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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1997
REGISTRATION NO. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GILMAN & CIOCIA, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 7291 11-2587324
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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475 Northern Boulevard, Great Neck, NY 11021, (516) 482-4860
(Address and telephone number of principal executive offices)
475 Northern Boulevard, Great Neck, NY 11021
(Address or principal place of business or intended principal place of business)
Mr. James Ciocia
Gilman & Ciocia, Inc.
475 Northern Boulevard
Great Neck, NY 11021, (516) 482-4860
(Name, Address and telephone number of agent for service)
WITH COPIES TO:
SETH A. AKABAS, ESQ.
AKABAS & COHEN
488 MADISON AVENUE, 11TH FLOOR
NEW YORK, NY 10022
(212) 308-8505
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF
SECURITIES AMOUNT TO BE PROPOSED OFFERING PROPOSED AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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Common Stock(2)................ 101,566 shares $7.94 $806,434 $237.90
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Warrants(3).................... 50,783 warrants $3.13 $158,951 $ 46.89
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Common Stock(4)................ 50,783 shares $7.94 $403,217 $118.95
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Common Stock(5)................ 507,926 shares $4.67(x) $2,372,014 $699.74
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Common Stock(6)................ 65,000 shares $7.94 $516,000 $152.22
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Common Stock................... 16,072 shares $7.94 $127,612 $ 37.65
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TOTAL: $1,293.35
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(1) Estimated using the market price of the Company's Common Stock or
Warrants solely for the purpose of determining the registration fee.
(2) Issuable upon exercise of the Underwriter's Warrants outstanding.
(3) Issuable upon exercise of the Underwriter's Warrants outstanding.
(4) Issuable upon exercise of the Redeemable Public Warrants that are
issuable upon exercise of the Underwriter's Warrants, assuming all of
the Underwriter's Warrants are exercised.
(5) Issuable upon exercise of all of the outstanding Redeemable Public
Warrants.
(6) Issuable upon exercise of stock options outstanding.
(7) Outstanding shares of Common Stock owned by an employee of the Company.
(x) Based on exercise price of warrant and not the market price of the
Company's Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 17, 1997
GILMAN & CIOCIA, INC.
507,926 SHARES OF COMMON STOCK
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233,421 SHARES OF COMMON STOCK BY SELLING SECURITY HOLDERS
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50,783 REDEEMABLE COMMON STOCK PURCHASE WARRANTS BY SELLING
SECURITY HOLDERS
This Prospectus relates to the offering by the Company (the "Offering") of
507,926 shares of common stock (the "Common Stock"), par value $.01 per share,
of Gilman & Ciocia, Inc., a Delaware corporation (the "Company").
This Prospectus also relates to the offering (the "Offering") by holders or
prospective holders of securities of the Company including officers and
directors (the "Selling Security Holders") of (i) shares of Common Stock
issuable upon the exercise of outstanding warrants and options, (ii) 16,072
shares of Common Stock held by an employee, and (iii) 50,783 warrants (the
"Redeemable Public Warrants") for the purchase of Common Stock at an exercise
price of $4.67 per share (the "Redeemable Public Warrant Exercise Price"),
expiring on September 8, 1998. Each Redeemable Public Warrant is redeemable at a
price of $.01 per warrant, provided that (i) notice of redemption is given to
the Redeemable Public Warrantholders not less than 30 days prior to redemption;
(ii) the average of the closing bid and asked quotations of the Common Stock
shall have been at least 25% above the Redeemable Public Warrant Exercise Price
for the 20 trading days ending on the third day prior to the day on which notice
of redemption is given; and (iii) holders of Redeemable Public Warrants shall be
entitled to exercise Redeemable Public Warrants until the close of business on
the day prior to the date fixed for redemption.
Shares underlying the Redeemable Public Warrants will be sold as warrants
are exercised. Such Common Stock and other Common Stock being sold by Selling
Security Holders may be sold by the Selling Security Holders, from time to time,
in transactions on the over-the-counter market, in negotiated transactions, or
through a combination of such methods of sale, at fixed prices, which may be
changed. The Company or the Selling Security Holders, as the case may be may
effect such transactions by selling the Common Stock or Redeemable Public
Warrants to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Company or the Selling Security Holders, as the case may be, and/or the
purchasers of the Common Stock or Redeemable Public Warrants for whom such
broker-dealers may act as agent or to whom they may sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). See "PLAN OF DISTRIBUTION" and "SELLING SECURITY
HOLDERS."
None of the proceeds of the sale of the shares of Common Stock or the
Redeemable Public Warrants by the Selling Security Holders will be received by
the Company. The Company could receive approximately $3,198,248 of gross
proceeds from the exercise of all of the currently outstanding Redeemable
Warrants, the Underwriter's Warrants, the Redeemable Public Warrants issuable
upon the exercise of the Underwriter's Warrants and outstanding options.
However, such exercise of any of the outstanding options and warrants is not
assured.
The shares of Common Stock and the Redeemable Public Warrants are traded on
The NASDAQ SmallCap Stock Market under the symbols "GTAX" and "GTAX-W,"
respectively. As of December 1, 1997, the trading price for shares of the
Company's Common Stock was $7.94 per share and $3.31 per Redeemable Public
Warrant.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF
RISK AND SHOULD BE PURCHASED ONLY BY INVESTORS ABLE TO SUSTAIN A TOTAL LOSS OF
THEIR INVESTMENT. PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS
DISCUSSED UNDER THE CAPTION "RISK FACTORS" LOCATED ON PAGE [ ].
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The Company's fiscal year ends on June 30th. The Company is currently a
reporting company under the Securities Exchange Act of 1934, as amended. The
Company will provide without charge to each shareholder a copy of all reports
filed thereunder. Such requests should be addressed to the Company at 475
Northern Boulevard, Great Neck, NY 11021, telephone number (516) 482-4860,
Attention: Secretary. Such reports will also be available for inspection at The
NASDAQ Stock Market at 1735 K Street, N.W., Washington, D.C. 20006. In addition,
such reports and other information will be available for inspection at the
public reference facilities of the Securities and Exchange Commission in
Washington DC, and at its regional offices at 7 World Trade Center, New York, NY
10048 and at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
IL 60604, and copies of such materials could be obtained from the Public
Reference Section of the Securities and Exchange Commission (the "Commission")
in Washington, D.C. at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Copies of this filing, reports, proxy and information
statements and other information regarding the Company are available on the
Commission's website at http://www.sec.gov.
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GILMAN & CIOCIA, INC.
CROSS-REFERENCE SHEET
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ITEM CAPTION LOCATION
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1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors.... Prospectus Summary; Risk Factors
4. Use of Proceeds......................... Use of Proceeds
5. Determination of Offering Price......... Not Applicable
6. Dilution................................ Not Applicable
7. Selling Security Holders................ Selling Security Holders
8. Plan of Distribution.................... Plan of Distribution; Selling Security
Holders
9. Legal Proceedings....................... Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons................... Management
11. Security Ownership of Certain Beneficial
Owners and Management................. Principal Stockholders
12. Description of Securities............... Description of Securities
13. Interest of Named Experts and Counsel... Legal Matters
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Remuneration of Officers and Directors
15. Organization within Last Five Years..... Not Applicable
16. Description of Business................. Business; Risk Factors; Financial Statements;
Prospectus Summary; Market Information; Use
of Proceeds
17. Management's Discussion and Analysis or
Plan of Operation..................... Legal Matters and Analysis of Financial
Condition and Results of Operations
18. Description of Property................. Business -- Facilities
19. Certain Relationships and Related
Transactions.......................... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters................... Market Information; Prospectus Summary
21. Executive Compensation.................. Remuneration of Officers and Directors
22. Financial Statements.................... Financial Statements
23. Changes in and Disagreements with
Accountants and Financial
Disclosure............................ Changes in and Disagreements with Accountants
and Financial Disclosure
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PROSPECTUS SUMMARY
The following summary is intended only to summarize certain material in
this Registration. This summary is qualified in its entirety by the detailed
information and financial statements that appear elsewhere herein.
THE COMPANY
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 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. 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.
THE OFFERING
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Securities Outstanding:
Before the Offering........................ 5,588,913 shares of Common Stock (1)
507,926 Redeemable Common Stock Purchase
Warrants
After the Offering......................... 6,314,188 shares of Common Stock (2)
Securities Offered........................... 741,347 shares of Common Stock (3)
50,783 Redeemable Common Stock Purchase
Warrants (4)(5)
Use of Proceeds.............................. The Company will receive $2,372,014 from the
exercise of the outstanding Redeemable Public
Warrants. The Company will not receive any of
the proceeds from the sale of shares of Common
Stock by the Selling Security Holders; all
proceeds will be paid directly to the Selling
Security Holders. See "SELLING SECURITY
HOLDERS."(5) The Company could receive
$3,198,248 of gross proceeds from the exercise
of the Redeemable Public Warrants, the
Underwriter's Warrants, the Redeemable Public
Warrants issuable upon exercise of the
Underwriter's Warrants and the outstanding
options described herein. However, such
exercise of any of the outstanding options and
warrants is not assured. The Company will use
such proceeds for working capital purposes.
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Risk Factors................................. An investment in the Common Stock offered
hereby involves a high degree of risk and
immediate dilution. Common Stock should not be
purchased by a person who cannot afford the
loss of his or her entire investment. A
prospective purchaser of Common Stock should
carefully consider the factors discussed under
the caption "RISK FACTORS."
The Company's NASDAQ Symbols:
Common Stock................................. GTAX
Redeemable Warrants.......................... GTAX-W
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(1) Does not include 101,566 shares of Common Stock and 50,783 Redeemable Public
Warrants, all issuable pursuant to the Underwriter's Warrants to acquire up
to 50,783 Units at an exercise price of $8.40 per Unit. See "RISK
FACTORS -- Underwriter's Warrants and Other Warrants Subject to
Registration." Does not include 65,000 shares of Common Stock issuable upon
the exercise of options at $2.50 per share, 280,081 shares of Common Stock
issuable upon the exercise of options at $2.60 per share, and 139,921 shares
of Common Stock issuable upon the exercise of options at $3.65 per share,,
all granted under the Company's 1993 Joint Incentive and Non-Qualified Stock
Option Plan (the "Plan"). Does not include 340,000 shares of Common Stock
issuable upon the exercise of options at $3.50 per share, 253,000 shares of
Common Stock issuable upon the exercise of options at $2.75 per share,
20,000 shares of Common Stock issuable upon the exercise of options at $2.00
per share, 11,000 shares of Common Stock issuable upon the exercise of
options at $1.75 per share and 7,000 shares of Common Stock issuable upon
the exercise of options at $1.75 per share, all granted under non-plan
employee stock agreements.
(2) Assumes the issuance of 101,566 shares of Common Stock issuable pursuant to
the Underwriter's Warrants, 50,783 shares of Common Stock issuable upon the
exercise of the Redeemable Public Warrants that are issuable upon exercise
of the Underwriter's Warrants, 65,000 shares of Common Stock issuable on the
exercise of options at $2.50 per share, and 507,926 shares of Common Stock
issuable on the exercise of public redeemable warrants at $4.67 per share.
Does not include 139,921 shares of Common Stock issuable upon the exercise
of options at $3.65 per share, 280,081 shares of Common Stock issuable upon
the exercise of options at $2.60 per share, 340,000 shares of Common Stock
issuable upon the exercise of options at $3.50 per share, 253,000 shares of
Common Stock issuable upon the exercise of options at $2.75 per share,
20,000 shares of Common Stock issuable upon the exercise of options at $2.00
per share, 11,000 shares of Common Stock issuable upon the exercise of
options at $1.75 per share and 7,000 shares of Common Stock issuable upon
the exercise of options at $1.75 per share, all granted under non-plan
employee stock agreements.
(3) The Common Stock offered hereunder will be issued in connection with the
exercise of the outstanding Redeemable Public Warrants, the Underwriter's
Warrants, the Redeemable Public Warrants issuable on exercise of
Underwriter's Warrants and certain other outstanding options.
(4) Assumed to be exercised in connection with the offering.
(5) The Redeemable Public Warrants registered hereunder are issuable upon, and
assume the exercise of, the Underwriter's Warrants.
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RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Common Stock should not be purchased by a person who cannot afford the
loss of his or her entire investment. The following risks, in addition to those
discussed elsewhere in this Prospectus, should be considered carefully in
evaluating the Company and its business prior to purchasing any of the Units
offered hereby.
1. Costs and Material Effects of Rapid Expansion. In order to open new
offices, the Company incurs significant expenses to purchase furniture,
equipment and supplies. The Company has found that a new office usually suffers
a loss in its first year of operation, shows no material profit or loss in its
second year of operation and does not attain profitability, if ever, until its
third year of operation. Therefore, the Company's operating income may be
reduced in any year that the Company opens a number of new offices that is
significant in relation to the number of its existing older offices. The Company
opened 15 new offices in January 1994, and during its 1994 fiscal year, the
Company earned $687,159 from operations. In January 1995 the Company opened 22
new offices, and in its 1995 fiscal year, the Company earned $583,164 from
operations, a decrease of 15% as compared to 1994. In addition, the Company
believes that income from offices opened in 1994 had begun to contribute to the
Company's earnings in 1995. In January 1996, the Company opened 44 new offices
and closed five by the end of the year, and the Company generated for the 1996
fiscal year $594,529 in operating income. In January 1997, the Company opened 8
new offices and generated for the 1997 fiscal year $875,994 from operations, an
increase of 67.9% as compared to 1996.
A rapid expansion of offices may, therefore, reduce the Company's
short-term net income or result in losses. No assurance, however, can be given
that new offices will ultimately operate profitably and increase the Company's
net income in the long term.
In addition, the Company plans to acquire small tax preparation practices.
The success of the Company will in large part be dependent upon the successful
operation of the practices acquired. No assurance can be given that the Company
will be able to successfully operate the practices that it acquires.
2. Seasonality and Need for Additional Financing. If the Company
encounters more difficulty in the acceptance of its services or in other areas,
or if the financial planners whom the Company recruits or the practices that it
acquires are not as successful as the Company anticipates, then the Company may
require additional financing for marketing and sales, the opening of new
offices, and/or general working capital. The Company also plans to fund any
additional capital requirements of JT Securities, its wholly owned subsidiary,
which is registered as a securities broker/dealer, from its profits, cash
reserves and borrowings. JT Securities, as a registered broker/dealer and
registered investment advisor, is subject to regulations requiring it to
maintain certain net capital amounts. The Company will also require
approximately $2,000,000 of financing each year to fund its operations during
tax season, particularly because, in the past, the Company experiences quarterly
losses from July 1st to December 31st each year. No assurance can be given that
such financing will be available to the Company, or, if it is available, that it
will be on terms favorable to the Company.
3. 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, which include H+R Block, Inc., H.D. Vest,
Inc., Jackson Hewitt Tax Service, Inc. and Triple Check Income Tax Service, Inc.
in the tax preparation field, and many well-known brokerage and other firms in
the financial services field, have significantly greater financial and other
resources than the Company. No assurance can be given that the Company will be
able to compete successfully with other older, more established companies. See
"BUSINESS -- Competition."
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. In the past, departing employees and affiliated financial planners
have competed with the Company. They have the advantage of knowing the Company's
methods and, in some cases, having access to the Company's clients. No assurance
can be given that the Company will be able to retain its most important
employees and financial planners or that the Company will be able to prevent
competition from them or successfully compete against them.
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4. Dependence Upon Key Personnel. The Company is dependent upon the
services of James Ciocia, its President, Thomas Povinelli, its Executive Vice
President, Gary Besmer, its Vice President, and Kathryn Travis, its Secretary.
The loss or interruption of the services of any of these individuals would have
a material adverse effect on the Company. The Company carries life insurance for
Thomas Povinelli and for James Ciocia. Each of the officers owns large holdings
of Common Stock of the Company and therefore has a substantial interest in the
success of the Company.
5. Potential Civil and Criminal Liabilities. The Company's business
preparing tax returns subjects it to potential civil liabilities under the
Internal Revenue Code and the regulations promulgated thereunder. Civil
penalties, ranging from $50 to $10,000 per violation, could be assessed against
the Company for failure to observe certain ministerial requirements, failure to
keep required records, improper disclosure of taxpayer records, or failure to
maintain required ethical standards with respect to the accuracy of the returns
and the positions taken therein regarding taxpayer liability for taxes. In
addition, because none of the full-time employees of the Company is an attorney,
and only one is a certified public accountant or otherwise enrolled to practice
before the IRS, the employees of the Company are strictly limited as to the
roles they may take in assisting a client in an audit with the IRS. Although the
Company has not been assessed with material civil penalties or fines, and
although the Company intends to comply with all applicable laws and regulations,
no assurance can be given that the Company will never incur any material fines
or penalties. The Company does not maintain any professional liability or
'malpractice' insurance policy. The Company has never been the subject of a
malpractice claim, but if many such claims were made, they could adversely
affect the Company.
In addition, making fraudulent statements on a tax return, willfully
delivering fraudulent documents to the IRS and unauthorized disclosure of
taxpayer information can constitute criminal offenses. Criminal penalties for
such offenses range from $1,000 and/or one year of imprisonment to $500,000
and/or three years of imprisonment per violation. The Company has never been
charged with a criminal offense.
6. Potential Liability for Failure to Register as a Broker/Dealer or an
Investment Adviser. As of July 1, 1994, all of the Company's business
relationships with registered representatives of an unaffiliated securities
broker/dealer have been transacted through the Company's wholly owned
subsidiary, JT Securities, a registered securities broker/dealer. In addition,
JT Securities registered as an investment advisor with the Commission and with
the appropriate authorities in New York State and Florida on June 8, 1995. The
Company believes that, prior to the registration of JT Securities, the Company's
business activities did not constitute it as a broker/dealer of securities or as
an investment adviser.
Prior to such registrations, if the Company was acting as a broker/dealer,
then it would have been required to register as such with the Commission, with
the National Association of Securities Dealers, Inc. ("NASD"), and possibly with
various state authorities, and if the Company was acting as an investment
adviser, then it would have been required to register as such with the
Commission and with various state authorities. In addition, the fact that the
Company has not registered in the past could subject it to civil liabilities,
and, possibly, a final order barring the participation of the Company and its
principals in the securities industry, in the case that it is determined by an
appropriate governmental authority that such registration was required.
Registration and the related reporting obligations impose additional costs on
the Company and limitations on its manner of doing business.
The Company derives a material portion of its revenues from JT Securities,
which earns a share of commissions with an unaffiliated broker/dealer and a
share of money management fees from registered investment advisors. JT
Securities is registered as a securities broker/dealer and an investment advisor
with the Securities and Exchange Commission and is a member of the NASD. JT
Securities is also registered as a broker/dealer in New York State, and a
registered investment advisor in New York State and Florida, but is not
currently registered as a broker/dealer or investment advisor in any of the
other states in which the Company has offices. The Company does not believe that
JT Securities is required to register as a broker/dealer or investment advisor
in such other states based upon its current activities, however, no assurance
can be given that state securities officials would not consider JT Securities to
be acting as an unregistered broker/dealer or investment advisor in such states.
7. Trademark. The Company has registered its "Gilman + Ciocia(R)"
trademark with the U.S. Patent and Trademark Office. No assurance can be given
that the Company would be able successfully to defend its
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trademark if forced to litigate its enforceability. The Company believes that
its trademark "Gilman + Ciocia(R)" constitutes a valuable marketing factor. If
the Company were to lose the use of such trademark, its sales could be adversely
affected.
8. Expansion into Financial Planning. The Company plans to continue to
expand into the area of financial planning and recruit financial planners. The
success of the Company will in large part be dependent upon the successful
operation of the financial planners who are recruited. No assurance can be given
that such financial planners will be successful in their ventures.
9. Control by Management. The current management of the Company owns
approximately 51% of the outstanding Common Stock of the Company. No cumulative
voting is in effect for the election of directors of the Company, and no such
arrangement is currently contemplated. The current management will, therefore,
be able to elect all of the directors and thereby effectively continue to
control the Company. See "DESCRIPTION OF SECURITIES."
10. Preferred Stock May Inhibit Change of Control. The Company has
authorized 100,000 shares of Preferred Stock, which may be issued, without
approval by the shareholders of the Company, by the Board of Directors of the
Company in such classes, with such designations, rights and preferences and at
such prices as the Board of Directors determines to be in the best interest of
the Company. Holders of such Preferred Stock so issued could have preferential
rights over the holders of Common Stock in a liquidation of the Company. In
addition, although management of the Company will control approximately 51% of
the outstanding Common Stock, if at any time in the future management does not
control a majority of the outstanding Common Stock, then Preferred Stock with
special voting or other rights could be issued that could entrench current
management and adversely affect any proposed change of control of the Company.
11. Management Discretion in Use of Proceeds. The proceeds of the Offering
will be utilized predominately for the opening of new offices, recruiting
financial planners, acquiring existing tax preparation practices, marketing and
sales, general and administrative expenses and working capital requirements.
However, management will have broad discretion over the application and
allocation of the use of the net proceeds. See "USE OF PROCEEDS."
12. Immediate Dilution. At the current market price of $7.94 and assuming
that all outstanding options are exercised and shares of Common Stock are sold,
purchasers of Common Stock will experience a dilution of $6.25.
13. No Dividends. Since its initial public offering of securities in 1994,
the Company has paid no dividends, and it 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.
14. Potential Future Sales pursuant to Rule 144. Of the 5,588,913 shares
of Common Stock currently issued and outstanding 3,500,000 shares are
"restricted securities" as that term is defined under the Securities Act of
1933, as amended (the "Act"). In general, under Rule 144 promulgated under the
Act, a person who has satisfied a one-year holding period may, under certain
circumstances, sell, within any three-month period, a number of shares that does
not exceed the greater of one percent of the then outstanding shares of Common
Stock or the average weekly trading volume of such shares during the four
calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares of Common Stock by a person who is not an
"affiliate" of the Company (as defined in Rule 144) and who has satisfied a
two-year holding period, without any volume or other limitation. Of the shares
of Common Stock currently outstanding, almost all of the "restricted" shares
have already been held for the one-year holding period mentioned above, but only
about 606,603 of the "restricted" shares have been held for longer than two
years and are not owned by "affiliates" of the Company shareholders.
The Company has granted 671,000 options to purchase shares of the Company's
Common Stock to fourteen individuals in addition to the 485,002 granted to
employees in conjunction with its 1993 Joint
- ---------------
(1) This calculation assumes that the following shares of common stock and
warrants will be fully exercised: 507,926 Redeemable Public Warrants, 50,783
Redeemable Public Warrants issuable upon the exercise of underwriter's
warrants, 50,783 underwriter's warrants and 65,000 options to an outside
party.
5
<PAGE> 9
Incentive and Non-qualified Stock Option Plan, of which 65,000 were sold to an
outside party. The shares issuable upon exercise of such options would be
eligible for resale under Rule 144 after one year following the exercise of such
options or earlier if the underlying Common Stock were registered by the
Company. Certain shares are registered in the Company's registration statement
on Form S-8 filed on October 28, 1996 and certain shares are registered in the
Company's registration statement of which this prospectus is a part.
The sale of restricted Common Stock in the future, or even the possibility
that it may be sold, may have an adverse affect on the market price for the
Common Stock.
15. Underwriter's Warrants, Other Warrants and Certain Options and Shares
Being Registered. The Company is registering for sale up to 507,926 shares
underlying the Redeemable Public Warrants and 101,566 shares of Common Stock
issuable pursuant to the Underwriter's Warrants, 50,783 shares of Common Stock
issuable upon the exercise of Redeemable Public Warrants that are issuable upon
exercise of the Underwriter's Warrants, 65,000 shares issuable upon exercise of
options at $2.50 per share, and 16,072 shares held by an employee. Exercise of
such Underwriter's Warrants could occur at a time that the Company could
probably obtain financing on better terms, and such exercise would likely dilute
the percentage ownership interest of holders of Common Stock. In addition, the
offering for sale of some or all of such underlying Common Stock, or even the
possibility of such sale, may have an adverse affect on the market price for the
Common Stock. See "DESCRIPTION OF SECURITIES" and "PLAN OF DISTRIBUTION."
This prospectus does not include the registration of 340,000 shares of
Common Stock issuable upon the exercise of options at $3.50 per share, 11,000
shares of Common Stock issuable upon the exercise of options at $1.75 per share,
10,000 shares of Common Stock issuable at $1.75 per share, 10,000 shares of
Common Stock issuable upon the exercise of options at $2.62 per share and 10,000
shares of Common Stock issuable upon the exercise of options at $2.32 per share,
which were all included in a registration statement on Form S-8 that was filed
with the Commission on October 28, 1996.
16. Rules Limiting Broker-Dealer Sales of Company Shares. It is possible
that the Company's Common Stock will be covered by a Commission rule that
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5,000,000 or individuals with
net worth in excess of $1,000,000 or annual income exceeding $200,000, or
$300,000 jointly with their spouse). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale.
In addition, it is possible that an underwriter's participation in the
trading market of the Common Stock and the Redeemable Warrants will be covered
by a Commission rule that imposes additional disclosure requirements on
brokerdealers in "penny stock" transactions. Although the Common Stock is
currently outside the definition of a "penny stock" under the applicable rules,
in the event the Common Stock were subsequently to become characterized as a
"penny stock," as a result of being delisted from The NASDAQ SmallCap Stock
Market or otherwise, broker/dealers effecting transactions for clients in the
Common Stock will be required to make extensive disclosures to such clients in
certain circumstances regarding the Common Stock, including bid, offer and other
pricing information relating to the Common Stock, such broker/dealer's
compensation and the compensation of associated persons in connection with the
transaction, and such client's specific account information. Such additional
burdens imposed upon broker/dealers may discourage broker/dealers from effecting
transactions in the Common Stock. Consequently, these rules may affect the
ability of broker-dealers to sell the Company's securities and also may affect
the ability of purchasers of Common Stock to sell their securities in the
secondary market.
17. Limitation on Directors' Liabilities under Delaware Law. Pursuant to
the Company's Certificate of Incorporation and under Delaware law, directors of
the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases illegal under Delaware law or any transaction in
which a director has derived an improper personal benefit. See "MANAGEMENT."
6
<PAGE> 10
MARKET INFORMATION
The Principal market on which the Company's Common Stock trades is The
NASDAQ SmallCap 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 during the period indicated:
<TABLE>
<CAPTION>
SALES PRICES
----------------
QUARTER ENDED HIGH LOW
----------------------------------------------------------- ---- ---
<S> <C> <C>
December 31, 1994.......................................... $3 3/4 $3 1/2
March 31, 1995............................................. $4 $2 1/4
June 30, 1995.............................................. $4 1/8 $2 1/4
September 30, 1995......................................... $5 5/8 $3 1/8
December 31, 1995.......................................... $7 1/2 $5 1/4
March 31, 1996............................................. $7 7/16 $5 1/2
June 30, 1996.............................................. $7 1/4 $5 3/8
September 30, 1996......................................... $6 1/2 $5 1/4
December 31, 1996.......................................... $3 1/2 $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 December 1, the approximate number of holders of record of the Common
Stock was 313.
The Company has not paid dividends to its shareholders since its initial
public offering 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:
<TABLE>
<S> <C>
Common Stock................................................... GTAX
Redeemable Warrants............................................ GTAX-W
</TABLE>
7
<PAGE> 11
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Security holders; all proceeds will be paid directly
to the Selling Security Holders. See "SELLING SECURITY HOLDERS." The Company
could receive $3,198,248 of gross proceeds from the exercise of all of the
currently outstanding Redeemable Warrants, the Underwriter's Warrants, the
Redeemable Public Warrants issuable upon exercise of the Underwriter's Warrants
and 65,000 additional shares of Common Stock issuable upon the exercise of
options. However, such exercise of any of the outstanding options and warrants
is not assured.
The Company estimates that it will incur approximately $200,000 in expenses
relating to this offering and intends to use the net proceeds for working
capital purposes. Such funds will not be kept separate from other funds of the
Company and collectively will be used to pay all obligations of the Company
including compensation to the officers. No proceeds are allocated specifically
to any other payment, directly or indirectly, to directors, officers or their
affiliates. The officers of the Company have broad discretion over the use of
proceeds. See Risk Factors -- Management Discretion in Use of Proceeds.
The sale and issuance of securities upon the exercise of Redeemable Public
Warrants will result in proceeds directly to the Company as follows:
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) ISSUER(3)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Per Share of Common Stock
507,926 Shares....................... $4.67(4) $-0- $2,372,014
- -----------------------------------------------------------------------------------------------
Total................................ $2,372,014
===============================================================================================
</TABLE>
(1) The 507,926 shares of Common Stock issuable at $4.67 per share consist of
the shares issuable upon the exercise of the 507,926 currently outstanding
Redeemable Public Warrants.
(2) The securities registered hereunder will not be sold through an underwriter,
however, the Company has retained First Colonial Securities, Inc. as advisor
in connection with this offering, has paid a $35,000 advance fee under such
arrangement and has agreed to pay a of $100,000 plus $25,000 of non
accountable expenses upon completion of the exercise of Redeemable Public
Warrants.
(3) All expenses of this registration other than commissions and concessions are
payable by the Company, and are estimated at $200,000, which is
cross-referenced at footnote number 4 for the following chart.
(4) The warrant exercise price is the price warrantholders may buy Common Stock
upon the exercise of Redeemable Public Warrants.
The sale of securities of Security Holders does not result in any proceeds
to the Company. However, it presumes exercise of outstanding warrants and
options, and proceeds to the issuer as follows:
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1)(2) COMMISSIONS(3) ISSUER(4)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Per Share of Common Stock
50,783 Shares..................... $4.67 (1) $-0- $237,157
101,566 Shares.................... $4.20 (1) $-0- $426,577
65,000 Shares..................... $2.50 (2) $-0- $162,500
Per Redeemable Public Warrant
50,783 Warrants................... $-0- (5) $-0- $-0-
- -----------------------------------------------------------------------------------------------
Total.................................. $-0- $826,234
===============================================================================================
</TABLE>
(1) The 50,783 Shares of Common Stock issuable at $4.67 per share consist of the
shares issuable upon exercise of those Redeemable Public Warrants that are
issuable in connection with the exercise of the Underwriter's Warrants. The
101,566 shares of Common Stock issuable at $4.20 per share consist of the
shares of Common Stock issuable upon the exercise of the Underwriter's
Warrants.
(2) Shares of Common Stock issuable upon the exercise of outstanding options.
(3) The securities registered hereunder will not be sold through an underwriter.
(4) All expenses of this registration other than commissions and concessions are
payable by the Company, and are estimated at $200,000 (cross-referenced in
the previous chart footnote number 3).
(5) The 50,783 Redeemable Public Warrants are issuable upon the exercise of the
Underwriter's Warrants. For the purposes of this chart, the entire exercise
price of the Underwriter's Warrants has been allocated to the Common Stock
issuable thereon.
8
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 has been registered under the registration statement of which this
prospectus is a part. However, there can be no assurance that the offering will
be consummated or that any of such options or warrants will be exercised.
During the 1996 and 1997 fiscal year, in connection with the acquisitions
of two practices, the Company bought the building in which the practice had
offices. The Company may purchase other real estate in connection with future
acquisitions but it has no plans to invest in real estate apart from its other
businesses.
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
results in lower advertising costs on a per-office basis, as the Company takes
advantage of economies of scale. The Company's direct mail division operates as
an independent division and solicits its own customers for its direct mail
services.
No events or transactions have occurred subsequent to September 30, 1997,
and the Company is not aware of any material trend, that would materially affect
an investor's understanding of the Company's financial condition or its results
of operations.
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; and (3) increased
financial planning revenues of approximately $1,290,000 over all offices; offset
partially by (4) a decrease of revenues of approximately $502,000 from its
direct mailing services resulting from the loss of a few customers.
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.
9
<PAGE> 13
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;
and the absence of any 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 services, the addition of the 1997 New Offices and having a
full year of operating expenses for the 40 net new 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 pertains to
the personnel working at the 1997 New Offices as well as the 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 of approximately $592,000 made during the Company's 1997 fiscal
year 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 for 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 40 net 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. Such 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 Company's 1998 fiscal year.
The Company's income after provision for income taxes 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 by a decrease in
other income of approximately $314,000.
10
<PAGE> 14
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 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.
Quarters Ended September 30, 1997 and September 30, 1996 Compared
The Company's revenues for the three months ended September 30, 1997 were
$2,441,460 as compared to revenues of $2,159,800 for the comparable period of
the prior year. The increase in revenues of 13.0% for the quarter ended
September 30, 1997 from revenues during the comparable period of the prior year
is attributable to the opening of the 1997 New Offices (which generated tax
preparation revenues that contributed approximately $46,000 of the increase in
tax preparation revenues in the quarter ended September 30, 1997) and to the
existing offices (which accounted for $[14,500] of additional tax preparation
revenues), increased financial planning revenues of approximately $433,251
(which was primarily generated in the pre-1997 offices), offset by decreased
revenues of $197,542 from the direct mail division.
The Company's total revenues for the quarter ended September 30, 1997
consist of $279,944 for tax preparation services, $1,801,672 for financial
planning services, and $359,844 for direct mail services. The Company's total
revenues for its quarter ended September 30, 1996 consist of $233,993 for tax
preparation services, $1,368,421 for financial planning services and $577,386
for direct mail services.
The increase in the Company's financial planning revenues for the quarter
ended September 30, 1997 compared to the prior year's first quarter was
approximately 32%. The increase in such financial planning revenues is
attributable to the continued 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 period of rapidly rising activities in the
marketplace, which induced clients to invest funds through the Company,
generating commission revenues for the Company.
The decrease in the Company's direct mail services for the quarter ended
September 30, 1997 compared to the comparable quarter of the prior year was
approximately 35%, resulting from the loss of a few customers.
The Company's operating expenses for the quarter ended September 30, 1997
were $2,615,144 as compared to operating expenses of $3,041,294 for the
comparable period of the prior year. The decrease of 14% in the Company's
operating expenses for the quarter ended September 30, 1997 from the comparable
period of the prior year was attributable to a decrease in salaries and
commissions in the amount of $253,908; a decrease in general and administrative
expenses of $40,649; and a decrease in direct mail costs of $177,106 offset by
an increase advertising expenses of $6,493; an increase in rent expense of
$17,710; and an increase in depreciation and amortization of $21,311. Salaries
and commissions decreased 19.5% for the quarter ended September 30, 1997 as
compared to the quarter ended September 30, 1996 due to personnel changes.
The Company's general and administrative expenses for the three months
ended September 30, 1997 were $656,502 as compared to $697,151 for the three
months ended September 30, 1996. The decrease of $40,649 is primarily due
to a write-off of bad debt expense in the amount of $150,000 during the quarter
ended September 30, 1996 and also a decrease in miscellaneous other expenses in
the amount of approximately $44,000. These decreases were offset by an increase
in telephone expenses of $50,000, an increase in expenses of professional fees
for $83,000, and an increase in filing fees of $21,000.
The reduction in direct mail costs of approximately $177,000 resulted
primarily from the decrease in sales volume.
11
<PAGE> 15
The net increase in other income of approximately $107,000 is due primarily
to the Company's investment in a partnership. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".
The Company's net loss for the three months ended September 30, 1997 is
$112,640 as compared to $587,098 for the three months ended September 30, 1996.
The decrease of approximately 81% is primarily attributable to the increase in
financial planning revenue of approximately $434,000.
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
decrease of approximately $1,105,000 is due primarily to a decrease in proceeds
from 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 $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
$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.
Quarters ended September 30, 1997 and September 30, 1996 Compared
The Company's cash flows used in operating activities was $281,843 and
$433,780, for the three months ended September 30, 1997 and 1996,
respectively.The decrease of approximately $152,000 is due primarily to a
decrease in net loss plus non-cash adjustments of approximately $293,000, an
increase in the proceeds from the sale of marketable securities of approximately
$22,000, a decrease of approximately $107,000 in advances to financial planners,
a decrease in security deposits of approximately $5,200, and a decrease in
prepaid expenses and other current assets of approximately $198,000. These
decreases in net cash used in operating activities were offset by an increase in
accounts receivable of approximately $300,000 and a decrease in accounts payable
and other accrued expenses of approximately $175,000.
Net cash provided by (used in) investing activities was $59,812 and
$(246,921) for the three months ended September 30, 1997 and 1996, respectively.
The increase of approximately $307,000 is primarily due to decreases in capital
expenditures of approximately $216,000, and a decrease in acquisition of
intangible assets of approximately $153,000. These increases were offset by an
increase in investments and marketable securities of approximately $62,000.
Net cash used in financing activities was $174,143 and $278,547 for the
three months ended September 30, 1997 and 1996, respectively. The decrease in
net cash used in financing activities of approximately $104,000 is primarily due
to a decrease in the payments of bank and other loans of approximately $446,000,
an increase in the proceeds from stock subscriptions receivable of approximately
$11,000, a decrease in deferred registration costs of $30,000 and the exercise
of stock options of approximately $18,000. These decreases in net cash used in
financing activities were offset by a decrease in proceeds from a bank loan of
$250,000 and an increase in the acquisition of treasury stock of approximately
$151,000.
12
<PAGE> 16
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, 1998.
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 September 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 September 30, 1997, the
note had an outstanding principal balance amounting to $750,000.
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.
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 periods
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.
13
<PAGE> 17
BUSINESS
GENERAL
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 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. 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.
HISTORY
Following its organization in 1981, most of the Company's expansion was
effected through separate corporations under common control with the Company. In
December 1992, the Company merged with fifteen of such affiliated corporations
conducting the same business as the Company. Several of such affiliated
corporations, which did not participate in the merger, were liquidated prior to
such merger. Their clients and territories were absorbed by other nearby offices
of the Company. 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. The Company now has a total of 121 offices.
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.
In May 1995, all of the Company's Class A Bridge Loan Warrants were
exercised at $2.08 per share, generating additional capital of $748,800 for the
Company.
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.
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<PAGE> 18
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. 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. The client then meets with a financial planner. See
"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 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 IRS.
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 believes that it 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, 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."
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<PAGE> 19
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 employee or
affiliate financial planner who is also an affiliate with a registered
investment advisor. 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 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.
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<PAGE> 20
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 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
17
<PAGE> 21
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 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.
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
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<PAGE> 22
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 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 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 219 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.
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.
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<PAGE> 23
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. 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 $1,884,768. 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.
LEGAL PROCEEDINGS
There are no material proceedings currently pending against the Company.
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<PAGE> 24
MANAGEMENT
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
EXECUTIVE OFFICER
OR DIRECTOR
NAME AGE POSITION SINCE
- --------------------------------- --- ------------------------------------ -----------------
<S> <C> <C> <C>
James Ciocia..................... 41 Chief Executive Officer, President 11/81
and Director
Thomas Povinelli................. 37 Chief Operating Officer, Chief 11/84
Financial Officer and Director
Gary Besmer...................... 56 Vice President and Director 11/84
Kathryn Travis................... 49 Secretary, Vice President and 11/89
Director
Seth A. Akabas................... 41 Director 4/95
Louis P. Karol................... 39 Director 4/95
</TABLE>
James Ciocia, Chief Executive Officer, 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, Chief Financial 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.
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 a 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.
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.
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<PAGE> 25
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.
BOARD OF DIRECTORS
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 a stock option plan 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 of the
scope of each audit of the Company, (ii) review, with the independent auditors,
of the Company's accounting practices and policies, (iii) review, with the
independent auditors, of their final report, (iv) review of the Company's
overall accounting and financial controls with internal and independent
auditors, and (v) consultation, as needed, with the independent auditors.
REMUNERATION OF OFFICERS AND DIRECTORS
MANAGEMENT
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL ANNUAL OTHER OPTIONS
NAME AND PRINCIPAL 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 $267,200 $240,000 $ 30,500(1) -0-
President and Director 1997 $251,200 $240,000 $ 9,580(2) 10,000
Thomas Povinelli....................... 1995 $259,600 $125,000 -0- 18,850
Chief Operating Officer, 1996 $339,300 $145,000 $ 78,600(3) -0-
and Director 1997 $199,951 $210,000 $ 9,951(4) 10,000
Gary Besmer............................ 1995 $145,100 $ 2,000 -0- 11,310
Vice President and 1996 $168,800 $ 3,000 $ 19,000(5) -0-
Director 1997 $142,149 $ 1,000 $ 7,149(6) 10,000
Kathryn Travis......................... 1995 $156,300 $ 4,000 -0- 14,170
Secretary, Vice President 1996 $166,200 $ 19,000 $ 49,300(7) -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) Auto expense.
(3) Includes $18,600 for auto expense and $60,000 for forgiveness of loan.
(4) Auto expense.
(5) Includes $7,000 for auto expense and $12,000 for forgiveness of loan.
(6) Auto expense.
(7) Includes $8,900 for auto expense, $32,300 for forgiveness of loan and $8,100
for health insurance.
(8) Auto expense.
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<PAGE> 26
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FISCAL YEAR-END(#) FISCAL YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ------------------------------------------------- ------------------------- ----------------------------
<S> <C> <C>
James Ciocia..................................... 133,370 / -- $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.
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.
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 the committee of two 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.
To the date of this Prospectus, Non-Qualified Options to purchase 83,604
shares, 83,604 shares, 50,163 shares, and 62,710 shares of Common Stock at the
price of $2.60 per share have been granted under the Plan to James Ciocia,
Thomas Povinelli, Gary Besmer and Kathryn Travis, respectively; Non-Qualified
Options to purchase 41,766 shares, 41,766 shares, 25,060 shares, and 31,329
shares of Common Stock at the price of $3.65 per share have been granted under
the Plan to James Ciocia, Thomas Povinelli, Gary Besmer and Kathryn Travis,
respectively; Non-Qualified Options to purchase 18,850 shares, 18,850 shares,
11,310 shares, and 14,170 shares of Common Stock at the price of $2.50 per share
have been granted under the Plan to James Ciocia, Thomas Povinelli, Gary Besmer
and Kathryn Travis, respectively. In total, the Company has granted options to
purchase 485,002 shares and options to purchase 330,998 shares remain to be
granted under 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"). Under the 1997 Plan, the Company may issue shares of Common Stock
and grant options to purchase up to an aggregate of 300,000 shares. Such
23
<PAGE> 27
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 1997 Plan is administered by the committee of two independent directors
of the Board of Directors of the Company, which has authority to determine the
persons to whom stock is issued, 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 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.
24
<PAGE> 28
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of November 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>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF 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
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.
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
25
<PAGE> 29
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 $500 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 advanced by the Company. In such
transactions, such Common Stock was valued at its then current 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
loans in the form of lines of credit as described in the Management's Discussion
and Analysis Section. 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, the wife of the former Chief
Financial Officer -- $196,000, Anna Saras, the 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 a 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.
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
shares 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.
26
<PAGE> 30
PLAN OF DISTRIBUTION
The Common Stock and Redeemable Warrants registered hereby will be issued
by the Company to the holders of the applicable convertible security upon the
exercise thereof by such holders. The Company may engage in solicitations
through its officers and directors or through placement agents to induce the
holders of such securities to exercise them. In addition, the Company has the
right to redeem Redeemable Public Warrants at a price of $.01 per share,
provided that Redeemable Public Warrantholders will have 30 days to exercise in
the case of such redemption. If the Company redeems the Redeemable Public
Warrants however, the volume of warrantholders exercising the warrants may
depress the market price of the Common Stock. Upon exercise, the Common Stock
and Redeemable Public Warrants will be held by such holders and any further
distribution will not be in the Company's control.
The Company has retained First Colonial Securities Group Inc. ("First
Colonial") pursuant to a letter agreement (the "Letter Agreement") dated October
31, 1997 to provide investment banking advisory services to the Company in
connection with the registration of which this prospectus is a part and the
possible solicitation of warrantholders and other steps to induce them to
exercise such warrants, including, without limitation, the possible redemption
of the Redeemable Public Warrants. The Letter Agreement provides for a fee of
$135,000, $35,000 of which has already been paid, and $100,000 of which will be
due and payable upon the redemption of the Redeemable Public Warrants or the
exercise of a majority of the Redeemable Public Warrants, in either case on or
before June 30, 1998. If the $100,000 becomes due and payable, then the Company
will also pay to First Colonial a nonaccountable expense allowance equal to
$25,000. If First Colonial's engagement is terminated on or after June 30, 1998,
then the Company will reimburse First Colonial for its reasonable expenses
incurred in connection with its performance.
The Letter Agreement also provides for the Company to indemnify First
Colonial from any liability arising in the course of its performance except to
the extent a liability arises out of First Colonial's negligence or misconduct.
SELLING SECURITY HOLDERS
All of the shares of Common Stock (collectively, the "Shares") offered
herein for the accounts of the persons identified in the following table (the
"Selling Security Holders") may be sold from time to time. The Selling Security
Holders and the amount of securities that may be acquired by each are set forth
below.
All of the Shares, which will be offered by the Selling Security Holders,
may be acquired by them as follows: 65,000 shares at an exercise price of $2.50
pursuant to outstanding employee options sold to Rozel International Holding,
Ltd., 101,566 shares of Common Stock and 50,783 Redeemable Public Warrants
issuable to Patterson Travis, Inc. may be acquired at a price of $8.40 per unit,
each unit consisting of two shares of Common Stock and one Public Redeemable
Warrant, and 50,783 shares of Common Stock issuable to Patterson Travis, Inc.
upon exercise of the Redeemable Public Warrants that are issuable upon exercise
of the Underwriter's Warrants may be acquired at a price of $4.67. As of the
date of this Prospectus, no Selling Security Holder has exercised any of the
warrants or options described above.
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT OF AMOUNT OF OF COMMON
COMMON COMMON STOCK
STOCK OWNED STOCK OWNED AFTER
SELLING SECURITY HOLDER AND POSITION TO COMPANY BEFORE OFFERING OFFERED OFFERING(>1%)
- ----------------------------------------------------- --------------- ---------- --------------
<S> <C> <C> <C>
Patterson Travis, Inc.,.............................. 273,888 101,566(1) 2.2%
underwriter of Company's initial public offering
Rozel International Holding, Ltd..................... 65,000 65,000 -0-
</TABLE>
27
<PAGE> 31
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE
PUBLIC AMOUNT OF OF PUBLIC
REDEEMABLE PUBLIC REDEEMABLE
WARRANTS REDEEMABLE WARRANTS
OWNED WARRANTS OWNED AFTER
SELLING SECURITY HOLDER AND POSITION TO COMPANY BEFORE OFFERING OFFERED OFFERING(>1%)
- -------------------------------------------------------- --------------- ---------- -----------
<S> <C> <C> <C>
Patterson Travis, Inc................................... 50,783 50,783 -0-
original underwriter of Company's initial public
offering
</TABLE>
- ---------------
(1) Issuable upon exercise of the Redeemable Public Warrants that are issuable
upon exercise of the Underwriter's Warrants.
<TABLE>
<CAPTION>
STOCK
STOCK OWNED STOCK OWNED AFTER
SELLING SECURITY HOLDER AND POSITION TO COMPANY BEFORE OFFERING OFFERED OFFERING(>1%)
- -------------------------------------------------------- --------------- ---------- -----------
<S> <C> <C> <C>
Edward Haas, employee................................... 64,286 16,072 -0-
</TABLE>
PLAN OF DISTRIBUTION BY SELLING SECURITY HOLDERS
No underwriter is involved in the distribution of the securities that may
be owned by the Selling Security Holders, but rather sales will be made by the
Selling Security Holders either directly or through one or more securities
brokers or dealers in over-the-counter transactions on The NASDAQ Stock Market,
or in privately negotiated transactions. At the time that a particular offer of
any of the Shares is made by or on behalf of a Selling Security Holder, to the
extent required, a Prospectus Supplement will be distributed that will set forth
the number of Shares being offered and the terms of the offering, including the
name or names of any underwriters, dealers or agents, the purchase price paid by
any underwriter for Shares purchased from the Selling Security Holder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers,
and the proposed selling price to the public.
Shares sold in over-the-counter transactions will be sold at the current
market prices at the time of sale, and any Shares sold in private transactions
will be sold at prices acceptable to the buyer and seller. Broker-dealers
through which the Selling Security Holders effect sales of the Shares may
receive compensation in the form of discounts, concessions or commissions from
the Selling Security Holders and/or the purchasers of the Shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer may be in excess of
customary compensation).
The Selling Security Holders and any broker-dealers who act in connection
with the sale of Shares hereunder may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and profit on any resale
of the Shares as principal might be deemed to be underwriting discounts and
commissions under the Securities Act.
Under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the regulations promulgated thereunder, any person engaged in a distribution
of Common Stock offered by this Prospectus may not simultaneously engage in
market-making activities with respect to the Common Stock during the applicable
"cooling off" period (9 days) prior to the commencement of such distribution. In
addition, and without limiting the foregoing restriction, the Selling Security
Holders will be subject to applicable provisions of the Exchange Act and the
rules and regulations promulgated thereunder, including, without limitation,
Rules 10b-6 and 10b-7 in connection with transactions in the Shares, which
provisions may limit the timing of purchases and sales of shares of Common Stock
by the Selling Security Holders.
The Selling Security Holders will receive the entire proceeds from the sale
of their Shares, less any commissions paid to brokers or dealers for executing
such offers. Although the Company will not receive any funds from the sale of
the Selling Security Holders' shares, the Company will pay for all expenses of
the offering and will furnish current prospectuses to the Selling Security
Holders at their request.
28
<PAGE> 32
DESCRIPTION OF SECURITIES
UNITS
Each Unit (a "Unit") issued upon the exercise of an Underwriter's Warrant
consists of two shares of the Common Stock, par value $.01 per share, of the
Company and one redeemable warrant (each a "Redeemable Public Warrant"), each
Redeemable Public Warrant to purchase one additional share of such Common Stock
at an exercise price of $4.67 per share. The Units are no longer traded as
units, and the Common Stock and Redeemable Public Warrants composing the Units
are separately transferrable.
COMMON STOCK
The Company, a Delaware corporation, is authorized to issue nine million
(9,000,000) shares of Common Stock, par value $.01 per share. At the date of
this Prospectus the Company has five million, five hundred eighty-eight
thousand, nine hundred twelve (5,588,912) shares of Common Stock outstanding.
Upon payment in full of the subscription price therefor, the shares of Common
Stock are not subject to further assessment or call.
The following summary description of the Common Stock is qualified in its
entirety by reference to the Company's Certificate of Incorporation, as amended.
The holders of the Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of Preferred Stock that may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor, and,
in the event of liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities. The outstanding Common Stock is,
and the Common Stock to be outstanding upon completion of this offering will be,
validly issued, fully paid and nonassessable.
REDEEMABLE PUBLIC WARRANTS
Each Redeemable Public Warrant entitles the holder thereof to purchase one
share of Common Stock at an exercise price of $4.67 per share, subject to
adjustment in the event of certain occurrences, such as stock dividends, splits
and combinations. The Redeemable Public Warrants are exercisable September 9,
1998, by surrendering the certificate representing the Redeemable Public Warrant
to the Company, or its authorized transfer agent, with the subscription form
attached thereto properly completed and executed together with payment in full
by certified or bank teller's check of the aggregate exercise price of all the
Redeemable Public Warrants then exercised. The Redeemable Public Warrants are
redeemable by the Company at a price of one cent ($.01) per Redeemable Public
Warrant, provided that (i) notice of redemption is given to the Redeemable
Public Warrantholder not less than thirty days prior to the date fixed for
redemption; (ii) the aggregate average of the closing bid and asked quotations
of the Common Stock shall have been at least 25% above the Redeemable Public
Warrant Exercise Price per share for the twenty trading days ending on the third
day prior to the day on which notice of redemption is given; and (iii) holders
of the Redeemable Public Warrants shall be entitled to exercise Redeemable
Public Warrants until the close of business on the day prior to the date fixed
for redemption.
The Company may at any time, and from time to time, extend the exercise
period of the Redeemable Public Warrants provided that written notice of such
extension is given to the Redeemable Public Warrantholders prior to the
expiration date then in effect. Also, the Company may reduce the exercise price
of the Redeemable Public Warrants for limited periods of time through the end of
the exercise period. Changes in the terms of outstanding Redeemable Public
Warrants may constitute an offering of a new security for which an appropriate
registration statement (or post-effective amendment to the registration
statement of which this Prospectus is a part) would have to be filed and
declared effective prior to any exercise under such changed terms. In addition,
the Company may be deemed to be engaged in a self tender offer or a going
private transaction, which would result in additional required filings. The
Company must give notice of any
29
<PAGE> 33
reduction of the exercise price to the Redeemable Public Warrantholders. The
Company does not currently contemplate an extension of the exercise period or a
reduction of the exercise price.
Each Redeemable Public Warrant will be separable from the Units upon
issuance and will be separately traded and quoted. No assurance can be given,
however, that any trading market for the Redeemable Public Warrants will
continue. Upon the expiration of the Redeemable Public Warrants following the
exercise period referred to above, any market that might have existed for the
Redeemable Public Warrants will terminate.
The exercise price of the Redeemable Public Warrants and the number of
shares issuable upon exercise will be adjusted upon the occurrence of certain
events, including (a) the issuance of dividends payable in Common Stock, (b)
subdivisions or combinations of the Common Stock, (c) the issuance of rights or
options entitling the holder to acquire shares of Common Stock at less than the
then current market price and the then current Redeemable Warrant Exercise
Price, and (d) the issuance of shares of Common Stock or of obligations or other
securities convertible into or exchangeable for shares of Common Stock, in each
case for a consideration less than the then current market price and the then
current Redeemable Warrant Exercise Price; provided that no adjustment will be
required for the issuance of shares upon the exercise of conversion, option,
warrant or other rights currently outstanding and described elsewhere in this
Prospectus, and no adjustment will be required in the event that a merger or
acquisition is undertaken by the Company, and no adjustment will be required
upon the issuance or exercise of options under a bona fide employee stock option
plan and in certain other circumstances.
The Redeemable Public Warrants are being issued pursuant to a Warrant
Agreement between the Company and Corporate Stock Transfer, Inc., as Warrant
agent. Corporate Stock Transfer, Inc. will also act as the Company's transfer
agent for its Common Stock. The foregoing brief description of the Redeemable
Public Warrants is a summary of the rights and privileges of Redeemable Public
Warrantholders, does not purport to be complete and is qualified in its entirety
by reference to the Warrant Agreement, a copy of the form of which is an exhibit
to the Registration Statement of which this Prospectus forms a part.
UNDERWRITER'S WARRANTS
The Company granted to the underwriter of its initial public offering of
securities five-year Underwriter's Warrants to purchase up to 50,783 Units
exercisable until September 9, 1999, at $8.40 per Unit, subject to adjustment in
the event of certain occurrences, such as stock dividends, splits and
combinations. The Underwriter's Warrants also contain certain provisions further
protecting the holder against dilution.
The Underwriter's Warrants may be exercised by surrendering the certificate
representing the Underwriter's Warrants to the Company, or its authorized
transfer agent, with the subscription form attached thereto properly completed
and executed together with payment in full of the aggregate exercise price. The
Underwriter's Warrants and the securities underlying them are covered by the
Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Company is authorized to issue 100,000 shares of Preferred Stock, none
of which is outstanding, and the Company has no current understanding to issue
any of such Preferred Stock. The Board of Directors of the Company is vested
with authority to divide the authorized shares of Preferred Stock into one or
more series of such shares and to fix and determine the relative rights and
preferences of any such series. A series of such shares may, among other
matters, establish (a) the number of shares of Preferred Stock to constitute
such series and the designations thereof; (b) the rate and preference of
dividends, if any, the time of payment of dividends, whether dividends are
cumulative and the date from which any dividend shall accrue; (c) whether
Preferred Stock may be redeemed, and, if so, the redemption price and the terms
and conditions of redemption; (d) the liquidation preferences payable on
Preferred Stock in the event of liquidation; (e) sinking fund or other
provisions, if any, for redemption or purchase of such shares; (f) the terms and
conditions by which Preferred Stock may be converted, if the series is issued
with the privilege of conversion; and (g) voting rights, if any. The Board of
Directors, without the approval of the Company's shareholders, has the power to
authorize the issuance of Preferred Stock with voting and conversion rights that
could adversely affect the
30
<PAGE> 34
voting power of the Common Stock. See "RISK FACTORS -- Preferred Stock May
Inhibit Change of Control."
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
BDO Seidman, LLP was dismissed as the independent accountants of the
Company as of September 16, 1997. Such former independent accountants' report on
the financial statements of the Company for the prior year did not contain an
adverse opinion or disclaimer of opinion, and was not modified as to
uncertainty, audit scope or accounting principles. The decision to replace the
Company's independent accountants was made by the Company's Board of Directors.
There was no disagreement with the former accountants, either that was resolved
or that remained unresolved, on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. On
September 16, 1997, the Company engaged Arthur Andersen, LLP as its new
independent certified public accountants.
LEGAL MATTERS
The legality of the securities offered hereby will be passed on for the
Company by Akabas & Cohen, 488 Madison Avenue, 11th floor, New York, NY 10022.
Akabas & Cohen is the beneficial and record owner of 8,966 shares of the
Company's Common Stock. Seth Akabas, a partner in the law firm of Akabas &
Cohen, is a director of the Company.
EXPERTS
The financial statements of the Company for the year ended June 30, 1996
included in this Prospectus have been included herein in reliance on the report
by BDO Seidman, 330 Madison Avenue, New York, NY 10022, appearing elsewhere in
this Prospectus and upon the authority of such firm as experts in auditing and
accounting.
The financial statements for the year ended June 30, 1997 included in this
Prospectus constituting a part of this Registration Statement have been audited
by Arthur Andersen, LLP, independent certified public accountants, to the extent
and for the period set forth in their report appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon such report given
upon the authority of said firm as experts in giving such report.
ADDITIONAL INFORMATION
The Company has filed with the office of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, its Registration
Statement on Form SB-2 (Registration No. 33-80627 under the Securities Act of
1933, with respect to the securities offered hereby (the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information, reference is hereby made to the Registration Statement.
Statements contained in the Prospectus as to the contents of any document are
not necessarily complete, and in each instance reference is made to the copy of
such document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement and such other reports filed by the Company may be
inspected without charge at the Public Reference Section of the Commission in
Washington D.C. at the address set forth above, at the Commission's regional
office in the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60604, and at the Commission's office at 7 World Trade Center, New York, NY
10048, and copies of all or any part thereof may be obtained from the Commission
at prescribed rates. Copies of this filing, reports, proxy and information
statements and other information regarding the Company are available on the
Commission's website at http://www.sec.gov.
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<PAGE> 35
Any document or part thereof which is incorporated by reference within this
Prospectus and not delivered herewith, will be provided, without charge, to each
person, including any beneficial owner, to whom a Prospectus is delivered, upon
written or oral request of such person; however, exhibits to documents that are
incorporated by reference shall not be furnished unless such exhibits are
specifically incorporated by reference into the information that the Prospectus
incorporates. Such information may be obtained by writing the Company at 475
Northern Boulevard, Great Neck, NY 11021, telephone (516) 482-4860, Attn:
Secretary.
32
<PAGE> 36
INDEX
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-19
F-1
<PAGE> 37
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. The consolidated financial statements of Gilman &
Ciocia, Inc. and subsidiaries as of June 30, 1996, were audited by other
auditors whose report dated September 30, 1996, expressed an unqualified opinion
on those statements.
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.
ARTHUR ANDERSEN LLP
New York, New York
October 13, 1997
F-2
<PAGE> 38
GILMAN & CIOCIA, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash............................................................. $ 2,524,315 $2,920,489
Marketable securities............................................ 66,568 49,658
Accounts receivable, net of allowance for doubtful accounts of
$87,500....................................................... 1,229,192 1,109,535
Receivables from related parties, current portion................ 394,296 373,039
Prepaid expenses and other current assets........................ 351,027 451,968
---------- ----------
Total current assets.......................................... 4,565,398 4,904,689
Property and equipment, net........................................ 1,625,774 1,679,106
Intangible assets, net of accumulated amortization of $472,449
(September 30, 1997) and $468,249 (June 30, 1997)................ 1,075,737 1,147,297
Advances and notes receivable from financial planners, net of
current portion.................................................. 83,952 169,239
Receivables from related parties, net of current portion........... 402,295 447,806
Deferred tax assets................................................ 27,889 27,899
Other assets....................................................... 715,767 649,540
---------- ----------
Total assets............................................. $ 8,496,812 $9,025,576
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................ $ 883,333 $ 899,487
Accounts payable................................................. 190,089 168,210
Accrued expenses and other current liabilities................... 157,641 318,690
Income taxes payable............................................. -- 68,200
---------- ----------
Total current liabilities..................................... 1,231,063 1,454,587
---------- ----------
Long-term liabilities:
Long-term borrowings............................................... 466,667 552,000
---------- ----------
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 5,588,913 shares (September 30, 1997) and 5,578,913
shares (June 30, 1997)........................................ 55,889 55,789
Paid-in capital.................................................... 6,249,580 6,231,555
Retained earnings.................................................. 1,480,729 1,593,369
Less -- Treasury Stock, at cost; 213,733 shares (September 30,
1997) and 157,433 shares (June 30, 1997)......................... (789,951) (638,556)
---------- ----------
6,996,247 7,242,157
Stock subscriptions and accrued interest receivable................ (197,165) (223,168)
---------- ----------
Total stockholders' equity.................................... 6,799,082 7,018,989
---------- ----------
Total liabilities and stockholders' equity............... $ 8,496,812 $9,025,576
========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-3
<PAGE> 39
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1997 1996
THREE MONTHS ENDED ----------- -----------
SEPTEMBER 30,
-------------------------
1997 1996
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Tax preparation fees.................. $ 279,944 $ 233,993 $ 9,921,967 $ 8,147,986
Financial planning commissions........ 1,801,672 1,368,421 6,961,602 5,671,905
Direct mail services.................. 359,844 557,386 2,188,320 2,689,786
---------- ---------- ----------- -----------
Total revenues..................... 2,441,460 2,159,800 19,071,889 16,509,677
---------- ---------- ----------- -----------
Operating expenses:
Salaries and commissions.............. 1,047,521 1,301,430 7,581,136 6,690,091
General and administrative expenses... 656,502 697,151 3,572,901 3,054,568
Advertising........................... 29,187 22,694 2,819,941 2,585,125
Direct mail costs..................... 202,104 379,210 1,136,347 1,682,108
Rent.................................. 486,043 468,333 1,884,768 1,502,788
Depreciation and amortization......... 193,787 172,476 785,922 525,468
Reimbursement of financial planning
expenses........................... -- (125,000)
---------- ---------- ----------- -----------
Total operating expenses........... 2,615,144 3,041,294 17,781,015 15,915,148
---------- ---------- ----------- -----------
Operating income................... (173,684) (881,494) 1,290,874 594,529
---------- ---------- ----------- -----------
Other income (expenses):
Income (loss) from investment in
partnership........................ 20,913 (92,587) 73,127 198,165
Interest income....................... 21,459 20,915 77,162 91,435
Interest expense...................... (38,653) (16,937) (201,534) (107,111)
Rental income......................... 2,700 4,920 16,557 19,180
Realized gain (loss) on sale of
marketable securities.............. (16,213) 6,580 91,175
Unrealized gain on marketable
securities......................... 1,157 6,828 --
Other income.......................... 32,088
---------- ---------- ----------- -----------
Total other income (expense)....... 23,451 (83,689) (21,280) 292,844
---------- ---------- ----------- -----------
Income (loss) before provision for
income taxes.......................... (150,233) (965,183) 1,269,594 887,373
Provision for income taxes.............. (37,593) (378,085) 393,600 352,647
---------- ---------- ----------- -----------
Net income (loss)............. $ (112,640) $ (587,098) $ 875,994 $ 534,726
========== ========== =========== ===========
Net income (loss) per share... $ (0.02) $ (0.11) $ 0.16 $ 0.10
========== ========== =========== ===========
Weighted average common and
common equivalent shares:
Primary............................... 5,461,216 5,550,582 5,572,854 5,916,044
Fully diluted......................... 5,558,296 5,550,582 5,572,854 5,916,044
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 40
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCK
COMMON STOCK ADDITIONAL SUBSCRIPTIONS AND TREASURY STOCK TOTAL
------------------- PAID-IN RETAINED ACCRUED INTEREST -------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE SHARES AMOUNT EQUITY
--------- ------- ---------- ---------- ----------------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995... 5,634,864 $56,348 $5,815,194 $ 660,838 $(773,980) 116,964 $(411,875) $ 5,346,525
Purchase of treasury
stock............... -- -- -- -- 67,590 10,594 (67,590) --
Retirement of treasury
stock............... (127,558) (1,276) -- (478,189) -- (127,558) 479,465 --
Issuance of common
stock............... 26,307 263 53,063 -- -- -- -- 53,326
Exercise of stock
options............. 10,000 100 23,100 -- -- -- -- 23,200
Compensation
recognized in
connection with the
issuance of stock
options............. -- -- 232,782 -- -- -- -- 232,782
Repayments of stock
subscriptions....... -- -- -- -- 310,809 -- -- 310,809
Issuance of stock
subscriptions....... 6,969 70 39,930 -- (40,000) -- -- --
Accrued interest
income.............. -- -- -- -- (22,433) -- -- (22,433)
Accrued tax benefit
related to exercise
of common stock
options............. -- -- 20,006 -- -- -- -- 20,006
Net income.............. -- -- -- 534,726 -- -- -- 534,726
--------- ------- ---------- ---------- ---------- -------- --------- ----------
Balance, June 30,
1996.................. 5,550,582 55,505 6,184,075 717,375 (458,014) -- -- 6,498,941
Purchase of treasury
stock............... -- -- -- -- -- 175,900 (733,200) (733,200)
Reissuance of treasury
stock............... -- -- (53,093) -- -- (18,467) 94,644 41,551
Issuance of common
stock............... 28,331 284 100,573 -- -- -- -- 100,857
Repayments of stock
subscriptions....... -- -- -- -- 261,954 -- -- 261,954
Accrued interest
income.............. -- -- -- -- (27,108) -- -- (27,108)
Net income............ -- -- -- 875,994 -- -- -- 875,994
--------- ------- ---------- ---------- ---------- -------- --------- ----------
Unaudited:
Balance, June 30,
1997.................. 5,578,913 55,789 6,231,555 1,593,369 (223,168) 157,433 (638,556) 7,018,989
Repayments of stock
subscriptions....... -- -- -- -- 25,117 -- -- 25,117
Purchase of treasury
stock............... -- -- -- -- -- 56,300 (151,395) (151,395)
Exercise of stock
options............. 10,000 100 18,025 -- -- -- -- 18,125
Accrued interest
income.............. -- -- -- -- 886 -- -- 886
Net (loss)............ -- -- -- (112,640) -- -- -- (112,640)
--------- ------- ---------- ---------- ---------- -------- --------- ----------
Balance, September 30,
1997.................. 5,588,913 $55,889 $6,249,580 $1,480,729 $(197,165) 213,733 $(789,951) $ 6,799,082
========= ======= ========== ========== ========== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 41
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ (112,640) $ (587,098) $ 875,994 $ 534,726
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Compensation expense recognized in
connection with the reissuance of
treasury stock and the issuance of
stock options.......................... -- 27,735 41,551 232,782
Depreciation and amortization............ 158,500 172,464 785,922 525,468
(Income) loss from investment in
partnership............................ (20,913) 92,587 (73,127) (198,165)
Deferred tax provision (benefit)......... -- (57,417) 105,686 (133,585)
Compensation expense recognized in
connection with the forgiveness of
officers' loans........................ -- -- -- 123,899
(Gain) loss on sale of marketable
securities............................. 16,213 -- (6,580) (91,175)
Compensation expense recognized in
connection with amortization of
advances to financial planners......... 35,287 115,210 235,013 79,851
Provisions for doubtful accounts......... -- 25,000 41,526 99,175
Interest on stock subscriptions.......... (4,611) (10,305) (27,108) (22,433)
Gain on disposal of property and
equipment.............................. -- (9,000)
Unrealized gain on marketable
securities............................. (1,157) -- (6,828) --
Proceeds from sale of marketable
securities............................. 22,323 -- 32,580 2,186,925
(Increase) decrease in:
Accounts receivable......................... (119,657) 178,595 (174,375) (441,136)
Advances to financial planners.............. 54,662 (51,989) (78,214) (653,768)
Security deposits........................... (2,367) (7,548) (16,872) (100,486)
Prepaid expenses and other current assets... (60,891) (258,880) (115,009) 26,786
Accounts payable, accrued expenses and other
current liabilities...................... (246,592) (72,134) (109,312) 461,998
Income taxes payable........................ -- -- 5,598 --
--------- --------- ---------- ----------
Net cash provided by (used in) operating
activities............................. (281,843) (433,780) 1,516,445 2,621,862
--------- --------- ---------- ----------
Cash flows from investing activities:
Capital expenditures........................ (54,737) (270,516) (592,362) (900,385)
Acquisition of intangible assets............ (13,655) (166,865) (487,442) (730,076)
Investments................................. (39,394) -- (150,000) (448,360)
Purchase of marketable securities........... (23,048) -- -- --
Proceeds from sales of investments.......... -- -- 378,009 --
Proceeds from related party transactions.... 190,646 219,460 398,545 152,655
Payments to related parties................. -- (29,000) (676,250) (494,220)
--------- --------- ---------- ----------
Net cash provided by (used in) investing
activities............................. 59,812 (246,921) (1,129,500) (2,420,386)
--------- --------- ---------- ----------
</TABLE>
F-6
<PAGE> 42
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Acquisition of treasury stock............... (151,395) -- (733,200) --
Proceeds from bank and other loans.......... -- 250,000 3,602,000 2,297,222
Payments of bank and other loans............ (101,487) (547,934) (2,859,262) (2,000,000)
Proceeds from sale of common stock and
exercise of stock options................ 18,125 -- 100,857 76,526
Proceeds from stock subscriptions........... 30,614 19,387 261,954 310,809
Incurrence of deferred registration costs... 30,000 -- (60,600) --
--------- --------- ---------- ----------
Net cash provided by (used in) financing
activities............................. (174,143) (278,547) 311,749 684,557
--------- --------- ---------- ----------
Net increase (decrease) in cash............... (396,174) (959,248) 698,694 886,033
Cash, beginning of period..................... 2,920,489 2,221,795 2,221,795 1,335,762
--------- --------- ---------- ----------
Cash, end of period........................... $ 2,524,315 $ 1,262,547 $2,920,489 $2,221,795
========= ========= ========== ==========
Supplemental disclosures of cash flows
information:
Cash paid during the period for --
Interest................................. $ 34,012 $ 16,937 $ 196,405 $ 107,184
Income taxes............................. 58,830 22,515 439,724 449,276
Noncash transactions --
Liquidation of investment in partnership
into Marketable securities............. -- -- 68,830 --
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
receivable............................. -- -- -- 67,590
Retirement of all outstanding treasury
stock.................................. -- -- -- 479,465
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 43
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND
1996 IS UNAUDITED)
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 ("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 that are reported at fair value with unrealized gains and
losses included in earnings.
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 $1,548,186 and $1,615,546 for
September 30, 1997 and June 30, 1997, respectively, 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 $85,714,
$70,777, $274,613,
F-8
<PAGE> 44
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$190,817 for the three-month periods ended September 30, 1997 and 1996 and 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 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.
For the three-month periods ended September 30, 1997 and 1996 and the years
ended June 30, 1997 and 1996, the Company acquired customer lists and entered
into non-competition agreements for approximately $14,000, $167,000, $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 LongLived 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 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 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
F-9
<PAGE> 45
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 September 30, 1997 and 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 periods
ending after December 15, 1997, and earlier application is not permitted. When
adopted, the
F-10
<PAGE> 46
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Interim Periods Presented
The interim consolidated financial statements for the three months ended
September 30, 1997 and 1996 are unaudited. Accordingly, they do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
fair presentation have been included. Operating results for the three month
period ended September 30, 1997, are not necessarily indicative of the results
that may be expected for the year ending June 30, 1998.
3. RECEIVABLES FROM RELATED PARTIES
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- --------
<S> <C> <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 $350,000
Notes receivable of $52,250 and $100,000 from independent
contractors/ stockholders of the Company due on December 18, 1997
and June 19, 1999, respectively. Interest is charged at 9% and 6%
per annum, respectively........................................... 152,250 152,250
Receivable from stockholder of the Company, due in bi-weekly
installments of $3,156 through June 15, 1999...................... 131,340 147,362
Note receivable from stockholder of the Company due on October 9,
1997. Interest is charged at 8% per annum......................... 115,989 113,989
Other............................................................... 47,012 57,244
-------- --------
796,591 820,845
Less -- Current portion............................................. 394,296 373,039
-------- --------
$ 402,295 $447,806
======== ========
</TABLE>
Interest income from these receivables was approximately $4,600, $3,200,
$10,000, and $13,000 for the three-month periods ended September 30, 1997 and
1996 and the years ended June 30, 1997 and 1996, respectively.
4. ADVANCES AND NOTES RECEIVABLE FINANCIAL PLANNERS
Advances and notes receivable -- financial planners consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- --------
<S> <C> <C>
Unamortized portion of non-interest bearing advances
to financial planners............................. $ 251,945 $287,232
Notes receivable from financial planner due December
4, 1998. Interest is charged at 6% per annum...... -- 57,500
-------- --------
251,945 344,732
Less -- Current portion............................. 167,993 175,493
-------- --------
$ 83,952 $169,239
======== ========
</TABLE>
F-11
<PAGE> 47
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
Buildings.......................................... $ 402,367 $ 402,367
Equipment.......................................... 2,089,904 2,038,237
Furniture and fixtures............................. 370,554 367,484
Leasehold improvements............................. 183,415 183,415
---------- ----------
3,046,240 2,991,503
Less -- Accumulated depreciation and
amortization..................................... 1,420,466 1,312,397
---------- ----------
$ 1,625,774 $1,679,106
========== ==========
</TABLE>
For the three-month periods ended September 30, 1997 and 1996 and the years
ended June 30, 1997 and 1996, depreciation and amortization expense from
property and equipment was approximately $194,000, $172,000, $394,000 and
$321,000, respectively.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
Investment in ATM Partners, LP (Note 10)........... $ 281,547 $ 271,870
Security deposits.................................. 212,291 226,724
Other assets....................................... 221,929 150,946
---------- ----------
$ 715,767 $ 649,540
========== ==========
</TABLE>
7. BANK DEBT
Bank debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
<S> <C> <C>
Bank line of credit................................ $ 500,000 $ 500,000
Term loan.......................................... 750,000 833,333
Notes payable -- other............................. 100,000 118,154
---------- ----------
1,350,000 1,451,487
Less -- Short-term borrowings...................... 883,333 899,487
---------- ----------
$ 466,667 $ 552,000
========== ==========
</TABLE>
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
has been renewed through October 31, 1998. The line of credit is guaranteed by
the four principal stockholders of the Company. At September 30, 1997 and 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 September 30, 1997 and
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 September
30, 1997 and June 30, 1997) plus 1.75% through
F-12
<PAGE> 48
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 17, 1999. The loan is collateralized by all of the Company's assets. At
September 30, 1997 and June 30, 1997, the Company's outstanding balance under
this loan was $750,000 and $833,333, respectively.
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
fiscal year of future minimum rental payments required under operating leases as
of June 30, 1997.
<TABLE>
<S> <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 September 30, 1997 and 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. At September 30, 1997 and June
30, 1997, JT had net capital of $1,469,426 and $2,007,331, respectively, which
was $1,444,426 and $1,982,331, respectively, in excess of its required net
capital of $25,000.
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.
F-13
<PAGE> 49
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 expire 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 September 30, 1997 and June 30, 1997, 420,002 options have
been granted under the Option Plan.
The table below summarizes plan and nonplan stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES 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, September 30, 1997 and June 30, 1997.............. 1,366,002 3.59
=========
Exercisable, September 30, 1997 and June 30, 1997.............. 1,093,002 3.81
=========
</TABLE>
Options outstanding and exercisable at September 30, 1997 and June 30, 1997
and related weighted average exercise price and life information follows:
<TABLE>
<CAPTION>
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE REMAINING
FISCAL YEAR ----------------- ----------------- LIFE
GRANT DATE SHARES PRICE SHARES PRICE (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>
F-14
<PAGE> 50
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 since July 1, 1995 consistent with the provisions of SFAS No. 123, the
Company's net income or loss and earnings or loss per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
------------------------- ---------------------
1997 1996 1997 1996
--------- ----------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss), as reported...... $(112,640) $ (587,098) $875,994 $534,726
Net income (loss), pro forma........ (183,150) (1,034,003) 832,418 101,098
Earnings (loss) per share, as
reported.......................... (0.02) (0.11) 0.16 0.10
Earnings (loss) per share, pro
forma............................. (0.03) (0.19) 0.15 0.02
</TABLE>
The pro forma effect on net income or loss 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>
<S> <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.
For the three months ended September 30, 1997, the Company acquired 56,300
shares of its common stock for an aggregate cost of $151,395.
F-15
<PAGE> 51
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Subscriptions and Accrued Interest Receivable
Stock subscriptions receivable of $197,165 and $223,168 at September 30,
1997 and June 30, 1997, respectively, bear interest at a rate of 9% per annum.
For the three-month periods ended September 30, 1997 and 1996 and the years
ended June 30, 1997 and 1996, the Company recognized interest income of $4,288,
$10,305, $27,108 and $35,879, respectively. At September 30, 1997 and June 30,
1997 accrued interest receivable were $22,631 and $23,518, respectively.
The Company is holding in escrow all of the shares of its common stock
related to the stock subscription receivable. The shares will be released when
the stock subscription receivables are collected.
The following is a schedule by year of principal payments to be received:
<TABLE>
<S> <C>
Year ending June 30:
1998.................................................... $ 90,013
1999.................................................... 64,387
2000.................................................... 45,250
--------
$199,650
========
</TABLE>
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"). All investment transactions are executed
through JT. At September 30, 1997, June 30, 1997 and 1996, the Company had
approximately 41%, 41% and 35%, respectively, interest in the Partnership. The
Company recognized income (loss)of approximately $21,000, $(93,000), $73,000 and
$198,000 from the Partnership for the three-month periods ended September 30,
1997 and 1996 and for the years ended June 30, 1997 and 1996, respectively.
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. For the three-month periods ended September 30, 1997 and 1996, the
individuals earned gross commissions of approximately $131,000 and $58,000
respectively, from sales of securities and insurance products, and paid the
Company approximately $0 and $68,000 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.
F-16
<PAGE> 52
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 planning
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-17
<PAGE> 53
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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-18
<PAGE> 54
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. TAXES ON INCOME
Provisions for income taxes in the consolidated financial statements
consist of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal................................................ $211,903 $362,297
State and local........................................ 76,011 123,935
-------- ---------
Total current....................................... 287,914 486,232
-------- ---------
Deferred:
Federal................................................ 82,025 (103,483)
State and local........................................ 23,661 (30,102)
-------- ---------
Total deferred tax (benefit)........................ 105,686 (133,585)
-------- ---------
$393,600 $352,647
======== =========
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<S> <C>
Compensation expense recognized for financial reporting purposes
in connection with common stock option grants issued at below
market value................................................... $ 93,200
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-19
<PAGE> 55
======================================================
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
BY THIS PROSPECTUS OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
AN OFFER OR SOLICITATION IN SUCH JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................
Risk Factors..........................
Market Information....................
Use of Proceeds.......................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Remuneration of Officers and
Directors...........................
Principal Stockholders................
Certain Transactions..................
Plan of Distribution..................
Selling Securityholders...............
Description of Securities.............
Legal Matters.........................
Experts...............................
Additional Information................
Changes in and Disagreements with
Accountants and Financial Disclosure..
</TABLE>
UNTIL THE CONCLUSION OF THE DISTRIBUTION OF THE SECURITIES OFFERED HEREBY,
THERE IS AN OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
507,926 SHARES
OF COMMON STOCK
233,421 SHARES
OF COMMON STOCK
BY SELLING SECURITYHOLDERS
50,783 REDEEMABLE
COMMON STOCK
PURCHASE WARRANTS
BY
SELLING SECURITYHOLDERS
GILMAN & CIOCIA, INC
------------------------
PROSPECTUS
DECEMBER 17, 1997
======================================================
<PAGE> 56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article EIGHTH of the Corporation's Certificate of Incorporation provides:
A director of this Corporation shall not be personally liable to this
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to this Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which
the director derived any improper personal benefit. If the Delaware General
Corporation Law is hereafter amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of this Corporation shall be eliminated or limited
to the fullest extent permitted by the Delaware General Corporation Law, as
so amended.
Article NINTH of the Corporation's Certificate of Incorporation provides:
This Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or complete
action, suit or proceeding, whether civil, criminal, administrative or
investigative, or by or in the right of this Corporation to procure
judgment in its favor, by reason of the fact that he is or was a director
or officer, employee or agent of this Corporation, or is or was serving at
the request of this Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of this Corporation, in accordance with and to the full extent
permitted by statute. Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by this Corporation in advance of
the final disposition of such action, suit or proceeding as authorized by
the Board of Directors in the specific case upon receipt of an undertaking
by or on behalf of the director, officer, employee or agent to repay such
amount unless it shall ultimately be determined that he is entitled to be
indemnified by this Corporation as authorized in this section. The
indemnification provided by this section shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled
under these Articles or any agreement or vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office,
and shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
Article TENTH of the Company's By-Laws provides as follows:
Any person made a party to any action or proceeding (whether or not by
or in the right of the Corporation to procure a judgment in its favor or by
or in the right of any other corporation) by reason of the fact that he,
his testator or intestate, is or was a director, officer or employee of the
Corporation, or of any corporation which he served as such at the request
of the Corporation, shall be indemnified by the Corporation against
judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, actually and necessarily incurred by him in
connection with the defense of or as a result of such action or proceeding,
or in connection with any appeal therein, to the full extent permitted
under the laws of the State of Delaware from time to time in effect. The
Corporation shall have the power to purchase and maintain insurance for the
indemnification of such directors, officers and employees to the full
extent permitted under the laws of the State of Delaware from time to time
in effect. Such right of indemnification shall not be deemed exclusive of
any other rights of indemnification to which such director, officer or
employee may be entitled.
II-1
<PAGE> 57
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by Registrant in connection with the issuance and
distribution of the securities being registered (other than underwriting
discounts and commissions, and non-accountable expenses of $-0-) are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Fees.................................. $ 1,511.85
NASDAQ Stock Market listing fees......................................... -0-
Transfer/Warrant Agent's Fee and Expenses................................ 1,000
Accounting Fees and Expenses............................................. 10,000
Blue Sky Fees and Expenses............................................... -0-
Printing Expenses........................................................ 10,000
First Colonial Securities Group, Inc..................................... 160,000
Legal Fees............................................................... 10,000
Miscellaneous............................................................ 7,488.15
--------
TOTAL.......................................................... $ 200,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In May 1995, the Company issued 203,428 shares of Common Stock in
connection with the Company's acquisition of Gilbert Financial Services, Inc.
and granted options to purchase 400,000 shares of Common Stock in connection
with an employment agreement with Mr. Steven Gilbert. After the end of the 1995
fiscal year, 60,000 options granted to Mr. Gilbert during such year were
rescinded pursuant to a preexisting incentive compensation agreement.
In June 1995, Judah Wernick, an employee of the underwriter in the
Company's initial public offering purchased all outstanding bridge loan Class A
Warrants, and upon exercise thereof, the Company issued 360,000 shares of Common
Stock for an aggregate purchase price of $748,800.
In June 1995, the Company issued 64,286 shares of Common Stock in partial
consideration for the acquisition of assets used in the direct mail advertising
business.
In August 1995, the Company sold 70,161 shares of Common Stock to employees
and independent contractors of the Company at prices ranging from $3.07 to
$3.50, for an aggregate purchase price of approximately $232,000. During the
same period, the Company also issued 10,100 shares of Common Stock to employees
and others as performance bonuses.
In August 1995, the Company sold a total of 22,759 shares of its Common
Stock (which had been returned to the Company as a result of a default in the
payment of a subscription receivable) to an officer and a former officer of the
Company for an aggregate purchase price of $69,870.
In addition, in August 1995, the Company issued 25,713 restricted shares of
Common Stock for an aggregate purchase price of $89,995.50 to the following
individuals in the following amounts: Dominick Riolo 8,571 shares; Gregory
Ferone 8,571 shares; and Armando Olivieri 8,571 shares, pursuant to a contract
for the opening of new offices in New City, New York, Mamaroneck, New York and
Scarsdale, New York between such individuals and the Company.
The Company, in August 1995, sold 1,429 restricted shares of Common Stock
to Joseph Jensen for an aggregate purchase price of $5,000.00 pursuant to a
severance compensation package agreement between such individual and the
Company.
In October 1995, the Company sold a total of 20,000 shares of Common Stock
upon exercise of a stock option to one of its key independent contractors for an
aggregate purchase price of $40,650 pursuant to a previous contract between such
individual and the Company.
In October 1995, the Company issued 3,050 restricted shares of Common Stock
as performance bonuses to the following individuals in the following amounts:
Neil Hasset 300 shares; Jim Ptacek 100 shares; Carol
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<PAGE> 58
Livolsi 100 shares; Karen Sheppard 50 shares; Joel Weinberger 50 shares; Jeffrey
Ambrosio 50 shares; Pat Ewing 50 shares; Kerry O'Keefe 50 shares; Richard Boehm
200 shares; Dominick Riolo 100 shares; Joe Jacoes 100 shares; Larry Brenner 100
shares; Dave Burgio 100 shares; Lorraine Buscareno-Smith 100 shares; Dave
Critelli 100 shares; Deborah E. O'Connell 1,200 shares; and Scott Fisher 300
shares.
In November 1995, the Company sold 100 restricted shares of Common Stock to
Gwendolyn Morgan at $4.625 per share for an aggregate purchase of $462.50 and
5,455 restricted shares of Common Stock to Joel Weinberger at approximately
$5.50 per share for an aggregate purchase price of $30,000.00.
In November 1995, the Company issued 3,688 restricted shares of Common
Stock to Kerry O'Keefe as a performance bonus.
In November 1995, the Company sold 5,000 restricted shares of Common Stock
to Frank Daguanno at $6.00 per share for an aggregate purchase price of $30,000.
In December 1995, the Company issued 1,600 restricted shares of Common
Stock as performance bonuses to the following individuals in the following
amounts: Thomas Mallis 100 shares; Carol Sanford 100 shares; Sandy Valle 100
shares; Rosalie Maiorano 100 shares; Angelo Perna 100 shares; Georget Czajkowski
100 shares; Leonard Shrift 100 shares; Patricia White 100 shares; Vinka Pelaic
100 shares; Robert Gilman 100 shares; Jennifer Gilman 100 shares; Debra Seeley
100 shares; Kerry O'Keefe 100 shares; Joel Weinberger 100 shares; Pat Ewing 100
shares; and Tim Bodner 100 shares.
In February 1996, the Company issued 15,254 restricted shares of Common
Stock for an aggregate purchase price of $80,000 to the following individuals in
the following amounts: Howard Wilkin 5,405 shares; Alfred Schepis 5,405 shares;
and Armando Olivieri 4,444 shares, pursuant to management agreements as signing
bonuses between such individuals and the Company.
In April 1996, the Company issued a total of 3,400 shares of Common Stock
to an employee for services rendered.
In October 1996, the Company sold a total of 10,000 shares of Common Stock
upon exercise of a stock option to one of its key independent contractors for an
aggregate purchase price of $23,200 pursuant to a previous contract between such
individual and the Company.
In March 1997, the Company granted options to purchase shares of Common
Stock at $2.75 per share to employees and officers as follows: Serafino Maiorano
75,000; Dominick Ciocia 32,000; Gerald Hoenings 16,000; John Brower 50,000; Lee
Povinelli 40,000; James Ciocia 10,000; Thomas Povinelli 10,000; Gary Besmer
10,000; and Kathryn Travis 10,000.
In June 1997, the Company granted options to purchase 10,000 shares of
Common Stock at $2.50 per share to Lewis Pasquin and George Dagher.
In October 1997, the Company sold a total of 10,000 shares of Common Stock
upon exercise of a stock option to one of its key independent contractors for an
aggregate purchase price of $18,100 pursuant to a previous contract between such
individual and the Company.
All sales reported under this item were exempt from the registration
requirements of the Securities Act of 1933, as amended, by reason of Section
4(2) thereof and/or the rules and regulations promulgated thereunder as sales of
securities not involving a public offering.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
3.1 Registrant's Articles of Incorporation, as amended, incorporated by reference to
the like numbered exhibit in the Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No. 33-70640-NY
</TABLE>
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<PAGE> 59
<TABLE>
<S> <C>
3.2 Registrant's By-Laws, incorporated by reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2 under the Securities Act of 1933,
as amended, File No. 33-70640-NY
4.1 Resolution of Designation, Powers, Preferences and Rights of Series A Preferred
Stock, incorporated by reference to the like numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under the Securities Act of 1933, as amended,
File No. 33-70640-NY
4.2 Form of Warrant of Bridge Loan lenders, incorporated by reference to the like
numbered exhibit in the Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
4.3 Form of Warrant included in Units, incorporated by reference to the like numbered
exhibit in the Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
4.4 Form of Underwriter's Warrant, incorporated by reference to the like numbered
exhibit in the Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
5 Opinion of Akabas & Cohen
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 Registrant'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 Registrant'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 Registrant'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 like numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under the Securities Act of 1933, as amended,
File No. 33-70640-NY
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 Registrant'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 Registrant'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 Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
10.10 Omitted.
10.11 Omitted.
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 Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No. 33-70640-NY
</TABLE>
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<PAGE> 60
<TABLE>
<S> <C>
10.13 Omitted.
10.14 Omitted.
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 Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No. 33-70640-NY
10.16 Underwriting Agreement between the Registrant and Patterson Travis, Inc.,
incorporated by reference to exhibit number 1.1 in the Registrant'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.
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 Omitted.
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
</TABLE>
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<PAGE> 61
<TABLE>
<S> <C>
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
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
10.36 Letter of Agreement between dated October 31, 1997 by and between First Colonial
Securities Group Inc. and the Registrant
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
23.1 Consent of Akabas & Cohen (Included in Exhibit 5)
23.2 Consent of BDO Seidman, LLP
23.3 Consent of Arthur Andersen, LLP
</TABLE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering;
II-6
<PAGE> 62
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering; and
(e) If the Registrant requests acceleration of the effective date of the
Registration Statement under Rule 461 under the Securities Act, the Registrant
acknowledges that:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised 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.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred
or paid by a director, officer or controlling person of the small business
issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
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<PAGE> 63
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Great
Neck, State of New York, on December 15, 1997.
GILMAN & CIOCIA, INC.
By /s/ JAMES CIOCIA
------------------------------------
James Ciocia, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<C> <S> <C>
/s/ JAMES CIOCIA President and Director December 15, 1997
- ------------------------------------------
James Ciocia
/s/ THOMAS POVINELLI Chief Operating Officer, Chief December 15, 1997
- ------------------------------------------ Financial Officer and
Thomas Povinelli Director
/s/ GARY BESMER Director December 15, 1997
- ------------------------------------------
Gary Besmer
/s/ KATHRYN TRAVIS Director December 15, 1997
- ------------------------------------------
Kathryn Travis
/s/ LOUIS KAROL Director December 15, 1997
- ------------------------------------------
Louis Karol
/s/ SETH AKABAS Director December 15, 1997
- ------------------------------------------
Seth Akabas
</TABLE>
II-8
<PAGE> 64
INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------------- ----
<S> <C> <C>
5 Opinion of Akabas & Cohen......................................................
10.36 Letter of Agreement between dated October 31, 1997 by and between First
Colonial Securities Group Inc. and the Registrant..............................
23.2* Consent of BDO Seidman, LLP....................................................
23.3 Consent of Arthur Andersen, LLP................................................
</TABLE>
- ---------------
* To be filed by amendment
II-9
<PAGE> 1
EXHIBIT 5
[LETTERHEAD OF AKABAS & COHEN]
ATTORNEYS AT LAW
December 17, 1997
Gilman & Ciocia, Inc.
475 Northern Boulevard
Great Neck, NY 11021
Re: Gilman & Ciocia, Inc.
Registration Statement on Form SB-2
File No. 33-80627
Ladies and Gentlemen:
We have acted as counsel to Gilman & Ciocia, Inc., a Delaware
corporation (the "Registrant"), in connection with the preparation and filing of
a Registration Statement on Form SB-2 (the "Registration Statement"), as
amended, relating to an offering (the "Offering") of 507,926 shares of Common
Stock, par value $.01 per share (the "Common Stock") by the Registrant, 16,072
shares of Common Stock by an employee of the Company, 233,421 shares of Common
Stock by selling securityholders who can acquire such shares upon exercise of
options and warrants and 50,783 redeemable Common Stock purchase warrants (the
"Redeemable Public Warrants") for the purchase of Common Stock at an exercise
price of $4.67 per share by a selling securityholder.
In connection with the proposed Offering, we have examined the
Certificate of Incorporation, as amended, and the By-laws of the Registrant, the
form of certificates representing shares of Common Stock and Redeemable Public
Warrants, resolutions of the Board of Directors of the Registrant, and the
Registration Statement and the Exhibits filed therewith. We have also made such
inquiries and examined originals, certified copies or copies of such other
instruments as we have deemed necessary or appropriate for the purpose of this
opinion. For purposes of such examination, we have assumed the genuineness of
all signatures on original documents, and the conformity to the original
documents of all copies submitted.
Based upon the foregoing inquiries and examinations, we are of the
opinion that:
1. The Registrant is a duly organized and validly existing
corporation under the laws of the State of Delaware.
<PAGE> 2
AKABAS & COHEN
ATTORNEYS AT LAW
December 17, 1997
Gilman & Ciocia, Inc.
Page two
2. All securities covered by the Registration Statement are duly
authorized by the Board of Directors. The shares of common stock that are
covered by the Registration Statement and which are already issued were validly
issued, fully paid and non-assessable securities of the Registrant at the time
of issuance. The shares of common stock that are to be issued pursuant to the
terms of the options and/or warrants and the Redeemable Public Warrants, and
which are to be sold in accordance with the Registration Statement will, upon
such sale, be validly issued, fully paid and non-assessable securities of the
Registrant.
We hereby consent to the use of our name under the caption "Legal
Matters" in the Prospectus forming part of the Registration Statement and any
amendment thereto, and to the filing of this opinion as Exhibit 5 thereto.
Very truly yours,
/s/ Akabas & Cohen
<PAGE> 1
FIRST COLONIAL SECURITIES GROUP INC.
INVESTMENT BANKERS
NASD Members
SIPC Insured
10 Lake Center Executive Park
401 North Rouse 73 -- Suite 202
Marlton, New Jersey 08053
(609) 596-2424
(215) 563-1540
(800) 828-7658
Fax(609) 983-7752
October 31, 1997
Gilma & Ciocio, Inc.
475 Northern Boulevard
Great Neck, NY 11021
Attn: Thomas Povinelli & James Ciocio
Dear Tom:
You have requested that First Colonial Securities Group (the "Financial
Advisor") provide certain advisory and investment banking services to the
management ("Management") and the Board of Directors (the "Directors") of Gilman
& Ciocia, Inc. (the "Company") in connection with the proposed redemption for
cash or exercise of the Company's redeemable public common stock purchase
warrants ("Warrants") into shares of the Company's common stock (the
"Transaction"). Based upon our discussions to date, we understand the Directors
would like the Financial Advisor to advise the Company with respect to the
Transaction. We appreciate the opportunity to be of service to you.
The purpose of this letter is to outline the basic terms and conditions of
our proposed engagement, and it is based upon our current knowledge about the
Company and the markets for your securities. It is understood, however, that the
decision to proceed with our engagement will depend on the satisfactory results
of our due diligence investigation (including reviews of legal and accounting
issues), the Company's business prospects (including a review of the Company's
business plan and accompanying financial projections) and prevailing securities
market conditions at the time of the Transaction. We will advise the Company as
to the structure and timing of the Transaction. If requested by the Company we
will interact with and solicit interest among brokers and market makers with
regard to the Transaction, provide such other investment banking advisory
services as the Company may reasonably request in connection with the
transaction, and provide reports on the status of our work.
1. FEES AND EXPENSES.
A. ADVISORY FEE. The Company will pay us a financial advisory fee of
$135,000 ($100,000 shall be payable at the close of the 30 day warrant
solicitation period or the date of redemption of the warrants, whichever is
later, and $35,000 is payable upon signing this letter.) If the redemption
of the Warrants or the exercise of a majority of Warrants has not occurred
by June 30, 1998 then the Company may terminate this Agreement and the
$100,000 portion of the fee shall be cancelled.
B. NONACCOUNTABLE EXPENSE ALLOWANCE. The Company shall pay First
Colonial Securities Group Inc. a nonaccountable expense allowance of
$25,000 at the close of the 30 day Warrant solicitation period or the date
of redemption of the warrants, whichever is later. If this Agreement is
terminated prior to such payment, then the Company shall reimburse First
Colonial Securities Group, Inc. for its reasonable expenses incurred in the
performance of its duties hereunder, up to $25,000. These fees and expenses
are based on a transaction size of approximately 500,000 warrants being
exercised or redeemed. If that number changes, then such fees and expenses
will be pro-rated up or down accordingly.
<PAGE> 2
2. INDEMNITY. The Company, intending to be legally bound, hereby agrees
to indemnify First Colonial Securities Group, Inc. and its affiliates and their
respective directors, officers, agents, employees and controlling persons (First
Colonial Securities Group, Inc. "Indemnified Party") from and against any and
all losses, claims, damages and liabilities, joint or several for which such
Indemnified Party may become subject under any applicable federal or state law,
or otherwise, to the extent based upon claims for damages arising out of any
transactions contemplated by this agreement or the engagement of First Colonial
Securities Group, Inc. pursuant to, and the performance by First Colonial
Securities Group, Inc. of the services contemplated by, this agreement, and will
reimburse any Indemnified Party for all reasonable expenses (including
reasonable legal fees and expenses), as they are incurred in connection with the
investigation of, preparation for or defense of any pending or threatened claim
or any action or proceeding arising therefrom, whether or not such Indemnified
Party is a party (so long as such Indemnified Party is involved in any such
claim, action or proceeding) and whether or not such claim, action or proceeding
is initiated or brought by or on behalf of the Company. The Company will be not
be liable under the foregoing indemnification provision to the extent that any
loss, claim, damage, liability or expense is found, in a final judgement by a
court, to have resulted from an Indemnified Party's willful misconduct or
negligence.
If the indemnification provided for in this agreement is for any reason
held unenforceable by an Indemnified Party, although otherwise applicable in
accordance with its terms, the Company agrees to contribute to the losses,
claims, damages and liabilities for which such indemnification is held
unenforceable (i) in such proportion as is appropriate to reflect the relative
benefits of a Transaction to the Company and its stockholders, on the one hand,
and the First Colonial Securities Group, Inc. on the other hand, or (ii) if (but
only if) the allocation provided for in clause (ii) is for any reason held
unenforceable, in such proportion as is appropriate to reflect not only the
relative benefits of a Transaction referred to in clause (i) but also the
relative fault of the Company, on the one hand, and First Colonial Securities
Group, Inc., on the other hand, as well as any other relevant equitable
considerations: provided, however, to the extent permitted by applicable law, in
no event will the Indemnified Parties, in the aggregate, be required to
contribute an amount in excess of the fees actually paid to First Colonial
Securities Group, Inc. pursuant to this agreement.
Each Indemnified Party shall notify the Company promptly of any claim with
respect to which indemnification may be sought hereunder, and the Company shall
have the right to assume and control the defense of any such claim.
The Company agrees that, without First Colonial Securities Group, Inc.'s
prior written consent (which will not be unreasonably withheld), it will not, as
to First Colonial Securities Group, Inc. or any other Indemnified Party, settle,
compromise or consent to the entry of any judgement in any pending or threatened
claim, action or proceeding in respect of which indemnification could reasonably
be expected to be sought under the indemnification provision of this agreement,
unless such settlement, compromise or consent includes an unconditional release
of such Indemnified Party from all liability arising out of such claim, action
or proceeding.
Irrespective of the number of Indemnified Parties, the Company shall not be
liable for fees and expenses of more than one counsel pursuant to this letter in
connection with any proceeding or related proceedings in the same jurisdiction
or geographic location. The Company shall have the right to select the counsel
to represent the Indemnified Party. The Company shall not be liable for any
settlement of any claim without its consent, which consent shall not be
unreasonably withheld. If the Company, or any affiliate of the Company, or any
of its or their respective directors, officers, employees, agents and
controlling persons is the principal defendant in any such action or proceeding,
counsel selected by the Indemnified Parties shall cooperate with counsel for the
principal defendant in the defense of such action or proceeding to the extent
that such cooperation shall not be prejudicial to its clients or otherwise
improper.
In the event that an Indemnified Party is requested or required to appear
as a witness in any action brought by or on behalf of or against the Company in
which such Indemnified Party is not named as a defendant, the Company agrees to
reimburse First Colonial Securities Group, Inc. for all reasonable expenses
incurred by it in connection with such Indemnified Party's appearing and
preparing to appear as such witness including, without limitation, the
reasonable fees and disbursements of its legal counsel.
<PAGE> 3
3. First Colonial Securities Group, Inc. shall not, and shall cause its
officers, agents and employees to not, make any statement or representation
about the Company unless it is recorded in written documents supplied to First
Colonial Securities Group, Inc. by the Company and not inconsistent with the
documents most recently filed by the Company with the Securities and Exchange
Commission. First Colonial Securities Group, Inc. shall share information
received about the Company only with its professional advisors on a need-to-know
basis and only if they agree to keep same strictly confidential, and shall keep
such information strictly confidential, except to the extent such information is
or becomes public through no action directly or indirectly of First Colonial
Securities Group, Inc. or such disclosure is required by law.
If the foregoing correctly sets forth your understanding, please so
indicate by signing and returning to us the enclosed copy of this letter
together with your check for $35,000.00. We look forward to working with you
toward a successful Transaction and a long-term investment banking relationship.
Sincerely,
<TABLE>
<S> <C>
First Colonial Securities Group, Inc. Gilman & Ciocia, Inc.
By: /s/ BEN LICHTENBERG By: /s/ THOMAS POVINELLI
---------------------------------------- ----------------------------------------
Ben Lichtenberg Thomas Povinelli
Executive Vice President
By: /s/ JAMES CIOCIA
----------------------------------------
James Ciocia
</TABLE>
Accepted and agreed to as of , 1997.
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement on SB-2 registering 507,926 shares of Common Stock,
233,421 shares of Common Stock by selling securityholders, and 50,783 Redeemable
Common Stock Purchase Warrants by selling securityholders.
ARTHUR ANDERSEN LLP
New York, New York
December 15, 1997
