<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
X Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required) For the fiscal year ended June 30, 1997.
__ Transition report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (No fee required)
For the transition period from _______ to _______
Commission file number 000-22996
GILMAN & CIOCIA, INC.
(Name of small business issuer in its charter)
Delaware 11-2587324
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
475 Northern Boulevard, Great Neck, NY 11021
(Address of principal executive offices) (Zip Code)
(516) 482-4860
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Securities registered under Section 12(g) of the Act:
Title of each class Name of each exchange
on which registered
Common Stock, par value
$.01 Per share N/A
Redeemable Warrants to purchase
Common Stock N/A
Check whether the issuer: (1) filed reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days. Yes X No ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
State issuer's revenues for its most recent fiscal year. $19,071,889
The aggregate market value of the voting stock held by non-affiliates
as of September 30, 1997 was $15,128,289 based on a sale price of $5.0625.
State the number of shares outstanding of each class of the issuer's
classes of common equity, as of the latest practicable date. As of September 30,
1997, 5,588,913 shares of the issuer's common equity were outstanding.
Transitional Small Business Disclosure Format (check one): Yes__ No X
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Gilman & Ciocia, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on September 3, 1993, the successor in interest to
Gilman & Ciocia, Inc., a New York corporation organized on November 4, 1981 and
is a preparer of federal, state and local income tax returns. The Company also
earns revenues from acting as an insurance agent and mortgage broker. In
addition, the Company's wholly owned subsidiary, JT Securities, Inc. (a
registered securities broker/dealer and a registered investment advisor )("JT
Securities"), earns a significant portion of the Company's revenues by effecting
limited transactions in securities for its clients, providing office space,
clerical support and client references to registered representatives of another
registered securities broker/dealer. Such registered representatives are
employees or affiliated financial planners of the Company and effect
transactions in securities on behalf of clients of the Company. The Company also
has a division operating as a direct mail service.
The Company has a total of one hundred and twenty one offices: forty
one in New York, sixteen in New Jersey, nine in Florida, nine in Arizona, nine
in Ohio, seven in Maryland, seven in Connecticut, seven in Washington, six in
Massachusetts, five in Nevada, two in California, two in Pennsylvania and one in
Kentucky, and it maintains its principal executive office at 475 Northern
Boulevard, Great Neck, NY 11021, telephone (516) 482-4860.
The Company opened fifteen offices in January 1994, twenty two offices
in January 1995, forty four offices in 1996, closing four in the first half of
1996 and eight in 1997.
In December 1994, the Company consummated its initial public offering
("IPO") of 507,926 units, including the underwriter's overallotment option, of
its securities to the public for $7.00 per unit. Each unit consisted of two
shares of the Company's common stock and a warrant to purchase another share of
common stock at $4.67 per share. Proceeds of the offering less underwriting
discounts of approximately $278,000 were approximately $3,277,000. Expenses for
the IPO totaled approximately $190,000, resulting in net proceeds to the Company
of approximately $3,087,000. In connection with the IPO, the Company issued
warrants to purchase 50,783 units to the underwriter at an exercise price of
$8.40.
On February 10, 1995, effective November 1, 1994, the Company acquired
all the outstanding stock of Gilbert Financial Services Inc. (a Florida
Corporation) in exchange for 203,428 shares of the Company's common stock.
On June 30, 1995, the Company acquired certain assets in order to
commence a direct mail service business under the name of "Progressive Mailing."
The Company uses direct mail as its main form of advertising and has expanded
its Progressive Mailing operations into an independent business.
MARKET AND STRATEGIC OVERVIEW
The Company believes that most middle and upper income Americans require
services for preparing income tax returns. Other financial services, such as
brokerage for mutual fund investment and the sale of insurance products, have
historically been supplied by segmented firms, but the Company believes that the
current trend to multiservice firms that provide clients with the convenience of
personalized, "one-stop" financial shopping will enable the Company to extend
the services that it delivers to its existing tax preparation clients and to
attract more clients for its full range of services.
2
<PAGE> 3
TAX RETURN PREPARATION
The Company prepares federal, state and local income tax returns for
individuals, predominantly in the middle and upper income brackets. The
preparation of a tax return by the Company usually involves a personal meeting
at the office between a prospective client and an employee of the Company. At
the meeting, the Company's employee solicits from the client the information on
income and deductions and family status necessary to prepare the client's tax
return. The Company uses publicly available computer software packages for the
processing of tax returns for which it pays standard licensing fees and
royalties. After the meeting, drafts of the client's tax returns are prepared.
After review and final correction by the tax preparer, the returns are delivered
to the client for filing. If the client desires, the client then meets with a
financial planner. See "DESCRIPTION OF BUSINESS --Financial Planning Services."
In keeping with the trend toward increasingly automated filing of
income tax returns, the Company offers to clients the option of filing their
federal income tax returns electronically. Under this system, the final federal
income tax return is transmitted to the Internal Revenue Service ("IRS") through
a publicly available software package.
Refund anticipation loans are also available to the clients of the
Company through arrangements with approved banking institutions. Using this
service, a client is able to receive a check in the amount of his federal
refund, drawn on an approved bank, at the office where he or she had his or her
return prepared. The Company acts only as a facilitator between the client and
the bank in preparing and submitting the loan documentation and receives a fee
for these services payable upon consummation of the loan. The Company has no
liability in connection with these loans. The Company makes no such loans, and
its funds are not disbursed in any fashion to reimburse customers.
None of the Company's full-time tax preparers is a certified public
accountant, and, therefore, they are limited in the representation that they can
provide to clients of the Company on an audit by the Internal Revenue Service
(the "IRS"). The Company provides training seminars for all tax preparers.
Training for seasonal preparers consists of a biweekly tax course that runs from
September through December from 9 a.m. - 4 p.m. on Saturdays. This course covers
all aspects of tax return preparation. In addition, a one-day seminar is given
in January which covers all new tax law changes as well as a general review of
the process of tax return preparation.
The Company's business of preparing income tax returns subjects it to
potential civil liabilities under the Internal Revenue Code (the "Code").
Although the Company complies with all applicable laws and regulations, no
assurance can be given that the Company will never incur any material fines or
penalties.
In addition, the Company does not maintain any professional liability
or malpractice insurance policy. Although the Company complies with all
applicable laws and regulations, no assurance can be given that the Company will
not be subject to professional liability or malpractice suits.
SEASONALITY
The Company's tax preparation business is conducted predominantly in
the months of February, March and April when most individuals prepare their
federal, state and local income tax returns. The Company hires approximately 500
seasonal employees in conjunction with the utilization of its existing employees
to meet the demand imposed during those months, and as a result, has avoided
opening offices especially for tax season and closing them after the peak
period.
To assist in funding operations during the off season and to facilitate
its plans for expansion,
3
<PAGE> 4
the Company has a credit facility in the form of a line of credit up to
$3,500,000. Borrowings under this line are in the form of short-term notes with
interest charged monthly at the bank's prime lending rate plus 1 1/2 % to
1-3/4%.
BROKER/DEALER SUBSIDIARY
JT Securities is registered as a securities broker/dealer under the
Securities Exchange Act of 1934, as amended, and has been a member of the
National Association of Securities Dealers, Inc. ("NASD") since July 1994. In
addition, JT Securities has effected all filings under New York State law to
register as a broker/dealer in New York and Florida. In 1995, JT Securities was
registered with the Securities and Exchange Commission (the "Commission") and
with the states of New York and Florida as an investment advisor. See
"DESCRIPTION OF BUSINESS--Regulation."
FINANCIAL PLANNING SERVICES
While preparing tax returns, clients often consider other aspects of
their financial needs, such as insurance, investments and pension and estate
planning. The Company attempts to capitalize on this situation by introducing
clients of its tax preparation business to its employees and affiliated
financial planners who are registered representatives of JT Securities or
another registered securities broker/dealer and/or authorized agents of
insurance carriers.
Most middle and upper income individuals require a variety of financial
planning services. If clients seek insurance products in connection with the
creation of a financial plan, they are referred to an employee or affiliated
financial planner of the Company (who may be the tax preparer himself) who is an
authorized agent of an insurance underwriter. If clients seek mutual fund
products or other securities for investment, they are referred to an employee or
affiliated financial planner of the Company (who may be the tax preparer
himself) who is a registered representative of a securities broker/dealer,
either the Company's wholly owned subsidiary or another broker dealer. If
clients seek money management services, they are referred to an investment
advisor of JT Securities. See "DESCRIPTION OF BUSINESS--Relationship with
Registered Representatives of Broker/Dealers; and --Relationship with Authorized
Agents of Insurance Underwriters; and --Relationship with Investment Advisors."
RELATIONSHIP WITH REGISTERED REPRESENTATIVES OF BROKER/DEALERS
A number of the Company's full-time employees and affiliated financial
planners are registered representatives ("Registered Representatives") of Royal
Alliance Associates, Inc. ("Royal Alliance"), an unaffiliated corporation, which
is a registered securities broker/dealer and a member of the NASD. Three of such
full-time employees (all of whom are officers of the Company) are also
Registered Representatives of JT Securities.
Registered Representatives who work with only one firm are supervised
by such firm. Registered Representatives who work with Royal Alliance and JT
Securities are generally supervised by both firms and with regards to any
particular transaction by the firm through which the transaction is effected.
Such firms are exclusively responsible for all supervision and record keeping in
connection with the Registered Representatives and their activities.
If clients of the Company inquire about the acquisition or sale of
investment securities, they are directed to one of such Registered
Representatives. Such Registered Representatives are able, through Royal
Alliance or JT Securities, to effect transactions in such securities at the
request of clients and retain a certain percentage of the commissions earned on
such transactions. Royal Alliance has
4
<PAGE> 5
licensed principals in all areas of the securities business. JT Securities has
licensed principals in selected areas of the securities business. The securities
transactions effected by Registered Representatives who are either employed by
or affiliated with the Company, involve interests in mutual funds, variable
annuities, corporate equities and bonds and other securities.
All security transactions are introduced and cleared on a fully
disclosed basis through a correspondent broker that is a member of the New York
Stock Exchange.
For a securities transaction effected through Royal Alliance, Royal
Alliance retains approximately 6% of the total commission, and a majority of the
individual Registered Representatives and JT Securities each receives
approximately 47% of the total commission. Each of the Registered
Representatives except the officers of the Company has entered into an
independent contractor's agreement with the Company, which generally provides
that a specified percentage of the commissions earned by the Registered
Representative is paid to JT Securities as compensation for supplying to such
Registered Representative office space, clerical and secretarial support and
references of clients. All Registered Representatives have agreements that
contain covenants requiring them to maintain strict confidentiality and to
refrain from certain competition with the Company. Each agreement with a
Registered Representative has a duration of no more than one year from the date
of the agreement.
The Company has no written agreement with Royal Alliance, and either
the Company or Royal Alliance could terminate their relationship at any time.
The Company believes that other broker/dealers, including JT Securities, could
be found to affiliate with and supervise the Registered Representatives if the
Company's relationship with Royal Alliance were terminated.
RELATIONSHIP WITH AUTHORIZED AGENTS OF INSURANCE UNDERWRITERS
Certain of the Company's full-time employees and affiliated financial
planners are authorized agents of insurance underwriters. If clients of the
Company inquire about insurance products, then they are directed to one of such
authorized agents. Such agents are able, through several insurance underwriters,
to sell insurance products at the request of clients and retain a certain
percentage of the commissions earned on such sales. The Company is an authorized
insurance agent under both New York and Florida law.
Each of the insurance agents (except the Company's officers) has
entered into an independent contractor's agreement with the Company. Each such
agreement generally provides that a specified percentage of the commissions
earned by the agent is paid to the Company as compensation for the Company's
supplying to such agent office space, clerical and secretarial support and
references of clients. The agreements also contain covenants requiring the agent
to maintain strict confidentiality and to refrain from certain competition with
the Company. Each agreement with an insurance agent has a duration of no greater
than one year from the date of the agreement.
MARKETING
Most of the Company's clients are repeat clients from prior years. The
majority of clients in each office return to the Company for tax preparation
services during the following years, and the retention rate is approximately
75%. In addition, the Company markets its services principally through direct
mail and promotions.
Direct Mail. Each year prior to the "tax season" when individuals file
federal, state and local income tax returns, the Company sends direct mail
advertisements. The direct mail advertising solicits business principally for
the Company's tax preparation services. A large majority of the Company's
5
<PAGE> 6
new clients each year are first introduced to the Company through its direct
mail advertising.
Promotions. The Company offers a $50 U.S. Savings Bond to any client
that refers another two clients to the Company. The program has resulted in
approximately 300 new clients per year.
Online. The Company currently has two web sites on the Internet:
http://www.gtax.com and http://www.ssnn.com for income tax and financial
planning advice, 10K/Q information and the latest news releases.
Other Marketing. The Company also prints and distributes brochures and
flyers about its services.
The Company believes that its most promising market for expansion may
lie in areas where Americans and other nationals are migrating. Individuals
usually retain a local tax preparer in connection with their personal tax
returns. When people move, therefore, they usually seek to find a new income tax
preparer. At or shortly after the time that they move, therefore, individuals
are most susceptible to the direct mail advertising of the Company's tax
preparation services. The Company has not conducted any analysis of demographic
data or any formal market surveys.
COMPETITION
The income tax preparation and financial planning services industry is
highly competitive. The Company's competitors include companies specializing in
income tax preparation as well as companies that provide general financial
services. Many of these competitors, which include H + R Block, Inc., HD Vest,
Inc., Jackson Hewitt Tax Service, Inc. and Triple Check Income Tax Service, Inc.
in the tax preparation field and many well-known brokerage firms in the
financial services field, have significantly greater financial and other
resources than the Company. The Company believes that the primary elements of
competition are convenience, quality of service and price. No assurance can be
given, however, that the Company will be able to compete successfully with
larger and more established companies.
In addition, the Company may suffer from competition from departing
employees and affiliated financial planners. Although the Company attempts to
restrict such competition contractually, as a practical matter, enforcement of
contractual provisions prohibiting small scale competition by individuals is
difficult.
TRADEMARKS
The Company has registered its "Gilman & Ciocia" trademark with the
U.S. Patent and Trademark Office. No assurance can be given that the Company
would be able successfully to defend its trademark if forced to litigate its
enforceability. The Company believes that its trademark "Gilman & Ciocia"
constitutes a valuable marketing factor. If the Company were to lose the use of
such trademark, its sales could be adversely affected.
DIRECT MAIL DIVISION
The Company commenced operations of a direct mail service division in
July 1995 under the name "Progressive Mailing". Progressive Mailing does not
design, create or draft the text for direct mail materials, but does provide
limited consulting services in these areas. The Progressive Mailing
6
<PAGE> 7
division uses equipment acquired from a liquidated company and is operated by
certain personnel hired from that company.
The Company's principal marketing medium is direct mail solicitation,
and the Company's solicitations constitute the majority of Progressive Mailing's
services. Currently, Progressive Mailing is soliciting business solely through
word of mouth and referrals. The Company has hired a salesperson to help market
its services.
The direct mail business is highly competitive with many large and
small entities competing for business. The principal factors of competition are
timeliness, accurate service and price.
At September 30, 1997, the Company employed twenty one persons on a
full-time basis in its Progressive Mailing division: one executive person, one
clerical personnel, and nineteen staff personnel.
REGULATION
The Company, as a preparer of federal income tax returns, is subject to
the regulations of the Code and regulations promulgated thereunder. The Code
requires, for example, that tax preparers comply with certain ministerial
requirements with respect to the preparation and filing of tax returns and rules
on the maintenance of taxpayer records. The Code also imposes regulations
relating to the truthfulness of the contents of tax returns, the confidentiality
of taxpayer information, and the proper methods of negotiating taxpayer refund
checks. Penalties for violations are specified in the Code.
To represent a taxpayer before the IRS after the initial audit, an
individual must meet certain requirements. Only an attorney, a certified public
accountant or a person specifically enrolled to practice before the IRS can
represent a taxpayer in such circumstances. Several of the employees of the
Company meet such requirements. Most of the full-time employees of the Company,
therefore, are limited in that they may appear as a representative of a taxpayer
only through the stage of an audit examination at the office of a District
Director, and then only upon complying with applicable regulations.
Tax preparers are prohibited by regulations promulgated by the IRS from
using information on a taxpayer's tax return for certain purposes involved in
the solicitation of other business from such taxpayer without the consent of
such taxpayer. The Company believes that it complies with all applicable IRS
regulations.
With the exception of qualified advisors of JT Securities, a registered
investment advisor, neither the employees of the Company nor its affiliated
financial planners generally give investment advice about particular investments
to clients. Instead, financial planning services involve making clients aware of
the types of vehicles available for savings, investment and planning for
retirement and death, disability and other contingencies. Furthermore, any
advice given by employees of the Company or affiliated financial planners is
incidental to their work in connection with the purchases and sales of mutual
fund shares and other securities. They are registered representatives of a
broker/dealer and work under the supervision of such broker/dealer. Accordingly,
the Company does not believe that it or any of its employees (other than
qualified advisors of JT Securities, a registered investment advisor) is
required to register as an investment adviser with the Commission or any
applicable state agency. In 1992, the staff of the Commission made written
inquiries to the Company regarding a possible requirement for it to register as
an investment adviser. The Company responded to such inquiries in March 1993 and
has not received any other communication from the Commission on this subject.
Since such date, JT Securities has registered as an investment advisor.
If the Commission were to determine that, prior to the registration of
JT Securities, as a
7
<PAGE> 8
securities broker/dealer and as an investment adviser, the Company was required
to be registered as a broker/dealer and/or as an investment adviser, then the
Company may be subject to regulatory action.
The registered representatives themselves are strictly regulated in
their activities as registered representatives of a securities broker/dealer
under the Securities Act of 1934, as amended, and the rules and regulations
promulgated thereunder, state regulation, the rules of the NASD and by the rules
and regulations of the broker/dealer.
JT Securities, is a registered broker/dealer under the Securities
Exchange Act of 1934, as amended, and a member of the NASD, is subject to
detailed rules and regulations, including extensive record keeping requirements,
incumbent upon registered broker/dealers and investment advisors. JT Securities
is also registered as an investment adviser under the Investment Advisers Act of
1940, and is subject, therefore, to the detailed rules and regulations
promulgated thereunder.
JT Securities has not registered as a broker/dealer in any states other
than New York and Florida, although the Company has offices in ten other states.
The Company does not believe that JT Securities is currently required to so
register. The State of Washington made written inquiries in 1996 regarding
possible requirements for JT Securities to register as a securities
broker/dealer in the State of Washington. The Company responded to such
inquiries and has not received any further communication from the State of
Washington in this regard.
EMPLOYEES
At September 30, 1997, the Company employed 198 persons on a full-time
basis, including the Company's four officers. See "DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS." The Company's full-time employees
include 110 professional tax preparers, 40 clerical and support staff persons,
and 48 administrative personnel, who include the Company's executive officers.
In addition, 21 employees are part of the Company's direct mail services
division. During peak season the Company employs approximately 500 full-time
employees.
The Company also utilizes approximately 135 independent contractors who
serve as registered representatives of Royal Alliance and/or as insurance agents
as well as seasonal employees. See "DESCRIPTION OF BUSINESS--Seasonality."
The Company's offices are partially staffed by financial planners who
are affiliated with the Company as independent contractors, particularly during
the off season. The Company also retains seasonal employees. See "DESCRIPTION OF
BUSINESS--Seasonality." During a portion of the year, approximately ten of the
Company's offices are not staffed full-time by employees and/or full-time
financial planning affiliates of the Company. During such periods, such offices
are staffed part-time by affiliated financial planners and calls to such offices
when no personnel are present are forwarded automatically to an office of the
Company that is fully staffed.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company provides services to its clients at 121 local offices in
thirteen states: Forty one in New York, sixteen in New Jersey, nine in Arizona,
nine in Florida, nine in Ohio, seven in Maryland, seven in Connecticut, seven in
Washington, six in Massachusetts, five in Nevada, two in Pennsylvania, two in
California and one in Kentucky. Eight of such offices opened in January 1997.
8
<PAGE> 9
A majority of the offices are leased in commercial office buildings. Most of the
Company's offices are leased pursuant to standard form office leases, although
ten offices are leased on an oral month-to-month basis. The leases range in
remaining terms from one to seven years. The Company's rental expense during its
fiscal year ended June 30, 1997 was $1,762,860. The Company believes that any of
its offices could be replaced with comparable office space, however location and
convenience is an important factor in marketing the Company's services to its
clients. Since the Company advertises in the geographic area surrounding the
office location, the loss of such a office that is not replaced with a nearby
office could adversely affect the Company's business at that office.
The Company needs less than 1,000 square feet of usable floor space to
operate an office, and its needs can be flexibly met in a variety of real estate
environments. Therefore, the Company believes that its facilities are adequate
for its current needs.
The Company also owns two buildings housing two of its offices, one in
Babylon, New York and the other in Palmer, Massachusetts.
ITEM 3. LEGAL PROCEEDINGS.
There are no material proceedings against the Company currently
pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted during the fourth quarter of the Company's 1997
fiscal year to a vote of security holders.
PART II
ITEM 5. MARKET INFORMATION.
The Principal market on which the Company's common stock trades is The
Nasdaq Small-Cap Stock Market under the symbol "GTAX." Prior to December 1994 no
public market existed for the Company's securities.
The following table sets forth the high and low sales prices for the
common stock of the Company during the period indicated:
<TABLE>
<CAPTION>
Sales Prices
Quarter Ended High Low
<S> <C> <C>
June 30, 1995 $4 1/8 $2 1/4
September 30, 1995 $5 1/4 $5
December 29, 1995 $6 7/8 $6 3/4
March 31, 1996 $7 7/16 $5 1/2
June 28, 1996 $6 5/8 $6 1/8
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C>
September 30, 1996 $6 $5 1/2
December 31, 1996 $2 1/4 $2
March 31, 1997 $2 3/16 $2 1/16
June 30, 1997 $2 1/16 $1 15/16
September 30, 1997 $5 1/8 $4 1/8
</TABLE>
As of September 30, 1997 the approximate number of holders of record of
the Company's common stock was 339. The Company has not paid dividends to its
shareholders since its inception and does not plan to pay dividends in the
foreseeable future. The Company currently intends to retain any earnings to
finance the growth of the Company.
The Company's NASDAQ symbols are:
Common Stock........................... GTAX
Redeemable Warrants.................... GTAXW
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Results of Operations: 1997 and 1996 Fiscal Years Compared
Plan of Operation
Over the past two fiscal years, the Company opened 48 new offices which
represents 40% of all offices at June 30, 1997. The Company plans to continue
its expansion and open new offices during the next year (although no specific
target has been set), recruit successful financial planners and acquire existing
tax preparation practices. The Company anticipates funding this growth through
operating profits and use of its short-term line of credit, but anticipates that
additional funds may be available through the exercise of outstanding options
and warrants because the sale and/or resale of the common stock underlying such
securities was recently registered. However, there can be no assurance that the
offering will be consummated or that any of such options or warrants will be
exercised.
The Company anticipates that opening new offices will increase its
revenues, but will involve a substantial increase in costs. The Company has no
basis to predict whether its new offices will have a material effect on its net
income. The Company believes that its new offices can ultimately be operated
profitably, but expansion may initially reduce the Company's profits or result
in an overall loss in future years.
During the Company's 1997 fiscal year, the Company continued its
operations of a direct mail division in order to control the substantial costs
of advertising its many offices. The Company believes that the direct mail
division will eventually result in lower advertising costs on per-office basis,
as the Company takes advantage of economies of scale. The Company intends for
its direct mail division to operate as an independent division and solicit its
own customers for its direct mail services.
10
<PAGE> 11
RESULTS OF OPERATIONS
1997 and 1996 Fiscal Years Compared
The Company's revenues for the fiscal year ended June 30, 1997 were
$19,071,889 as compared to revenues of $16,509,677 for the prior fiscal year.
The increase in revenues for its 1997 fiscal year from its 1996 fiscal year is
attributable to: (1) the Company's opening of eight new offices in January 1997
(the "1997 New Offices") and the acquisition of ten customer lists, which
resulted in increased revenues from tax preparation services of $476,518; (2)
continued growth of the existing offices which resulted in increased revenues
from tax preparation services of approximately $1,297,000; (3) increased
financial planning revenues of approximately $1,290,000 over all offices; and
(4) decreased revenues of approximately $502,000 from its direct mailing
services.
The Company's total revenues for the year ended June 30, 1997 consist
of $9,921,967 for tax preparation services, $6,961,602 for financial planning
services and $2,188,320 for direct mailing services. The Company's total
revenues for the year ended June 30, 1996 consist of $8,147,986 for tax
preparation services and $5,671,905 for financial planning services; and
$2,689,786 for direct mailing services.
The growth in the tax preparation segment is primarily attributable to
the additional revenues generated by the 1997 New Offices, the continual growth
of the existing offices, and the increase of production from the tax preparers.
The growth in the financial planning segment is also attributable to the
continual growth of the existing offices and the increase of production from
the acquisition of new financial planners.
The remaining growth in financial planning revenues is a result of the
Company's benefiting from a year of rapidly rising equity security prices in the
marketplace, which induced clients to invest funds with the Company, generating
commission revenues for the Company. Any reduction in the rate of increase of
equity securities' prices in the marketplace could reduce the increase in
investments that the Company's clients make through the Company, and falling
market prices of securities could result in a reduction that would offset other
sources of growth in the Company's financial planning revenues. The 1997 growth
of the financial planning services was not significantly affected by the opening
of the 1997 New Offices. The Company has normally experienced a 6 to 12 month
delay after the opening of a new office before such office generates significant
financial planning revenues.
The Company's operating expenses for the 1997 fiscal year were
$17,781,015 as compared to operating expenses of $15,915,148 for the 1996
fiscal year. The increase of 11.7% in the Company's operating expenses for its
1997 fiscal year from its 1996 fiscal year was attributable to increases of
$891,045 in salaries and commissions; $518,333 in general and administrative
expenses; $234,816 in advertising; $381,980 in rent; and $260,454 in
depreciation and amortization, no reimbursement of financial planning expenses
($125,000 in 1996); and offset by a reduction in direct mail costs of $545,761.
The reasons for the increases in operating expenses are the increase
in financial planning
11
<PAGE> 12
services, the addition of the 1997 New Offices and having a full year of
operating expenses for the 22 offices opened in January of 1996.
The increase in salaries and commissions is due to increased tax
preparation salaries and financial planning activities (which generates
commissions that are generally shared with the Company's employees and
independent contractors). The increase in salaries and commissions pertain to
the personnel working at the 1997 New Offices as well as commissions that
resulted from increased financial planning activities which are predominantly
the result of increased investments by clients that resulted in increased
commissions.
The increase in depreciation and amortization is due primarily to the
acquisition of ten customer lists for approximately $487,000 and the capital
expenditures for approximately $592,000 made during 1997 including the purchase
of two buildings. The increase in advertising is primarily due to the 1997 New
Offices. The increase in rent is due to approximately $46,000 for the 1997 New
Offices, approximately $17,000 for the direct mail division and approximately
$319,000 in existing offices.
The increase of $518,333 in general and administrative expenses from
the Company's 1996 to its 1997 fiscal years resulted from the Company's
expansion of operations. Such increase was primarily the result of the
inclusion of six months of expenses for the eight new offices opened in January
1997, as well as a full year of expenses for the 22 new offices opened in
January 1996. These offices generated increases of approximately $15,000 in
office supplies, $14,000 in office expenses and $19,000 in telephone charges.
In addition, increased financial planning activities resulted in an increase of
approximately $120,000 in clearing fees, and the direct mail division incurred
$350,000 of general and administrative expenses during the Company's 1997
fiscal year.
The decrease in other income of $314,124 or 107% is due to the decrease
in income from the Company's investment in partnership of approximately
$125,000, a decrease in realized gains of approximately $84,000 on the sale
of marketable securities and an increase in interest expense of approximately
$95,000. In July 1995, the Company, together with an officer of the Company and
one of its former officers, formed an investment partnership, which yielded
income of approximately $73,000 during the Company's 1997 fiscal year as
compared to $198,000 for the 1996 fiscal year. The partnership began
liquidating its investments and distributing its assets to its partners in the
Company's 1997 fiscal year, and the Company expects that the investment of the
partnership will be fully liquidated during the 1998 fiscal year.
The Company's net income for its 1997 fiscal year is $875,994 as
compared to $534,726 for its 1996 fiscal year. The increase of 63.8% is
primarily attributable to increases in the Company's tax preparation segment of
approximately $396,000 and financial planning segment of approximately
$367,000. These increases are offset by a decrease in the Company's direct mail
division of approximately $68,000 and offset by a decrease in other income of
approximately $314,000. The decrease in income in the Company's direct mail
division is primarily attributable to the concentration of the direct mail
division's services and resources for the Company, which caused a loss of
certain client accounts outside of the Company.
The Company's business is highly seasonal, with the majority of its
revenue earned in the first four months of the calendar year. The effect of
inflation has not been significant to the Company's business in recent years.
The Company's tax return preparation business and its financial
planning business are closely linked together in that such various lines of
business generally use the same employees, assets, marketing and facilities and
can not be easily separated. The Company believes that its tax return
12
<PAGE> 13
preparation business is inextricably intertwined with, and a necessary adjunct
to, its financial planning activities and that the two segments can be viewed
meaningfully only as a whole.
LIQUIDITY AND CAPITAL RESOURCES
1997 and 1996 Fiscal Years Compared
The Company's cash flows provided by operating activities was
$1,516,445 and 2,621,862 for the years ended June 30, 1997 and 1996,
respectively. The increase of approximately $1,105,000 is due primarily to a
decrease in proceeds form the sale of marketable securities of approximately
$2,154,000, an increase in prepaid expenses and other current assets of
approximately $142,000, a decrease in accounts payable, accrued expenses and
other current liabilities, and income taxes payable of approximately $566,000.
This decrease was offset by an increase in net income plus non-cash adjustments
of approximately $830,000 and a decrease of approximately $576,000 in advances
to financial planners, a decrease in accounts receivable of approximately
$267,000 and a decrease in security deposits of approximately $84,000.
Net cash used in investing activities was $1,129,500 and $2,420,386 for
the years ended June 30, 1997 and 1996, respectively. The decrease of
approximately $1,290,000 is primarily due to decreases in capital expenditures
of approximately $308,000, due to a decrease in acquisitions of intangible
assets of approximately $243,000 and a decrease in investment in partnership of
approximately $298,000 and by increases in sales of investments of approximately
$378,000 and by an increase in proceeds from related party transactions of
approximately $246,000. The decrease is offset by an increase in payments of
related parties of approximately $182,000.
Net cash provided by financing activities decreased by $372,808 from
$684,557 to $311,749 due to the acquisition of treasury stock for approximately
$733,000 and a decrease in net proceeds from the issuance of common stock and
collections of stock subscriptions totaling approximately $86,000. The decrease
is offset by an increase in net borrowings of approximately $446,000.
The Company has two credit facilities with a bank. The first facility
is a line of credit for up to $2,500,000 which expires on October 31, 1997.
Borrowings under this line are in the form of short-term notes with interest
charged monthly at the bank's prime lending rate plus 1- 1/2 %. At June 30,
1997, the Company had an outstanding principal balance of $500,000.
The second credit facility is an installment note in the principal
amount of $1,000,000. The note is payable in 36 equal monthly installments of
approximately $28,000, plus interest at the bank's prime lending rate plus 1-
3/4%. The final installment is due December, 1999. At June 30, 1997, the note
had an outstanding principal balance amounting to $833,333.
In July 1996, the Company acquired a building to house one of its
offices in Babylon, NY for approximately $221,000. In November 1996, the
Company acquired a building to house one of its offices in Palmer, MA for
approximately $185,000. The Company acquired these buildings in connection with
its purchase of accounting practices as a condition to the sellers' selling
such businesses. The Company may acquire other real estate as part of its
future acquisition of accounting practices, but has no plans to independently
acquire real estate.
The Company believes that it could continue to operate without any
additional financing (other than its seasonal bank loans) during the next 12
months. The Company anticipates that it will not pay dividends on its Common
Stock in the foreseeable future, but will apply any profits to fund the
Company's expansion.
13
<PAGE> 14
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share."
This statement establishes new standards for computing and presenting earnings
per share (EPS), replacing the presentation of currently required primary EPS
with a presentation of basic EPS. For entities with complex capital structures,
the statement requires the dual presentation of both basic EPS and diluted EPS
on the face of the statement of operations. Under this new standard, basic EPS
is computed based on weighted average shares outstanding and excludes any
potential dilution. Diluted EPS reflects potential dilution from the exercise
or conversion of securities into common stock or from other contracts to issue
common stock. SFAS 128 is effective for financial statements issued for years
ending after December 15, 1997, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect the impact of the adoption of
this statement to be material to previously reported EPS amounts.
ITEM 7. FINANCIAL STATEMENTS.
INDEX
<TABLE>
<CAPTION>
Page
--------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS......... F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheet..................... F-4
Consolidated Statements of Income.............. F-5
Consolidated Statements of
Stockholders' Equity.......................... F-6
Consolidated Statements of Cash Flows.......... F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....... F-9 - F-20
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreement with accountants on accounting
and financial disclosure in the last quarter of the Company's fiscal year ended
June 30, 1997. However, on September 9, 1997, the Company dismissed its
principal independent accountants and engaged Arthur Andersen, LLP as its new
principal independent accountants, as disclosed in the Form 8-K that was filed
with the Securities and Exchange Commission on September 16, 1997.
14
<PAGE> 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Executive
Officer or
Director
Name Age Position Since
<S> <C> <C>
James Ciocia 41 President and Director 11/81
Thomas Povinelli 37 Chief Operating Officer 11/84
and Director
Gary Besmer 56 Vice President and Director 11/84
Kathryn Travis 49 Secretary, Vice President and Director 11/89
Seth A. Akabas 41 Director 4/95
Louis P. Karol 39 Director 4/95
</TABLE>
James Ciocia, President and Director
Mr. Ciocia is a principal founder of the Company. He opened his first
office in 1981 and has served in his current capacity since that time. In
addition to serving the company as its chief executive officer, he prepares tax
returns, serves as a life insurance agent and sells life and other insurance
products to clients of the company. Mr. Ciocia is a registered representative of
JT Securities and is a registered representative of Royal Alliance. A graduate
of St. John's University with a B.S. degree in accounting, he is a member of the
International Association for Financial Planners.
Thomas Povinelli, Chief Operating Officer and Director
Mr. Povinelli began his tenure with the Company as an accountant in
1983 and has served as an executive officer since November 1984. In addition to
supervising the opening of all new offices, he prepares tax returns, serves as a
life insurance agent, selling life and other insurance products to clients as
well as effecting transactions in mutual funds shares and other securities. Mr.
Povinelli is a registered representative of JT Securities and Royal Alliance. He
graduated from Iona College with a B.S. in accounting.
Gary Besmer, Vice President and Director
Mr. Besmer joined the company as an accountant in 1983 after retiring
from the New York City Police Department. He has served as an executive officer
and a director of the company since November, 1984. Mr. Besmer prepares tax
returns and manages the Company's Rockville Centre office. Mr. Besmer is a
registered representative of JT Securities and Royal Alliance. He is a graduate
of the New York Institute of Technology with a B.A. in behavioral science and a
minor in accounting.
15
<PAGE> 16
Kathryn Travis, Secretary, Vice President and Director
Ms. Travis began her career with the Company in 1986 as an accountant
and has served as Vice President and director since November, 1989. She prepares
tax returns and manages the Company's Great Neck office. She also serves as
President, a director and a registered representative of JT Securities and is a
registered representative of Royal Alliance. Ms. Travis graduated from the
College of New Rochelle with a B.A. in mathematics.
Louis P. Karol, Director
Mr. Karol has been a partner of the law firm of Karol, Hausman &
Sosnick and its predecessors for more than the prior five years. Mr. Karol is a
graduate of George Washington University and a graduate of Cardozo Law School
and has received an LLM degree in Taxation from New York University School of
Law. Mr. Karol is a Certified Public Accountant. Mr. Karol is on the Board of
Directors of the Long Island Chapter of the International Association of
Financial Planning.
Seth A. Akabas, Director
Since June 1991 Mr. Akabas has been a partner at the law firm of Akabas
& Cohen. Mr. Akabas is a graduate of Princeton University with a BA degree in
economics and a graduate of Columbia University Schools of Law and Journalism.
Each director is elected for a period of one year at the Company's
annual meeting of stockholders and serves until his or her successor is duly
elected by the stockholders. Officers are elected by and serve at the will of
the Board of Directors. The Company has two stock option plans committee and an
audit committee of its Board of Directors. The Company has no nominating,
compensation or other committees. The Stock Option Plan Committee administers
the Company's 1993 joint incentive and Non-Qualified Stock Option Plan and the
1997 Common Stock and Incentive and Non-Qualified Stock Option Plan of Gilman &
Ciocia, Inc. The audit committee is responsible for carrying out the functions
specified in Section 6 of Schedule E of the NASD by-laws. These functions
include: (i) review the scope of each audit of the Company, (ii) review, with
the independent auditors, the Company's accounting practices and policies, (iii)
review, with the independent auditors, their final report, (iv) review the
Company's overall accounting and financial controls with internal and
independent auditors, and (v) consult, as needed, with the independent auditors.
16
<PAGE> 17
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other
Name and Principal Fiscal Annual Options
Position Year Salary Bonus* Compensation (Shares)
- -------- ---- ------ ------ ------------ --------
<S> <C> <C> <C> <C> <C>
James Ciocia 1995 $ 267,200 $ 163,000 -0- 18,850
Chief Executive Officer, 1996 $ 251,200 $ 240,000 $30,500 (1) -0-
President and Director 1997 $ 201,100 $ 240,000 $9,580 (5) 10,000
Thomas Povinelli 1995 $ 259,600 $ 125,000 -0- 18,850
Chief Operating Officer 1996 $ 339,300 $ 145,000 $78,600 (2) -0-
and Director 1997 $ 199,951 $ 210,000 $9,951 (6) 10,000
Gary Besmer 1995 $ 156,100 $ 2,000 -0- 11,310
Vice President and 1996 $ 168,800 $ 3,000 $19,000 (3) -0-
Director 1997 $ 142,149 $ 1,000 $7,149 (7) 10,000
Kathryn Travis 1995 $ 156,300 $ 4,000 -0- 14,170
Secretary, Vice President 1996 $ 166,200 $ 19,000 $49,300 (4) -0-
and Director 1997 $ 142,149 $ 3,000 $7,149 (8) 10,000
</TABLE>
* Represents commission earned from non-affiliated entities.
(1) Includes $11,000 for auto expense and $19,500 for forgiveness
of loan.
(2) Includes $18,600 for auto expense and $60,000 for forgiveness
of loan.
(3) Includes $7,000 for auto expense and $12,000 for forgiveness
of loan.
(4) Includes $8,900 for auto expense, $32,300 for forgiveness of
loan and $8,100 for health insurance.
(5) Auto expense.
(6) Auto expense.
(7) Auto expense.
(8) Auto expense.
Messrs. Ciocia, Povinelli and Besmer and Ms. Travis earn commissions
from the sale of securities and insurance products to clients of JT securities
out of which commissions such individuals compensate JT Securities for clerical
and support services and client references. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
DIRECTORS
Directors of the Company receive no compensation for serving as a
director.
17
<PAGE> 18
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs
Fiscal Year-End(#) Fiscal Year-End($)(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------ ------------------------- -------------------------
<S> <C> <C>
James Ciocia 135,370 / - $279,200 / -
Thomas Povinelli 135,370 / - $279,200 / -
Gary Besmer 85,223 / - $175,772 / -
Kathryn Travis 104,039 / - $214,580 / -
</TABLE>
(1) Based on a year-end fair market value of the underlying securities equal to
$2 1/16.
STOCK OPTION PLAN
On September 14, 1993, the Company adopted the Company's 1993 Joint
Incentive and Non-Qualified Stock Option Plan, as amended October 14, 1993 (the
"Plan"), pursuant to which the Company may grant options to purchase up to an
aggregate of 816,000 shares. Such options may be intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or they may be intended not to qualify under
such Section ("Non-Qualified Options").
The Plan is administered by Seth Akabas and Louis Karol, the committee
of independent directors of the Board of Directors of the Company, which has
authority to determine the persons to whom the options may be granted, the
number of shares of Common Stock to be covered by each option, the time or times
at which the options may be granted or exercised, whether the options will be
Incentive Options or Non-Qualified Options, and other terms and provisions of
the options. The exercise price of the Incentive Stock Options granted under the
Plan may not be less than the fair market value of a share of Common Stock on
the date of grant (110% of such value if granted to a person owning in excess of
ten percent of the Company's securities). Options granted under the Plan may not
have a term longer than 10 years from the date of grant (five years if granted
to a person owning in excess of ten percent of the Company's securities) and may
not be granted more than ten years from the date of adoption of the Plan.
On May 19, 1997, the Company adopted the Company's 1997 Common Stock
and Incentive and Non-Qualified Stock Option Plan of Gilman & Ciocia, Inc. (the
"1997 Plan"), pursuant to which the Company may grant options to purchase up to
an aggregate of 300,000 shares. Such options may be intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Options"), or they may be intended
not to qualify under such Section ("Non-Qualified Options"). No Incentive
Options will be issued pursuant to the 1997 Plan until such 1997 Plan is
approved by the shareholders of the Company.
The Plan is administered by Seth Akabas and Louis Karol, the committee
of independent directors of the Board of Directors of the Company, which has
authority to determine the persons to whom the options may be granted, the
number of shares of Common Stock to be covered by each option, the time or times
at which the options may be granted or exercised, whether the options will be
Incentive Options or Non-Qualified Options, and other terms and provisions of
the options. The exercise price of the Incentive Stock Options granted under the
Plan may not be less than the fair market value of a share of Common Stock on
the date of grant. Options granted under the Plan may not have a term longer
than 10 years from the date of grant and may not be granted more than ten
18
<PAGE> 19
years from the date of adoption of the Plan.
INDEMNIFICATION
The Company's Certificate of Incorporation includes a provision that
eliminates or limits the personal financial liability of the Company's
directors, except in situations where there has been a breach of the duty of
loyalty, failure to act in good faith, intentional misconduct or violation of
the law.
In addition, the Company's By-laws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against such persons by reason of serving or having served
as officers, directors or in other capacities, except in relation to matters
with respect to which persons shall be determined to have acted not in good
faith, unlawfully or not in the best interests of the Company. With respect to
matters as to which the Company's officers and directors and others are
determined to be liable for misconduct or negligence in the performance of their
duties, the Company's By-laws provide for indemnification only to the extent
that the Company determines that such person acted in good faith and in a manner
not opposed to the best interests of the Company.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of September 30, 1997, to the extent
known to the Company, the ownership of the Company's Common Stock, par value
$.01 per share, by (i) each person who is known by the Company to own of record
or beneficially more than 5% of the issued and outstanding Common Stock, (ii)
each of the Company's directors and executive officers, and (iii) all directors
and executive officers as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
<S> <C> <C>
James Ciocia 1,050,473 (1) 18.4%
17 Folgers Lane
Dix Hills, NY 11746
Thomas Povinelli 1,093,473 (2) 19.1%
3427 Bayfront Place
Baldwin, NY 11510
Gary Besmer 548,480 (3) 9.7%
35 Deer Run
East Islip, NY 11730
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C>
Kathryn Travis 368,185 (4) 6.5%
31 Wood Lane
Lattingtown, NY 11560
Seth Akabas 8,966 (5) .2%
245 West 107th Street
New York, NY 10025
Louis Karol 780 .01%
28 Fairview Avenue
East Williston, NY 11596
Steven Gilbert 586,154 (6) 9.9%
2420 Enterprise Road; Suite 100
Clearwater, FL 34623
All directors and officers
as a group (6 persons) 3,070,357 50.8%
</TABLE>
(1) Includes 83,604 shares, 41,766 and 10,000 shares of Common Stock
issuable upon the exercise of currently exercisable options at prices of $2.60,
$3.65 and $2.75 respectively.
(2) Includes 83,604 shares, 41,766 and 10,000 shares of Common Stock
issuable upon the exercise of currently exercisable options at prices of $2.60,
$3.65 and $2.75, respectively.
(3) Includes 50,163 shares, 25,060 and 10,000 shares of Common Stock
issuable upon the exercise of currently exercisable options at prices of $2.60,
$3.65 and $2.75, respectively.
(4) Includes 62,710 shares, 31,329 and 10,000 shares of Common Stock
issuable upon the exercise of currently exercisable options at prices of $2.60,
$3.65 and $2.75, respectively.
(5) Includes 8,081 shares owned by the law firm of Akabas & Cohen of
which Mr. Akabas is a partner.
(6) Includes 246,154 shares owned by the Gilbert Family Limited
Partnership of which Steven Gilbert is a 97% beneficiary. In addition, includes
340,000 shares issuable upon exercise of options at $3.50 per share.
20
<PAGE> 21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each of James Ciocia, Thomas Povinelli, Gary Besmer and Kathryn Travis,
acts as a Registered Representative for Royal Alliance and as an authorized
agent for insurance carriers.
Mr. Ciocia earned gross commissions from sales of securities and
insurance products in connection with his work with the Company equal to
approximately $271,000 in the Company's 1997 fiscal year and $250,000 in the
Company's 1996 fiscal year and paid approximately $103,000, and $95,000 in
such years to the Company for clerical, support staff, office space and client
references.
Mr. Povinelli earned gross commissions from sales of securities and
insurance products in connection with his work with the Company equal to
approximately $210,000 in the Company's 1997 fiscal year, $145,000 in the
Company's 1996 fiscal year and paid approximately $80,000 and $55,000 in such
years to the Company for clerical, support staff, office space and client
references.
Mr. Besmer earned gross commissions from sales of securities and
insurance products in connection with his work with the Company equal to
approximately $1,000 in the Company's 1997 fiscal year and $3,000 in the
Company's 1996 fiscal year and paid approximately $400 and $1,000 in such
years to the Company for clerical, support staff, office space and client
references.
Ms. Travis earned gross commissions from sales of securities and
insurance products in connection with her work with the Company equal to
approximately $3,000 in the Company's 1997 fiscal year and $19,000 in the
Company's 1996 fiscal year and paid approximately $1,000 and $7,000 in such
years to the Company for clerical, support staff, office space and client
references.
In 1991, the four principal shareholders, Messrs. Ciocia, Povinelli and
Besmer and Ms. Travis, personally agreed to purchase the Common Stock of a
former stockholder and executed and delivered a promissory note in the original
principal amount of $360,000 in connection with such purchase. From 1991 through
1994, annual payments thereunder, in the amount of approximately $75,000 with
interest, were advanced by the Company, and each shareholder's allocable portion
thereof was deducted from his or her salary that would otherwise be payable by
the Company. In January 1995, the Company paid such former shareholder in full
on behalf of the four principal shareholders. In January and July 1995, the four
principal shareholders agreed to surrender a total of 96,964 shares of Common
Stock in lieu of repayment of such loans advances by the Company. In such
transactions, such Common Stock was valued at its market price.
The four principal shareholders, Messrs. Ciocia, Povinelli and Besmer
and Ms. Travis, personally guaranteed the repayment of the Company's long-term
loan in the amount of $500,000 from State Bank of Long Island as well as the
seasonal loan in the form of a line of credit which provides for borrowings up
to a maximum amount of $2,500,000 and expires on October 31, 1997. Such
shareholders received no consideration for such guarantees other than their
salaries and other compensation.
On July 1, 1995, the Company, Ralph Esposito, who was then its Chief
Financial Officer, Kathryn Travis, a executive officer of the Company, four
individuals who are relatives of the officers and an employee of the Company
formed ATM Partners, LP (the "Partnership"). Such individuals and their initial
investments are as follows: Madeline Esposito, wife of former Chief Financial
Officer - $196,000, Anna Saras, wife of the present Chief Financial Officer -
$198,000, Thomas Povinelli, Sr., father of the present Chief Financial Officer
- - $71,000, Tracy Ciocia, wife of the President - $150,000, and Joseph Bonocore,
an employee - $10,000. The Company's initial investment was $348,000 and
Kathryn Travis' initial investment was $6,000. At June 30, 1997, the Company
had an approximately 41% interest in the Partnership and recognized income of
approximately $73,000 and $198,000 from the Partnership for the years ended
June 30, 1997 and 1996. During fiscal year 1997 the Partnership began
liquidating its investments and distributing its assets to its partners. The
liquidation of the Partnership is expected to be completed during fiscal year
1998.
21
<PAGE> 22
In November 1995, the four executive officers and Ralph Esposito, then
the Company's chief financial officer, sold options to purchase a total of
65,000 share at $2.50 per share to Rummco, Ltd., a Cayman Islands company. In
connection with such sale, the Company agreed to consent to such sale and
register shares underlying such options with the registration statement of which
this Prospectus is a part. These options to purchase shares of common stock were
subsequently sold to Rozel International Holding, Ltd. in an agreement dated
June 10, 1996.
The Company holds term loans due from officers/stockholders aggregating
$350,000. These loans are due in fully amortizing biweekly installments
(including interest at 7% per annum) commencing October 3, 1997 through
maturity on June 30, 2000.
The Company holds term loans due from independent
contractors/stockholders in the amount of $52,250 due on December 18, 1997 at
an interest rate of 9% and $100,000 due on June 19, 1999 at an interest rate of
6%.
22
<PAGE> 23
ITEM 13. EXHIBITS, LIST AND REPORTS OF FORM 8-K.
(a) Exhibits
3.1 Company's Articles of Incorporation, as amended, incorporated
by reference to the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-70640-NY
3.2 Company's By-Laws, incorporated by reference to the like
numbered exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended, File
No. 33-70640-NY
4.1 Resolution of Designation, Powers, Preferences and Rights of
Series A Preferred Stock, incorporated by reference to the
like numbered exhibit in the Company's Registration Statement
on Form SB-2 under the Securities Act of 1933, as amended,
File No. 33-70640-NY
4.2 Form of Warrant of Bridge Loan lenders, incorporated by
reference to the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-70640-NY
4.3 Form of Warrant included in Units, incorporated by reference
to the like numbered exhibit in the Company's Registration
Statement on Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
4.4 Form of Underwriter's Warrant, incorporated by reference to
the like numbered exhibit in the Company's Registration
Statement on Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
10.1 Restated and Amended Agreement and Plan of Merger dated
December 23, 1992 among the Registrant and 15 participating
corporations, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-70640-NY
10.2 Asset Sale Agreement dated December 31, 1992, incorporated by
reference to the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-70640-NY
10.3 Escrow letter regarding certain shares of Common Stock of the
Registrant, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-70640-NY
10.4 Omitted.
10.5 Warrant Agreement dated December 12, 1994 between the
Registrant and the Warrant Agent, incorporated by reference to
the
23
<PAGE> 24
like numbered exhibit in the Company's Registration Statement
on Form SB-2 under the Securities Act of 1933, as amended,
File No. 33-70640-NY
10.6 Omitted.
10.7 1993 Joint Incentive and NonQualified Stock Option Plan of the
Registrant, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-70640-NY
10.8 Documents involved in the repurchase of shares and settlement
with Frank Pasatieri, a former shareholder of the Registrant,
incorporated by reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
10.9 Documents involved in the repurchase of shares and settlement
with Alan Grad, a former shareholder of the Registrant,
incorporated by reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
10.10 Form of Lock-up letter executed by shareholders of the
Registrant prior to the Company's initial public offering,
incorporated by reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
10.11 Term-loan Promissory Note to State Bank of Long Island,
incorporated by reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
10.12 Documents involved in the repurchase of shares and settlement
with Bernard McGee and Jay Cruice, former shareholders of the
Registrant, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-70640-NY
10.13 Omitted.
10.14 Form of guaranty of Term-loan Promissory Note to State Bank of
Long Island, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-70640-NY
10.15 Agreement among Registrant and James Ciocia, Thomas Povinelli,
Gary Besmer and Kathryn Travis regarding the repayment of
advances, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-70640-NY
24
<PAGE> 25
10.16 Underwriting Agreement between the Registrant and Patterson
Travis, Inc., incorporated by reference to exhibit number 1.1
in the Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
10.17 Stock Purchase Agreement dated February 10, 1995 between
Registrant and Steven Gilbert, incorporated by reference to
exhibit 99.1 to the Company's Current Report on Form 8-K,
dated February 10, 1995
10.18 Noncompetition Agreement dated February 10, 1995 between
Registrant and Steven Gilbert, incorporated by reference to
exhibit 99.2 to the Company's Current Report on Form 8-K,
dated February 10, 1995
10.19 Employment Agreement dated February 10, 1995 between Steven
Gilbert Financial Corp. and Steven Gilbert, incorporated by
reference to exhibit 99.3 to the Company's Current Report on
Form 8-K, dated February 10, 1995
10.20 Registration Rights Agreement dated February 10, 1995 between
Registrant and Steven Gilbert, incorporated by reference to
exhibit 99.4 to the Company's Current Report on Form 8-K,
dated February 10, 1995
10.21 Letter Agreement dated April 26, 1995 between and Steven
Gilbert, incorporated by reference to exhibit 10.20 in the
Company's quarterly report on Form 10-Q for the fiscal quarter
ended March 31, 1995
10.22 Joint Venture Agreement dated December 28, 1994 between
Midwood Tax Service, Inc. and Registrant, incorporated by
reference to the like number exhibit in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-80627
10.23 Promissory notes delivered by James Ciocia, Thomas Povinelli,
Gary Besmer and Kathryn Travis in payment for cash value of
life insurance policies held by Registrant on the lives of
such officers, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-80627
10.24 Omitted
10.25 Omitted
25
<PAGE> 26
10.26 Agreements dated November , 1995 among Rummco, Ltd., five
executive officers of Registrant, and Registrant in connection
with the sale of stock options, incorporated by reference to
the like numbered exhibit in the Company's Registration
Statement on Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.27 Lock-Up Release Letter by Patterson Travis, Inc. dated January
10, 1996, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-80627
10.28 Employment Agreement dated April 10, 1995 between Dominick
Riolo and Registrant in connection with the opening of a new
office, incorporated by reference to the like numbered exhibit
in the Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-80627
10.29 Employment Agreement dated April 10, 1995 between Gregory
Ferone and Registrant in connection with the opening of a new
office, incorporated by reference to the like numbered exhibit
in the Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-80627
10.30 Employment Agreement dated April 10, 1995 between Armando
Olivieri and Registrant in connection with the opening of a
new office, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-80627
10.31 Independent Employment Contract dated December 1993 between
Abraham Dorfman and Registrant, incorporated by reference to
the like numbered exhibit in the Company's Registration
Statement on Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.32 Form of Subscription Letter representing stock issuances to
individuals, incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No.
33-80627
10.33 Independent Contractor's Agreement dated September 6, 1995
between Howard Wilkin and the Registrant, incorporated by
reference to the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-80627
10.34 Independent Contractor's Agreement dated September 6, 1995
between Alfred Schepis and the Registrant, incorporated by
reference to the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-80627
26
<PAGE> 27
10.35 Independent Contractor's Agreement dated September 6, 1995
between Armando Olivieri and the Registrant, incorporated by
reference to the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, File No. 33-80627
11.01 Calculation of Net Income Per Share, incorporated by reference
to the like numbered exhibit in the Company's Registration
Statement on Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
21 List of Subsidiaries, incorporated by reference to Exhibit 21
in the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1995
27
<PAGE> 28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GILMAN & CIOCIA, INC.
By: /s/ Thomas Povinelli
-----------------------------------------
Thomas Povinelli, Chief Operating Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<S> <C>
/s/ James Ciocia Chief Executive Officer, President October 9, 1997
- -------------------------
James Ciocia and Director
/s/ Thomas Povinelli Chief Operating Officer, Chief Financial October 9, 1997
- -------------------------
Thomas Povinelli Officer and Director
/s/ Gary Besmer Vice President and Director October 9, 1997
- -------------------------
Gary Besmer
/s/ Kathryn Travis Secretary, Vice President and Director October 9, 1997
- -------------------------
Kathryn Travis
/s/ Seth Akabas Director October 9, 1997
- -------------------------
Seth Akabas
/s/ Louis P. Karol Director October 9, 1997
- -------------------------
Louis P. Karol
</TABLE>
28
<PAGE> 29
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-4
Consolidated Statements of Income F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-20
</TABLE>
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gilman & Ciocia, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Gilman & Ciocia,
Inc. and subsidiaries as of June 30, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gilman & Ciocia Inc. and
subsidiaries as of June 30, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen, LLP
New York, New York
October 13, 1997
F-3
<PAGE> 31
GILMAN & CIOCIA, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 2,920,489
Marketable securities 49,658
Accounts receivable, net of allowance
for doubtful accounts of $87,500 1,109,535
Receivables from related parties, current portion 373,039
Prepaid expenses and other current assets 451,968
-------------
Total current assets 4,904,689
PROPERTY AND EQUIPMENT, net 1,679,106
Intangible assets, net of accumulated amortization of $468,249 1,147,297
Advances and notes receivable from financial planners, net of current portion 169,239
Receivables from related parties, net of current portion 447,806
Deferred tax assets 27,899
Other assets 649,540
-------------
Total assets $ 9,025,576
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 899,487
Accounts payable 168,210
Accrued expenses and other current liabilities 318,690
Income taxes payable 68,200
-------------
Total current liabilities 1,454,587
-------------
LONG-TERM LIABILITIES:
Long-term borrowings 552,000
-------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value - shares authorized
100,000; none issued and outstanding -
Common stock - $.01 par value - shares authorized
9,000,000; issued and outstanding 5,578,913 55,789
Paid-in capital 6,231,555
Retained earnings 1,593,369
Less- Treasury Stock, at cost; 157,433 shares (638,556)
-------------
7,242,157
Stock subscriptions and accrued interest receivable (223,168)
-------------
Total stockholders' equity 7,018,989
-------------
Total liabilities and stockholders' equity $ 9,025,576
=============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-4
<PAGE> 32
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Tax preparation fees $ 9,921,967 $ 8,147,986
Financial planning commissions 6,961,602 5,671,905
Direct mail services 2,188,320 2,689,786
------------ ------------
Total revenues 19,071,889 16,509,677
------------ ------------
OPERATING EXPENSES:
Salaries and commissions 7,581,136 6,690,091
General and administrative expenses 3,572,901 3,054,568
Advertising 2,819,941 2,585,125
Direct mail costs 1,136,347 1,682,108
Rent 1,884,768 1,502,788
Depreciation and amortization 785,922 525,468
Reimbursement of financial planning expenses -- (125,000)
------------ ------------
Total operating expenses 17,781,015 15,915,148
------------ ------------
Operating income 1,290,874 594,529
------------ ------------
OTHER INCOME (EXPENSES):
Income from investment in partnership 73,127 198,165
Interest income 77,162 91,435
Interest expense (201,534) (107,111)
Rental income 16,557 19,180
Realized gain on sale of marketable securities 6,580 91,175
Unrealized gain on marketable securities 6,828 --
------------ ------------
Total other income (expense) (21,280) 292,844
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,269,594 887,373
PROVISION FOR INCOME TAXES 393,600 352,647
------------ ------------
Net income $ 875,994 $ 534,726
============ ============
NET INCOME PER SHARE $ 0.16 $ 0.10
============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES:
Primary 5,572,854 5,916,044
Fully diluted 5,572,854 5,916,044
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 33
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Stock
Subscriptions
and
Common Stock Additional Retained Accrued Interest
Shares Amount Paid-in Capital Earnings Receivable
------ ------ --------------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, July 1, 1995 5,634,864 $ 56,348 $ 5,815,194 $ 660,838 $(773,980)
Purchase of treasury stock -- -- -- -- 67,590
Retirement of treasury stock (127,558) (1,276) -- (478,189) --
Issuance of common stock 26,307 263 53,063 -- --
Exercise of stock options 10,000 100 23,100 -- --
Compensation recognized in connection
with the issuance of stock options -- -- 232,782 -- --
Repayments of stock subscriptions -- -- -- -- 310,809
Issuance of stock subscriptions 6,969 70 39,930 -- (40,000)
Accrued interest income -- -- -- -- (22,433)
Accrued tax benefit related to exercise
of common stock options -- -- 20,006 -- --
Net income -- -- -- 534,726 --
---------- -------- ----------- ----------- ---------
BALANCE, June 30, 1996 5,550,582 $ 55,505 $ 6,184,075 $ 717,375 $(458,014)
Purchase of treasury stock -- -- -- -- --
Reissuance of treasury stock -- -- (53,093) -- --
Issuance of common stock 28,331 284 100,573 -- --
Repayments of stock subscriptions -- -- -- -- 261,954
Accrued interest income -- -- -- -- (27,108)
Net income -- -- -- 875,994 --
---------- -------- ----------- ----------- ---------
BALANCE, June 30, 1997 5,578,913 $ 55,789 $ 6,231,555 $ 1,593,369 $(223,168)
========== ======== =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stock Stockholder's
Shares Amount Equity
------ ------ ------
<S> <C> <C> <C>
BALANCE, July 1, 1995 116,964 $(411,875) $ 5,346,525
Purchase of treasury stock 10,594 (67,590) --
Retirement of treasury stock (127,558) 479,465 --
Issuance of common stock -- -- 53,326
Exercise of stock options -- -- 23,200
Compensation recognized in connection
with the issuance of stock options -- -- 232,782
Repayments of stock subscriptions -- -- 310,809
Issuance of stock subscriptions -- -- --
Accrued interest income -- -- (22,433)
Accrued tax benefit related to exercise
of common stock options -- -- 20,006
Net income -- -- 534,726
-------- --------- -----------
BALANCE, June 30, 1996 -- $ -- 6,498,941
Purchase of treasury stock 175,900 (733,200) (733,200)
Reissuance of treasury stock (18,467) 94,644 41,551
Issuance of common stock -- -- 100,857
Repayments of stock subscriptions -- -- 261,954
Accrued interest income -- -- (27,108)
Net income -- -- 875,994
-------- --------- -----------
BALANCE, June 30, 1997 157,433 $(638,556) $ 7,018,989
======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 34
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 875,994 $ 534,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensation expense recognized in connection 41,551 232,782
with the reissuance of treasury stock and the issuance
of stock options
Depreciation and amortization 785,922 525,468
Income from investment in partnership (73,127) (198,165)
Deferred tax provision (benefit) 105,686 (133,585)
Compensation expense recognized in connection -- 123,899
with the forgiveness of officers' loans
Gain on sale of marketable securities (6,580) (91,175)
Compensation expense recognized in connection 235,013 79,851
with amortization of advances to financial planners
Provisions for doubtful accounts 41,526 99,175
Interest on stock subscriptions (27,108) (22,433)
Gain on disposal of property and equipment -- (9,000)
Unrealized gain on marketable securities (6,828) --
(Increase) decrease in:
Proceeds from sale of marketable securities 32,580 2,186,925
Accounts receivable (174,375) (441,136)
Advances to financial planners (78,214) (653,768)
Security deposits (16,872) (100,486)
Prepaid expenses and other current assets (115,009) 26,786
Accounts payable, accrued expenses and other (109,312) 461,998
current liabilities
Income taxes payable 5,598 --
----------- -----------
Net cash provided by operating activities 1,516,445 2,621,862
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (592,362) (900,385)
Acquisition of intangible assets (487,442) (730,076)
Investments (150,000) (448,360)
Proceeds from sales of investments 378,009 --
Proceeds from related party transactions 398,545 152,655
Payments to related parties (676,250) (494,220)
----------- -----------
Net cash (used in) investing activities $(1,129,500) $(2,420,386)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 35
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock $ (733,200) $ --
Proceeds from bank and other loans 3,602,000 2,297,222
Payments of bank and other loans (2,859,262) (2,000,000)
Proceeds from sale of common stock 100,857 76,526
and exercise of stock options
Proceeds from stock subscriptions 261,954 310,809
Incurrence of deferred registration costs (60,600) --
----------- -----------
Net cash provided by financing activities 311,749 684,557
----------- -----------
Net increase in cash 698,694 886,033
CASH, beginning of year 2,221,795 1,335,762
----------- -----------
CASH, end of year $ 2,920,489 $ 2,221,795
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for-
Interest $ 196,405 $ 107,184
Income taxes 439,724 449,276
Noncash transactions-
Liquidation of investment in partnership into 68,830 --
marketable securities
Reissuance of treasury stock at fair value 94,644 --
Issuance of common stock in exchange for stock subscriptions
receivable -- 40,000
Acquisition of treasury stock and write-off of stock subscriptions -- 67,590
receivable
Retirement of all outstanding treasury stock -- 479,465
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 36
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND
NATURE OF BUSINESS
Business
Gilman & Ciocia, Inc. and subsidiaries (the "Company"), which is incorporated in
Delaware, provides income tax preparation and financial planning services to
individuals and businesses as well as direct mail services through its
Progressive Mailing Services ("Progressive") division. The Company has three
wholly owned subsidiaries, two of which are inactive. The active subsidiary, JT
Securities, Inc. ("JT"), is a registered broker-dealer and investment advisor,
pursuant to the provisions of the Securities Exchange Act of 1934 and the
Investment Advisors Act of 1940.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all majority-owned
subsidiaries. All significant intercompany transactions have been eliminated.
The Company's investments in 20% to 50% owned companies in which it has the
ability to exercise significant influence over operating and financial policies
are accounted for on the equity method. Accordingly, the Company's share of the
earnings of these companies is included in consolidated net income.
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.
Marketable Securities
The Company has classified its short-term investments in debt instruments as
trading securities which are reported at fair value with unrealized gains and
losses included in earnings.
F-9
<PAGE> 37
Advances to Financial Planners
The Company entered into agreements with independent financial planners
("Planners"), which require the Planners to become captive agents of the
Company. In connection therewith, the Company advanced funds to financial
planners. The agreements require the advances to be forgiven over three years as
long as the Planners remain with the Company. As such, all advances are
amortized on a straight-line basis over three years.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization are
determined using straight-line or accelerated methods over the estimated useful
lives of the assets or, for leasehold improvements, over the lease terms, which
range from one to seven years.
Intangible Assets
Intangible assets represent the costs of $1,615,546 to acquire lists of customer
accounts and related covenants not to compete. Amortization is computed on a
straight-line basis over a period of five years and amounted to $274,613 and
$190,817 for the years ended June 30, 1997 and 1996, respectively.
The Company's operational policy for the assessment and measurement of any
impairment in the value of the intangible assets acquired which is other than
temporary is to evaluate the recoverability and remaining life of the intangible
assets and determine whether the intangible assets should be completely or
partially written-off or the amortization period accelerated. The Company will
recognize an impairment in the value of the intangible assets if the estimated
future operating cash flows of the relevant assets acquired are determined to be
less than their carrying amount. If the Company determines that impairment has
occurred, the measurement of the impairment will be equal to the excess of the
carrying amount of the intangible assets over the amount of the undiscounted
estimated operating cash flows.
During fiscal 1997 and 1996, the Company acquired customer lists and entered
into non-competition agreements for approximately $487,000 and $730,000,
respectively.
Impairment of Long-Lived Assets
During March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of." The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that full recoverability is questionable. Management
evaluates the recoverability of its intangible assets and other long-lived
assets and several factors are used in the valuation including, but not limited
to, management's plans for future operations, recent operating results and
projected cash flows. The Company adopted SFAS No. 121 in fiscal 1997, the
adoption of which did not have a material adverse effect on the results of
operations or financial condition.
Deferred Rent
Certain of the Company's lease agreements provide for scheduled rent increases
during the lease term or for rental payments commencing at a date other than
initial occupancy. Provision has
F-10
<PAGE> 38
been made for the excess of operating lease rental expense, computed on a
straight-line basis over the lease term, over cash rentals paid.
Revenue Recognition
The Company recognizes all revenues upon completion of the services associated
with income tax preparation and direct mail services. Securities transactions
and related commission revenue and expenses are recognized on a trade date
basis.
JT utilizes financial planners that are independent contractors of the Company
pursuant to arrangements under which the Company receives a portion of the
commission revenues generated by these individuals in exchange for providing
client referrals, office space, and clerical and secretarial support.
Advertising
The cost of advertising is expensed as incurred.
Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS No. 109 "Accounting for Income Taxes." Under SFAS 109, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
estimated tax rates and laws to taxable years in which such differences are
expected to reverse.
Stock-based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation awards to
employees using the intrinsic value method prescribed in Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock options
awarded to key employees and directors is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee or director must pay to acquire the stock.
As required, the Company has adopted SFAS No. 123 to account for stock-based
compensation awards to outside consultants. Accordingly, compensation costs for
stock option awards granted to outside consultants is measured at the date of
grant based on the fair value of the award using the Black-Scholes option
pricing model. (Note 9).
Net Income Per Share
Primary and fully diluted earnings per share are computed using the treasury
stock method, modified for stock options and warrants outstanding in excess of
20% of the total outstanding shares of common stock. Under this method, the
aggregate number of shares outstanding reflects the assumed use of proceeds from
the hypothetical exercise of the outstanding options and warrants, unless the
effect on earnings is anti-dilutive. The assumed proceeds are used to repurchase
shares of common stock at the average market value during the period to a
maximum
F-11
<PAGE> 39
of 20% of the shares outstanding. The balance of the proceeds, if any, are used
to reduce outstanding debt with the assumed interest expense savings being added
to the results of operations for the reported period.
Fully diluted earnings per share also reflects the assumed use of proceeds from
the hypothetical exercise of options and warrants to purchase common stock at
the ending market price for the reported period.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash, marketable
securities, accounts receivable, notes receivable, accounts payable and
borrowings, approximated fair value as of June 30, 1997, because of the
relatively short-term maturity of these instruments and their market interest
rates.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share." This
statement establishes new standards for computing and presenting earnings per
share (EPS), replacing the presentation of currently required primary EPS with a
presentation of basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both basic EPS and diluted EPS on
the face of the statement of operations. Under this new standard, basic EPS is
computed based on weighted average shares outstanding and excludes any potential
dilution. Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock. SFAS 128 is effective for financial statements issued for years
ending after December 15, 1997, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect the impact of the adoption of
this statement to be material to previously reported EPS amounts.
3. RECEIVABLES FROM RELATED PARTIES
<TABLE>
<CAPTION>
<S> <C>
Notes receivable from officers/stockholders of the Company that are due
in aggregate bi-weekly installments of $2,295 (including interest at
7% per annum) commencing October 3, 1997 through June 30, 2000.
$350,000
Notes receivable of $52,250 and $100,000 from independent contractors/stockholders of 152,250
the Company due on December 18, 1997 and June 19, 1999, respectively. Interest
is charged at 9% and 6% per annum, respectively.
Receivable from stockholder of the Company, due in bi-weekly installments of $3,156
through June 15, 1999. 147,362
Note receivable from stockholder of the Company due on October 9, 1997. Interest is
charged at 8% per annum. 113,989
Other 57,244
--------
820,845
Less- Current portion 373,039
--------
$447,806
========
</TABLE>
F-12
<PAGE> 40
For the years ended June 30, 1997 and 1996, interest income from these
receivables was approximately $10,000 and $13,000, respectively.
4. ADVANCES AND NOTES RECEIVABLE-
FINANCIAL PLANNERS
Advances and notes receivable - financial planners consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Unamortized portion of non-interest bearing advances $ 287,232
to financial planners.
Notes receivable from financial planner due December 4, 1998. Interest
is charged at 6% per annum. 57,500
----------
344,732
Less- Current portion 175,493
----------
$ 169,239
==========
</TABLE>
5. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Buildings $ 402,367
Equipment 2,038,237
Furniture and fixtures 367,484
Leasehold improvements 183,415
----------
2,991,503
Less- Accumulated depreciation and amortization 1,312,397
----------
$1,679,106
==========
</TABLE>
For the years ended June 30, 1997 and 1996, depreciation and amortization
expense from property and equipment was approximately $394,000 and $321,000,
respectively.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Investment in ATM Partners, LP (Note 10) $ 271,870
Security deposits 226,724
Other assets 150,946
----------
$ 649,540
==========
</TABLE>
7. BANK DEBT
Bank debt consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Bank line of credit $ 500,000
Term loan 833,333
Notes payable - other 118,154
----------
1,451,487
Less- Short-term borrowings 899,487
----------
$ 552,000
==========
</TABLE>
F-13
<PAGE> 41
The Company has a bank line of credit which provides for borrowings up to a
maximum amount of $2,500,000 and expires on October 31, 1997. The line of credit
is guaranteed by the four principal stockholders of the Company. At June 30,
1997, the Company had borrowings of $500,000 outstanding under this line of
credit. Interest is charged at the prime rate (8.5% at June 30, 1997) plus 1.5%.
The Company also has a $1,000,000 term loan with the bank which requires monthly
payments of $27,778 plus interest at the prime rate (8.5% at June 30, 1997) plus
1.75% through December 17, 1999. The loan is collateralized by all of the
Company's assets. At June 30, 1997, the Company's outstanding balance under this
loan was $833,333.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under various noncancelable lease agreements for the
rental of office space and equipment through 2002. The lease agreements for
office space contain escalation clauses based principally upon real estate
taxes, building maintenance and utility costs. The following is a schedule by
year of future minimum rental payments required under operating leases:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 1,512,988
1999 1,059,640
2000 723,293
2001 415,111
2002 129,104
--------------
$ 3,840,136
==============
</TABLE>
Professional Liability or Malpractice Insurance
The Company does not maintain any professional liability or malpractice
insurance policy. Although the Company believes it complies with all applicable
laws and regulations, no assurance can be given that the Company will not be
subject to professional liability or malpractice suits.
Clearing Agreements
All securities transactions are introduced and cleared on a fully disclosed
basis through a correspondent broker that is a member of the New York Stock
Exchange, Inc. (the "Broker") pursuant to a clearing agreement (the
"Agreement"). The Agreement states that JT will assume customer obligations
should a customer of JT default. At June 30, 1997, approximately $25,000 of cash
is held as a deposit requirement by the Broker.
Net Capital Requirements
JT is subject to the SEC's Uniform Net Capital Rule 15c 3-1, which requires the
maintenance of minimum regulatory net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. At June 30, 1997, JT had net capital of $2,007,331, which was $1,982,331 in
excess of its required net capital of $25,000.
F-14
<PAGE> 42
Financial Instruments with
Off-Balance Sheet Risk
In the normal course of business, JT executes, as an agent, transactions on
behalf of customers. If the agency transactions do not settle because of failure
to perform by either the customer or the counterparties, JT may be obligated to
discharge the obligation of the nonperforming party and, as a result, may incur
a loss if the market value of the security is different from the contract amount
of the transactions.
JT does not anticipate nonperformance by customers or counterparties in the
above situation. JT's policy is to monitor its market exposure and counterparty
risk. In addition, JT has a policy of reviewing, as considered necessary, the
credit standing of each counterparty and customer with which it conducts
business.
9. STOCKHOLDERS' EQUITY
Warrants
The Company has 507,926 and 50,783 warrants outstanding pertaining to those
issued to the public and the underwriter, respectively, in connection with the
Initial Public Offering in 1994. Each warrant issued to the public grants the
holder the right to purchase one share of common stock at an exercise price of
$4.67 and expires in September 1998. For an exercise price of $8.40 per warrant,
each of the warrants issued to the underwriter gives the holder two shares of
common stock and a warrant to purchase another share of common stock at an
exercise price of $4.67 and expires in September 1999.
Stock Option Agreements
and Stock Option Plan
The Company has granted stock options to employees, directors and consultants
pursuant to individual agreements or to its incentive and non-qualified stock
option plan.
In September 1993, the Company's Board of Directors and Stockholders adopted the
Company's Joint Incentive and NonQualified Stock Option Plan (the "Option
Plan"). The Option Plan provides for the granting, at the discretion of the
Board of Directors, of: (i) options that are intended to qualify as incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees and (ii) options not intended to so qualify to
employees, officers and directors. The total number of shares of common stock
for which options may be granted under the Option Plan is 816,000 shares. The
number of shares granted, prices, terms of exercise, and expiration dates are
determined by the Board of Directors. The Plan will terminate in September 2003.
At June 30, 1997, 420,002 options have been granted and are outstanding under
the Option Plan.
The Company charged earnings for compensation expense of $232,782, for the year
ended June 30, 1996, in connection with the issuance of stock options. There
were no compensatory stock options issued during fiscal 1997.
F-15
<PAGE> 43
The table below summarizes plan and nonplan stock option activity for the past
two years:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding, July 1, 1995 1,110,002 $3.48
Granted 355,000 4.43
Exercised (10,000) 2.00
Canceled (63,000) 3.50
---------
Outstanding, June 30, 1996 1,392,002 3.89
Granted 273,000 2.70
Canceled (299,000) 4.21
---------
Outstanding, June 30, 1997 1,366,002 3.59
=========
Exercisable, June 30, 1997 1,093,002 3.81
=========
</TABLE>
Options outstanding and exercisable at June 30, 1997 and related weighted
average exercise price and life information follows:
<TABLE>
<CAPTION>
Fiscal Year Options Outstanding Options Exercisable Remaining
Grant Date Shares Price Shares Price Life (Years)
---------- ------ ----- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
1994 420,002 $2.95 420,009 $2.95 1
1995 405,000 3.34 405,000 3.34 6
1996 268,000 4.88 268,000 4.88 3
1997 273,000 2.70 - - 4
</TABLE>
The Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the employee stock
options. Had compensation cost for the Company's employee stock options been
determined based on the fair value at the grant date for options granted in
fiscal years 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income, as reported $875,994 $534,726
Net income, pro forma 832,418 101,098
Earnings per share, as reported .16 .10
Earnings per share, pro forma .15 .02
</TABLE>
F-16
<PAGE> 44
The pro forma effect on net income for fiscal years 1997 and 1996 does not take
into consideration pro forma compensation expense related to grants made prior
to fiscal year 1996.
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
<S> <C> <C>
Expected life (years) 3
Interest rate 7.00%
Volatility 61.9%
Dividend yield 0%
</TABLE>
On May 19, 1997, the Company adopted the Company's 1997 Common Stock and
Incentive and Non-Qualified Stock Option Plan of Gilman & Ciocia, Inc. (the
"1997 Plan"), pursuant to which the Company may grant options to purchase up to
an aggregate of 300,000 shares. Such options may be intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Options"), or they may be intended
not to qualify under such Section ("Non-Qualified Options"). No Incentive
Options will be issued pursuant to the 1997 Plan until such 1997 Plan is
approved by the shareholders of the Company.
Treasury Stock
During fiscal 1995, the Board of Directors resolved to accept 85,930 and 11,034
shares, respectively, of the Company's common stock from four officers in lieu
of repayment of certain loans due to the Company. The shares were valued at the
approximate fair market value of $3.50 per share for an aggregate value of
$339,375. Of the 96,964 shares, 85,930 were returned to treasury stock on August
23, 1995. The remaining 11,034 shares were returned to treasury stock on
September 22, 1995.
During fiscal 1996, the Board of Directors of the Company resolved to cancel and
return all existing shares of the Company's treasury stock to authorized and
unissued shares of common stock.
During fiscal 1997, the Company acquired 175,900 shares of its common stock for
an aggregate cost of $733,200 and reissued 18,467 of these shares to employees
and consultants. The reissuance gave rise to the recognition of compensation
expense in the amount of $41,551 representing the excess of the fair value of
these shares at reissuance over their cost.
Stock Subscriptions and
Accrued Interest Receivable
Stock subscriptions receivable of $223,168 bear interest at a rate of 9% per
annum. For the years ended June 30, 1997 and 1996, the Company recognized
interest income of $27,108 and $35,879, respectively. At June 30, 1997 accrued
interest receivable was $23,518.
The Company is holding in escrow all of the shares of its common stock related
to the stock subscriptions receivable. The shares will be released when the
stock subscriptions receivables are collected.
The following is a schedule by year of principal payments to be received:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C> <C>
1998 $ 90,013
1999 64,387
2000 45,250
--------
$199,650
========
</TABLE>
F-17
<PAGE> 45
10. RELATED PARTY TRANSACTIONS
Investment in ATM Partners, L.P.
In July, 1995, the Company, together with one of its officers and five
individuals who are relatives of the officers of the Company formed ATM
Partners, LP (the "Partnership"). At June 30, 1997 and 1996, the Company had
approximately 41% and 35%, respectively, interest in the Partnership and
recognized income of approximately $73,000 and $198,000 respectively from the
Partnership for the years then ended.
Commissions Earned by Officers
The Company's principal officers/stockholders act as registered representatives
of the Broker and authorized agents of insurance carriers. During fiscal 1997
and 1996, these individuals earned gross commissions of approximately $486,000
and $582,000 respectively, from sales of securities and insurance products, and
paid the Company approximately $184,000 and $180,000 as reimbursement for client
referrals, office space, clerical and secretarial support.
Sale of Options by Officers/Stockholders
In November 1995, five executive officers sold options to purchase a total of
65,000 shares of the Company's common stock for $2.50 per option to Rummco, Ltd.
("Rummco"), a Cayman Islands company. In connection with such sale, the Company
agreed to consent to such sale. These options to purchase shares of common stock
were subsequently sold to Rozel International Holding. Ltd. ("Rozel") for $4.50
per option, in an agreement dated June 10, 1996. Both Rummco and Rozel are
independent of the Company.
Forgiveness of Indebtedness
of Officers/Stockholders
The four principal stockholders/officers were indebted to the Company under
demand loans totaling $123,899. The loans were converted to notes receivable
upon the Company's demand for repayment in March 1996, and then subsequently
forgiven and charged to compensation.
11. SEGMENTS OF BUSINESS
The Company is a provider of income tax preparation and financial planing
services to individuals and business in various states across the country.
Direct mail services are provided primarily to businesses and individuals in the
New York metropolitan area.
F-18
<PAGE> 46
The following presents financial information by segment for the years ended June
30, 1997 and 1996:
<TABLE>
<CAPTION>
Tax Financial
Preparation Planning Direct Mail Eliminations Consolidation
----------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Revenues from unaffiliated customers $9,921,967 $6,961,602 $2,188,320 $ - $19,071,889
Intersegment revenues - - 2,275,000 (2,275,000) -
---------- ---------- ---------- ----------- -----------
Total revenues 9,921,967 6,961,602 4,463,320 (2,275,000) 19,071,889
Direct costs 6,025,407 4,227,115 4,162,670 (2,275,000) 12,140,192
Depreciation and amortization 450,091 315,761 20,070 - 785,922
General corporate expenses 2,647,426 1,857,300 350,175 - 4,854,901
---------- ---------- ---------- ----------- -----------
Operating income $ 799,042 561,428 (69,595) - 1,290,874
========== ========== ========== =========== ===========
Interest expense $ 118,442 $ 83,092 $ - $ - $ 201,534
========== ========== ========== =========== ===========
Identifiable assets $7,135,360 $5,005,800 $ 329,938 $(3,376,844) $ 9,094,254
========== ========== ========== =========== ===========
Capital expenditures $ 553,446 $ - $ 38,916 $ - $ 592,362
========== ========== ========== =========== ===========
Direct costs consist of the following:
Direct mail costs $ - $ - $1,136,347 $ - $ 1,136,347
Advertising 1,642,630 1,152,386 2,299,925 (2,275,000) 2,819,941
Rent 1,044,261 732,599 107,908 - 1,884,768
Salaries and commissions 3,338,516 2,342,130 618,490 - 6,299,136
---------- ---------- ---------- ----------- -----------
Total direct costs $6,025,407 $4,227,115 $4,162,670 $(2,275,000) $12,140,192
========== ========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Tax Financial
Preparation Planning Direct Mail Eliminations Consolidation
----------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996:
Revenues from unaffiliated customers $8,147,986 $5,671,905 $2,689,786 $ - $16,509,677
Intersegment revenues - - 2,000,000 (2,000,000) -
---------- ---------- ---------- ----------- -----------
Total revenues 8,147,986 5,671,905 4,689,786 (2,000,000) 16,509,677
Direct costs 4,260,631 3,052,737 4,429,177 (2,000,000) 9,742,545
Depreciation and amortization 302,304 210,076 13,088 - 525,468
General corporate expenses 3,182,122 2,215,025 249,988 - 5,647,135
---------- ---------- ---------- ----------- -----------
Operating income $ 402,929 $ 194,067 $ (2,467) $ - $ 594,529
========== ========== ========== =========== ===========
Interest expense $ - $ - $ - $ - $ 107,111
========== ========== ========== =========== ===========
Identifiable assets $5,519,630 $2,048,485 $ 298,386 $ - $ 7,866,501
========== ========== ========== =========== ===========
Capital expenditures $ 813,750 $ - $ 86,635 $ - $ 900,385
========== ========== ========== =========== ===========
Direct costs consist of the following:
Direct mail costs $ - $ - $1,682,108 $ - $ 1,682,108
Advertising 1,509,001 1,048,628 2,027,496 (2,000,000) 2,585,125
Rent- 831,303 577,685 93,800 - 1,502,788
Salaries and commissions 1,920,327 1,426,424 625,773 - 3,972,524
---------- ---------- ---------- ----------- -----------
Total direct costs $4,260,631 $3,052,737 $4,429,177 $(2,000,000) $ 9,742,545
========== ========== ========== =========== ===========
</TABLE>
Intersegment sales are recognized upon the completion of the services associated
with direct mail services.
F-19
<PAGE> 47
12. TAXES ON INCOME
Provisions for income taxes in the consolidated financial statements consist of
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current:
Federal $378,760 $ 362,297
State and local 66,840 123,935
-------- ---------
Total current 445,600 486,232
-------- ---------
Deferred:
Federal (44,200) (103,483)
State and local (7,800) (30,102)
-------- ---------
Total deferred tax (benefit) (52,000) (133,585)
-------- ---------
$393,600 $ 352,647
======== =========
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Compensation expense recognized for financial reporting purposes in $ 93,200
connection with common stock option grants issued at below
market value
Book amortization of intangibles in excess of tax 129,600
Provision for bad debts 35,200
Provision for deferred rent liability 29,200
Book depreciation in excess of tax (139,823)
Investments accounted for under the equity method (119,478)
---------
$ 27,899
=========
</TABLE>
No valuation allowance has been established against the deferred tax assets
because management believes that all of the deferred tax assets will be
realized.
A reconciliation of the federal statutory rate to the income taxes is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C> <C>
Year ended June 30:
Federal income taxes computed at
statutory rates $ 431,662 34.0% $301,706 34.0%
State and local taxes, net of federal
tax benefit 76,176 6.0 44,225 5.0
Reversal of overaccruals (156,000) (12.3) - -
Other 41,762 (3.3) 6,716 .7
--------- ----- -------- ----
$ 393,600 31.0% $352,647 39.7%
========= ==== ======== ====
</TABLE>
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,920,489
<SECURITIES> 49,658
<RECEIVABLES> 1,197,035
<ALLOWANCES> 87,500
<INVENTORY> 0
<CURRENT-ASSETS> 4,904,689
<PP&E> 2,991,503
<DEPRECIATION> 1,312,397
<TOTAL-ASSETS> 9,025,576
<CURRENT-LIABILITIES> 1,454,587
<BONDS> 0
0
0
<COMMON> 55,789
<OTHER-SE> 6,963,200
<TOTAL-LIABILITY-AND-EQUITY> 9,025,576
<SALES> 0
<TOTAL-REVENUES> 19,071,889
<CGS> 0
<TOTAL-COSTS> 17,645,710
<OTHER-EXPENSES> (180,254)
<LOSS-PROVISION> 135,305
<INTEREST-EXPENSE> 201,534
<INCOME-PRETAX> 1,269,594
<INCOME-TAX> 393,600
<INCOME-CONTINUING> 875,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 875,994
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
