 2011:
 
   
For Three Months Ended March 31,
 
(in thousands)
 
2012
   
% of
Total
   
2011
   
% of
Total
 
Company-Owned Offices
  $ 4,830       58.9 %   $ 3,963       49.4 %
Independent Offices
    3,376       41.1 %     4,051       50.6 %
Total
  $ 8,206             $ 8,014          
 
Our total revenues for the three months ended March 31, 2012 were $12.3 million consisting of $8.2 million for financial planning services and $4.1 million for tax preparation and accounting services, compared to $12.1 million for the three months ended March 31, 2011 consisting of $8.1 million for financial planning services and $4.0 million for tax preparation and accounting services, a decrease in total of $0.2 million or 2.0%.  Financial planning services represented approximately 67.0% and tax preparation fees and accounting services represented approximately 33.0% of our total revenues during the three months ended March 31, 2012.  Financial planning services represented approximately 66.0% and tax preparation fees and accounting services represented approximately 34.0% of our total revenues during the three months ended March 31, 2011.  Revenue from financial planning services consisted of approximately 73.0% earned from brokerage commissions, 20.0% from asset management, 3.0% from insurance, 3.0% from PCS marketing, and 1.0% from lending services.

Financial planning revenue for the three months ended March 31, 2012 was $8.2 million, an increase of $0.2 million or 2.4%, compared to $8.0 million for the three months ended March 31, 2011.  The product mix during the three months ended March 31, 2012 is not indicative of the year and possibly future earnings.  Advisory fees are down $0.5 million as a result of a net removal of $49.2 million of our money under management due to attrition amongst our independent financial planners and trails are up $0.4 million as we continue our commitment to products with recurring revenue.

Tax preparation and accounting services revenue was $4.0 million for the three months ended March 31, 2012, an increase of $44.0 thousand from the same period during the previous fiscal year.  The majority of this increase in tax preparation and accounting services revenue is attributable to price increases offset in part by client attrition.

Expenses

Our total operating expenses for the three months ended March 31, 2012 were $11.3 million, a decrease of $0.2 million or 1.8%, compared to $11.5 million for the three months ended March 31, 2011.  This decrease is mostly due to a decrease in advertising expenses of $0.3 million, commission expenses of $0.1 million and rent expenses of $0.1 million, offset in part by an increase in general and administrative expenses of $0.3 million.

Commission expense was $5.5 million for the three months ended March 31, 2012, compared with $5.7 million for the three months ended March 31, 2011.  The decrease of $0.2 million is mainly attributable to a decrease in financial planning commission expense which as a percentage of financial planning revenue, was approximately 62.5% for the three months ended March 31, 2012 versus 64.0% for the three months ended March 31, 2011.  This decrease in commission expense as a percentage of revenue is the result of higher financial planning revenues amongst our employee channel where a lower commission percentage is paid compared to the independent channel.

Salaries, which consist primarily of compensation, related payroll taxes and employee benefit costs, remained relatively unchanged, or $2.6 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

General and administrative expenses increased by $0.3 million or 27.1% in the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  This increase is mostly attributable to an increase in professional development costs as we continue to invest in our financial planners and increased bad debt reserves related to accounting services provided by our acquisition made during fiscal 2011 and bad debt reserves related to forgiveable loans made to financial planners who failed to meet certain production numbers.

Advertising expense decreased $0.3 million or 50.6% in the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  We continue to control these costs while maintaining our marketing strategy.
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Brokerage fees and licenses remained relatively unchanged, or $0.3 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Rent expense decreased by $55.0 thousand or 8.2% in the three months ended March 31, 2012 compared to the three months ended March 31, 2011.   This decrease is attributable to lower rents at a number of company owned offices and downsizing several company offices to smaller locations, offset in part by annual rent increases on other existing leases.

Depreciation and amortization expense decreased by 4.4%, or $13.0 thousand for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  This decrease is mostly attributable to certain assets reaching their full depreciable lives and the sale of one office, offset in part by increases in depreciation and amortization as a result of the two acquisitions made in fiscal 2010 and the acquisition made in fiscal 2011.

Our income from operations before other income and expense increased to $1.0 million for the three months ended March 31, 2012 compared to $0.6 million for the three months ended March 31, 2011.  Our net income for the three months ended March 31, 2012 was $0.9 million, or $0.01 per basic and diluted share, compared with $0.5 million, or $0.01 per basic and diluted share for the three months ended March 31, 2011.  The increase in income from operations was primarily attributable to higher revenues and a reduction in all operating expenses with the exception of general and administrative expenses and salaries.

Total other income/(expense) was a net expense of $0.1 million for the three months ended March 31, 2012, an increase of $38.0 thousand or 41.3% compared with the same period last year.  This increase is mostly the result of a business development credit received during the three months ended March 31, 2011.

As a result of those factors described above, our net income for the three months ended March 31, 2012 increased 88.0% compared to the three months ended March 31, 2011.

RESULTS OF OPERATIONS – NINE MONTHS ENDED MARCH 31, 2012 COMPARED TO NINE MONTHS ENDED MARCH 31, 2011

Revenue

The following table presents revenue by product line and brokerage revenue by product type:
 
   
For the Nine Months Ended March 31,
 
(in thousands)
             
% Change
   
% of Total Revenue
   
% of Total Revenue
 
Consolidated Revenue Detail
 
2012
   
2011
    2012-2011     2012     2011  
               
Revenue by Product Line
                                   
Brokerage Commissions Revenue
  $ 16,723     $ 17,526       -4.6 %     56.2 %     56.6 %
Insurance Commissions & Fixed Annuities
    1,497       1,381       8.4 %     5.0 %     4.5 %
Advisory Fees (1)
    5,518       6,360       -13.2 %     18.5 %     20.6 %
Tax Preparation and Accounting Fees
    5,493       5,207       5.5 %     18.5 %     16.8 %
Lending Services
    150       127       18.1 %     0.5 %     0.4 %
Marketing Revenue
    393       336       17.0 %     1.3 %     1.1 %
    Total Revenue
  $ 29,774     $ 30,937       -3.8 %     100.0 %     100.0 %
                                         
Brokerage Commissions Revenue
    by Product Type
                                       
Mutual Funds
  $ 2,052     $ 2,853       -28.1 %     6.9 %     9.2 %
Equities, Bonds & Unit Investment Trusts
    1,746       2,053       -15.0 %     5.9 %     6.6 %
Variable Annuities
    5,186       5,146       0.8 %     17.4 %     16.6 %
Trails (1)
    6,773       6,460       4.8 %     22.8 %     20.9 %
All Other Products
    966       1,014       -4.7 %     3.2 %     3.3 %
    Brokerage Commissions Revenue
  $ 16,723     $ 17,526       -4.6 %     56.2 %     56.6 %

(1) Advisory fees represent the fees charged by the Company’s investment advisors on client’s assets under management and is calculated as a percentage of the assets under management, on an annual basis.  Trails are commissions earned by PCS as the broker dealer each year a client’s money remains in a mutual fund or in a variable annuity account, as compensation for services rendered to the client.  Advisory fees and trails represent recurring revenue.  While these fees generate substantially lower first year revenue than most commission products and are more susceptible to fluctuations in the financial markets, the recurring nature of these fees provides a platform for accelerating future revenue growth.

 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
The following table sets forth a breakdown of our consolidated financial planning revenue by company-owned offices and independent offices for the nine months ended March 31, 2012 and 2011:
 
   
For Nine Months Ended March 31,
 
(in thousands)
 
2012
   
% of
Total
   
2011
   
% of
Total
 
Company-Owned Offices
  $ 13,662       56.3 %   $ 12,940       50.3 %
Independent Offices
    10,619       43.7 %     12,790       49.7 %
Total
  $ 24,281             $ 25,730          

Our total revenues for the nine months ended March 31, 2012 were $29.8 million consisting of $24.3 million for financial planning services and $5.5 million for tax preparation and accounting services, compared to $30.9 million for the nine months ended March 31, 2011 consisting of $25.7 million for financial planning services and $5.2 million for tax preparation and accounting services, a decrease in total of $1.2 million or 3.8%.  Financial planning services represented approximately 82.0% and tax preparation fees and accounting services represented approximately 18.0% of our total revenues during the nine months ended March 31, 2012.  Financial planning services represented approximately 83.0% and tax preparation fees and accounting services represented approximately 17.0% of our total revenues during the nine months ended March 31, 2011.  Revenue from financial planning services consisted of approximately 69.0% earned from brokerage commissions, 23.0% from asset management, 6.0% from insurance, 1.0% from PCS marketing, and 1.0% from lending services.

Financial planning revenue for the nine months ended March 31, 2012 was $24.3 million, a decrease of $1.4 million or 5.6%, compared to $25.7 million for the nine months ended March 31, 2011.  This decline in revenue is attributable to a decrease in advisory fees of $0.8 million which decreased to $5.5 million during the nine months ended March 31, 2012 compared with $6.4 million for the nine months ended March 31, 2011.  This decline is due to net removed money as well as market conditions at June 30, 2011, September 30, 2011, and December 31, 2011 at which time fees for recurring revenues are calculated for the nine months ended March 31, 2012.  Revenues were further reduced by financial planner attrition.

Tax preparation and accounting services revenue was $5.5 million for the nine months ended March 31, 2012, up $0.3 million from the same period last year.  The majority of this increase in tax preparation and accounting services revenue is attributable to an acquisition made in fiscal year 2011 as well as price increases for tax preparation services, offset in part by the sale of one tax and accounting services office and client attrition.

Expenses

Our total operating expenses for the nine months ended March 31, 2012 were $29.9 million, a decrease of $2.3 million or 7.3%, compared to $32.2 million for the nine months ended March 31, 2011.  This decrease is mostly due to reduced commission expenses of $2.0 million, advertising expenses of $0.4 million and rent of $0.2 million, offset in part by increased salaries of $0.2 million.

Commission expense was $15.2 million for the nine months ended March 31, 2012, compared with $17.2 million for the nine months ended March 31, 2011.  This decrease of $2.0 million is attributable to the decrease in financial planning revenue and the fact that financial planning commission expense as a percentage of financial planning revenue was approximately 61.0% for the nine months ended March 31, 2012 versus 65.0% for the nine months ended March 31, 2011.  This decrease in commission expense as a percentage of revenue is the result of higher financial planning revenues amongst our employee channel where a lower commission percentage is paid compared to the independent channel.

Salaries, which consist primarily of compensation, related payroll taxes and employee benefit costs, increased by $0.2 million or 3.4% to $6.9 million for the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011.  This increase is mostly the result of new hires from acquisitions made during fiscal year 2011.

General and administrative expenses remained relatively unchanged, or $3.5 million for the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011.  Increases in professional development costs, as we continue to invest in our financial planners, and increases in bad debt reserves related to accounting services provided by our acquisition made during fiscal 2011 and forgiveable loans made to financial planners who failed to meet certain production numbers were offset by a decrease in professional fees incurred during fiscal 2011 related to the Independent Compliance Consultant required as part of the settlement with the SEC on March 16, 2010.
 
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Advertising expense decreased by 34.1%, or $0.4 million for the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011.  We continue to control these costs while maintaining our marketing strategy.

Brokerage fees and licenses decreased $75.0 thousand or 7.5% in the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011.  This decrease is mostly due to the decrease in financial planning revenues and the decrease in the value of assets under management at June 30, 2011, September 30, 2011, and December 31, 2011 at which time fees are determined and revenue is recognized during the nine months ended March 31, 2012 compared with the nine months ended March 31, 2011.

Rent expense decreased by 8.1%, or $0.2 million for the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011.   This decrease is attributable to the sale of one office during fiscal 2011, lower rents at a number of company owned offices and downsizing or relocating a number of company offices to smaller locations, offset in part by an acquisition and annual rent increases on other existing leases.

Depreciation and amortization expense decreased by 2.2%, or $19.0 thousand for the nine months ended March 31, 2012 compared with the same period in 2011.  This decrease is mostly attributable to certain assets reaching their full depreciable lives and the sale of one office, offset in part by increases in depreciation and amortization as a result of the two acquisitions made in fiscal 2010 and the acquisition made in fiscal 2011.

Our loss from operations before other income and expense decreased to $0.1 million for the nine months ended March 31, 2012 compared to a loss of $1.3 million for the nine months ended March 31, 2011.  Our net loss for the nine months ended March 31, 2012 was $0.5 million, or $(0.01) per basic and diluted share, compared with $1.7 million, or $(0.02) per basic and diluted share for the nine months ended March 31, 2011.  The decrease in loss from operations was primarily attributable to a reduction in expenses mostly in commission expense, offset in part, by lower financial planning revenues.

Total other income/(expense) was a net expense of $0.4 million for the nine months ended March 31, 2012, a decrease of $11.0 thousand or 2.8% compared with the same period last year.  This decrease is mostly the result of the loss on sale of an office recognized in the prior year nine months ended March 31, 2011 offset in part by higher interest expense due to the issuance of private offering notes.

As a result of those factors described above, our net loss for the nine months ended March 31, 2012 decreased 70.0% compared to the nine months ended March 31, 2011.

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended March 31, 2012, we realized a net loss of $0.5 million and at March 31, 2012 we had a working capital deficit of $6.6 million.  At March 31, 2012 we had $0.6 million of cash and cash equivalents and $2.9 million of trade accounts receivable, 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 fifteen to one.  At March 31, 2012 we were in compliance with this regulation.

On October 31, 2008 we commenced the Gilman Ciocia Common Stock and Promissory Note Offering, a private offering of our securities pursuant to SEC Regulation D (the “2008 Offering”).  The 2008 Offering was amended on December 8, 2008, September 3, 2009, December 16, 2009, February 11, 2010, March 29, 2010 and May 31, 2011.  The securities offered for sale in the 2008 Offering, as amended were:  $3.8 million of notes with interest at 10.0% (the “2008 Notes”) and $0.4 million, or 3.5 million shares of our $0.01 par value common stock with a price of $0.10 per share (the “Shares”).  As of March 31, 2012, $3.3 million of the 2008 Notes were outstanding and are due July 1, 2012 and $0.1 million, or 1.0 million shares, of our common stock were issued pursuant to the 2008 Offering.  We are exploring financing alternatives including possibly extending the 2008 Notes, financing through new private placements or other alternative debt financing.

On May 26, 2011 we issued an unsecured promissory note in the amount of $50.0 thousand to Ted Finkelstein, our Vice President, General Counsel and Secretary.  Such note was payable on demand by Mr. Finkelstein and earned interest at the rate of 10.0% per annum.  Such note was paid in full on July 1, 2011.  On September 21, 2011 we issued an unsecured promissory note in the amount of $50.0 thousand to Mr. Finkelstein payable on demand by Mr. Finkelstein at an interest rate of 10.0% per annum which was paid on November 1, 2011.  On September 23, 2011 we issued an unsecured promissory note in the amount of $50.0 thousand to Carole Enisman, our Executive Vice President of Operations, payable on demand by Ms. Enisman at an interest rate of 10.0% per annum.  On November 3, 2011 we issued an unsecured promissory note in the amount of $40.0 thousand to Michael Ryan, our President and Chief Executive Officer, payable on demand by Mr. Ryan at an interest rate of 10.0% per annum.  The unsecured promissory notes with Ms. Enisman and Mr. Ryan are still outstanding as of May 14, 2012.
 
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
On June 10, 2011, we commenced the Gilman Ciocia $0.9 million Promissory Note Offering, a private offering of our debt securities pursuant to SEC Regulation D (the “2011 Offering”).  The securities offered for sale in the 2011 Offering were $0.9 million of promissory notes with interest payable at 10.0% (the “2011 Notes”).  The 2011 Notes are collateralized by a security interest in our gross receipts from the preparation of income tax returns received by us from January 1, 2012 through June 30, 2012 (the “2012 Gross Receipts”).  The principal of the 2011 Notes was to be paid to the Note holders from the 2012 Gross Receipts on March 15, April 15, May 15, and June 15, 2012, with the balance of principal, if any, paid July 1, 2012.   The 2011 Offering was increased to $1.3 million on July 13, 2011 and to $1.8 million on November 15, 2011, collateralized by a 35% security interest in the 2012 Gross Receipts.  On March 15, 2012, we made total principal payments on the 2011 Notes of $0.4 million. On April 15, 2012, we made total principal payments on the 2011 Notes of $0.5 million.  On March 31, 2012, $1.3 million principal of the 2011 Notes was outstanding.

On May 2, 2012, we commenced the Gilman Ciocia $1.8 million Promissory Note Offering, a private offering of our debt securities pursuant to SEC Regulation D (the “2012 Offering”).  The securities offered for sale in the 2012 Offering are $1.8 million of promissory notes with interest payable at 10.0% (the “2012 Notes”).  The 2012 Notes will be collateralized by a  33.33% security interest in our gross receipts from the preparation of 2013 income tax returns (the “2013 Gross Receipts”).  The principal of the 2012 Notes will be paid to the Note holders from the 2013 Gross Receipts on March 31, April 30, May 31, and June 30, 2013, with the balance of principal, if any, paid July 1, 2013.

Our ability to satisfy our obligations depends on our future financial performance, which will be subject to prevailing economic, financial and business conditions.  Our capital requirements, at least in the near term, are expected to be provided by cash flows from operating activities, cash on hand at March 31, 2012, possible extensions of due dates on existing notes or a combination thereof.  To the extent future capital requirements exceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by the further sales of our securities through private offerings.  We are also continuing to control operating expenses and are implementing our acquisition strategy to increase earnings and cash flow.  While management believes that capital may be available, there is no assurance that such capital can be secured.  Additionally, there can be no assurance that our cost control measures will provide the capital needed which could adversely impact our business, nor can we assure the extensions of due dates on existing notes.

While we believe that payments to tax preparation and accounting practices which we have acquired have been and will continue to be funded through cash flow generated from those acquisitions, we need additional capital to fund initial payments on future acquisitions.  If we do not have adequate capital to fund those future acquisitions, we may not be able to proceed with such intended acquisitions, which could result in our not fully realizing all of the revenue which might otherwise be available to us.

Our insurance carrier interrelated all claims involving the variable annuity sales practices of certain registered representatives of PCS that involved an SEC Order Instituting Administrative and Cease-And-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b) and 21(c) of the Exchange Act, and Section 203(f) of the Investment Advisors Act of 1940 (the “Interrelated Claims”).  The total remaining insurance coverage for the Interrelated Claims was reduced from $1.0 million to $0.3 million after settling arbitrations commenced by customers.  On February 1, 2012, we settled the last pending Interrelated Claim customer arbitration for $0.4 million which was paid $0.3 million from insurance coverage and $0.1 million from us. As a result of this settlement, there is no remaining insurance coverage for arbitrations for Interrelated Claims which may be commenced by customers and we could be required to pay significant additional costs out of pocket, which would reduce our working capital and have a material adverse effect on our results of operations.  We continue to have insurance coverage for any claims that are not “interrelated claims” as previously defined.

Our net cash used in operating activities was $0.1 million for the nine months ended March 31, 2012, compared with net cash used in operating activities of $0.8 million for the nine months ended March 31, 2011.  This improvement is mostly due to the decreased net loss, offset partially by an increase in working capital needs mostly due to an increase in accounts receivable at March 31, 2012 associated with financial planning sales at the three months ended March 31, 2012.

Net cash used in investing activities was $0.2 million for the nine months ended March 31, 2012 compared with net cash provided by investing activities of $0.1 million for the nine months ended March 31, 2011.  Most of this decrease in cash provided by investing activities is related to our sale of an office made in fiscal 2011 and a decrease in the amount of forgivable loans issued as an incentive to hiring new financial planners.

Net cash provided by financing activities was $0.4 million for the nine months ended March 31, 2012 compared with net cash provided by financing activities of $0.3 million for the nine months ended March 31, 2011.  The increase in net cash provided by financing activities can be mostly attributed to the sale of 2011 Notes made during the nine months ended March 31, 2012, which totaled $1.1 million, offset by the pay down of $0.2 million of the 2008 Notes, $0.3 million of the 2011 Notes and $0.2 million of related party notes.
 
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
OFF BALANCE SHEET ARRANGEMENT

None.

CRITICAL ACCOUNTING POLICIES

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and the accompanying notes.  Actual results could differ from those estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions.  These critical accounting estimates are reviewed periodically by our independent auditors and the audit committee of our board of directors.

Our critical accounting estimates have not changed materially from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended June 30, 2011 as filed with the SEC.

Recent Accounting Pronouncements

In September 2011, the FASB issued new guidance on testing goodwill for impairment. Pursuant to the new guidance an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss. Under the new guidance, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The new guidance does not change the current guidance for testing other indefinite lived intangible assets for impairment. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011.  As of March 31, 2012, the Company has not elected to adopt the new guidance early, and when adopted, this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

In May 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance related to Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. generally accepted accounting principles (“U.S. GAAP”) and the International Financial Reporting Standards (“IFRS”), that results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value. The new guidance clarifies and changes some fair value measurement principles and disclosure requirements under U.S. GAAP.  Among them is the clarification that the concepts of highest and best use and valuation premise in a fair value measurement should only be applied when measuring the fair value of nonfinancial assets. Additionally, the new guidance requires quantitative information about unobservable inputs, and disclosure of the valuation processes used and narrative descriptions with regard to fair value measurements within the Level 3 categorization of the fair value hierarchy. The requirements of the amended accounting guidance are effective for us January 1, 2012 and early adoption is prohibited.  The adoption of the new accounting guidance did not have a material impact on our consolidated financial statements.

In December 2010, the FASB amended its guidance related to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more-likely-than-not that a goodwill impairment exists.  In determining whether it is more-likely-than-not that a goodwill impairment exists, consideration should be made as to whether there are any adverse qualitative factors indicating that an impairment may exist.  The requirements of the amended accounting guidance were effective for us July 1, 2011 and early adoption was prohibited.  The adoption of the new accounting guidance did not have a material impact on our consolidated financial statements. 


 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
In December 2010, the FASB amended its guidance related to business combinations entered into by an entity that are material on an individual or aggregate basis.  These amendments clarify existing guidance that if an entity presents comparative financial statements that include a material business combination, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  The requirements of the amended guidance were effective for us July 1, 2011 and early adoption was permitted.  This disclosure-only guidance did not have a material impact on our consolidated financial statements.

All other new accounting pronouncements issued but not yet effective or adopted have been deemed not to be relevant to us, hence are not expected to have any impact once adopted.


None


Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Exchange Act) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

We have carried out an evaluation under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial and Chief Accounting Officer, of our disclosure controls and procedures.  In designing and evaluating our disclosure controls and procedures, we and our management recognize that any disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. As of March 31, 2012, our Principal Executive Officer and Principal Financial and Chief Accounting Officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Controls

During the three months ended March 31, 2012, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 

 

PART II - OTHER INFORMATION


We and our wholly owned subsidiary Prime Capital Services, Inc. (“PCS”) have been named as a respondent in customer arbitrations and as a defendant in customer lawsuits (“Customer Claims”). These Customer Claims result from the actions of brokers affiliated with PCS.  Under the PCS registered representatives contract, each registered representative has indemnified us for these claims.  Most of these Customer Claims are covered by our errors and omissions insurance policy.  As of March 31, 2012, PCS was named as a respondent in two (2) customer arbitrations which were settled in April 2012, and PCS and the Company were named as a defendant in one customer lawsuit which is still pending.  We establish liabilities for potential losses from Customer Claims.  In establishing these liabilities, management uses its judgment to determine the probability that losses have been incurred and a reasonable estimate of the amount of losses.  While we will vigorously defend ourselves in these matters, and we assert insurance coverage and indemnification to the maximum extent possible, there can be no assurance that these lawsuits and arbitrations will not have a material adverse impact on our financial position.   At March 31, 2012 we have accrued $0.2 million for potential settlements, judgments and awards.

On April 6, 2012, the State of Florida Office of Financial Regulation commenced an Administrative Proceeding (the “OFR Administrative Proceeding”) against PCS, Asset & Financial Planning, Ltd. (“AFP”), a wholly owned subsidiary and a registered investment advisor, and three registered representatives of PCS.   The OFR Administrative Proceeding seeks the imposition of administrative fines in the amount of $575,000.00 from PCS, $238,500.00 from AFP and $323,500.00 from the registered representatives. The allegations in the OFR Administrative Proceeding concern the impact of management fees on the bonus provisions of a rider on 55 customer variable annuities between 2007 and 2010.  AFP has since instituted procedures to insure that no other variable annuities under management are similarly impacted.   PCS, AFP and the registered representatives believe that these transactions were an administrative error and that the customers did not suffer any economic harm or damage.  PCS, AFP and the registered representatives do not believe that the imposition of administrative fines is appropriate and they intend to vigorously defend against the OFR Administrative Proceeding.  While we believe that PCS, AFP and the registered representatives will prevail in the OFR Administrative Proceeding, we cannot at this time estimate the financial outcome of the OFR Administrative Proceeding.

On June 30, 2009, the Securities and Exchange Commission (“SEC”) commenced an administrative proceeding against the Company and PCS.   Under the terms of a settlement reached with the SEC on March 16, 2010, the Company and PCS agreed to certain undertakings, including retaining an Independent Compliance Consultant to conduct a comprehensive review of their supervisory, compliance and other policies, practices and procedures related to variable annuities. On October 20, 2010, the Independent Compliance Consultant submitted his report of recommendations to the SEC.  The Company, PCS and AFP, the Company’s registered investment advisor subsidiary, have implemented all material recommendations of the Independent Compliance Consultant, including the following changes to their supervisory, compliance and other policies, practices and procedures:

 
·
Moving the supervision of representatives of PCS from the PCS Compliance Department to a new Supervision Department.
 
·
Fingerprinting all non-registered personnel who regularly have access to the keeping, handling or processing of securities, monies or the original books and records relating thereto.
 
·
Conducting unannounced PCS branch exams and enhancing branch exam procedures.
 
·
Reviewing and revising procedures and new account forms for variable annuity purchases and exchanges.
 
·
Reviewing and revising training programs for representatives of PCS and AFP.


Except for the additional Risk Factor noted below, our risk factors have not changed materially from those disclosed in Part I, Item 1A of our 2011 Annual Report on Form 10-K as filed with the SEC on September 28, 2011.

In the event Michael Ryan, the Company’s Chief Executive Officer and President, violates the supervisory restrictions imposed by an SEC Administrative Law Judge, sanctions could be imposed against Mr. Ryan and on the Company.

On June 25, 2010, an SEC Administrative Law Judge issued a decision which became effective on August 5, 2010 concerning Mr. Ryan prohibiting him from serving in a supervisory capacity with any broker, dealer, or investment adviser, including our wholly-owned subsidiaries, AFP and PCS, with the right to reapply after one year.   Mr. Ryan has not reapplied for a new supervisory license.


 
ITEM 1A. RISK FACTORS - continued
 
Mr. Ryan continues to serve as the President and CEO of the Company.  To insure that Mr. Ryan does not violate the supervisory restrictions contained in the decision, our Board of Directors have imposed a restriction on Mr. Ryan that prohibits him from exercising any supervisory authority over PCS and AFP, their activities or representatives, including our employees in their capacity as PCS representatives.  Our Board of Directors has delegated to Carole Enisman, Executive Vice President of Operations, any issue that could potentially impact the conduct or employment of a PCS or AFP registered representative in his or her capacity as a PCS or AFP registered representative.  Ms. Enisman has been instructed that with respect to any such issue, she reports to our Board of Directors, and not to Mr. Ryan as President of Gilman Ciocia, Inc.


After the reporting period covered by this report on the Form of 10-Q, on May 2, 2012, we commenced the Gilman Ciocia $1.8 million Promissory Note Offering, a private offering of our debt securities pursuant to SEC Regulation D (the “2012 Offering”).  The securities offered for sale in the 2012 Offering are $1.8 million of promissory notes with interest payable at 10.0% (the “2012 Notes”).  The 2012 Notes will be collateralized by a 33.33% security interest in our gross receipts from the preparation of 2013 income tax returns (the “2013 Gross Receipts”).  The principal of the 2012 Notes was to be paid to the Note holders from the 2013 Gross Receipts on March 31, April 30, May 31, and June 30, 2013, with the balance of principal, if any, paid July 1, 2013.

On October 31, 2011, pursuant to the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), we granted to the independent members of our Board of Directors and Jim Ciocia, our Chairman of the Board, in the aggregate, $30.0 thousand in common stock options, or 626,304 common stock options each with an exercise price of $0.15 and a ten-year term which vest as to 20.0% of the shares annually commencing one year after the date of grant and which have a Black-Scholes value at the time of grant determined based on the closing price of our common stock on the date of grant.  Additionally, on October 31, 2011 we issued in the aggregate to these same board members $30.0 thousand in common stock, or 600,000 shares of restricted common stock.


None.


None.


None.
























 

3.1
Registrant’s Certificate of Amendment of Certificate of Incorporation, incorporated by reference to the exhibit in the Registrant’s Quarterly Report on Form 10-Q dated March 31, 2008, incorporated by reference herein.

3.2
Registrant’s Certificate of Incorporation, as amended, incorporated by reference to the like numbered exhibit in the Registrant’s Registration Statement on Form SB-2 under the Securities Act of 1933, as amended, File No. 33-70640-NY.

3.3
Registrant’s Certificate of Amendment of Certificate of Incorporation, incorporated by reference to the exhibit in the  Registrant’s Proxy Statement on Form 14-A under the Securities Exchange Act of 1934, as amended, filed on June 22, 1999.

3.4
Registrant’s By-Laws, incorporated by reference to the like numbered exhibit in the Registrant’s Registration Statement on Form SB-2 under the Securities Act of 1933, as amended, File No. 33-70640-NY.

 
 


101 
The financial information from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March31, 2012 furnished electronically herewith, and formatted in XBRL (Extensible Business Reporting Language):  Consolidated Balance Sheets; Consolidated Statements of Operations; Consolidated Statement of Cash Flows; and Notes to Consolidated Financial Statements, tagged as blocks of text.  (Filed herewith).




 
 
 
 

 
 
 



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
  GILMAN CIOCIA, INC.  
       
Dated: May 15, 2012
By:
/s/ Michael Ryan  
    Michael Ryan  
    Chief Executive Officer  
    (Principal Executive Officer)  
 
       
Dated: May 15, 2012
By:
/s/ Jay Palma  
    Jay Palma  
    Principal Financial and Chief Accounting Officer  
       
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28

XOTC:GTAX Quarterly Report 10-Q Filling

XOTC:GTAX Stock - Get Quarterly Report SEC Filing of XOTC:GTAX stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

Content Partners
XOTC:GTAX Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XOTC:GTAX Insider Activity 3 Filing - 1/1/2012  |  Next: XOTC:GTHP Guided Therapeutics Inc Insider Activity 3 Filing - 4/16/2012