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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934. For the fiscal year ended June 30, 1998.
/ / Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ______________ to
______________.
COMMISSION FILE NUMBER 000-22996
GILMAN & CIOCIA, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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Delaware 11-2587324
(State or jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
475 Northern Boulevard, Great Neck, NY 11021
(Address of principal executive offices) (Zip Code)
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(516) 482-4860
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
Securities registered under Section 12(g) of the Act:
Common Stock, par value $.01 Per share
(Title of class)
Redeemable Warrants to purchase Common Stock
(Title of class)
Check whether the issuer: (1) filed reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year. $28,533,083
The aggregate market value of the voting stock held by non-affiliates as of
September 30, 1998 was $20,128,612.50 based on a sale price of $6.25.
State the number of shares outstanding of each class of the issuer's classes of
common equity, as of the latest practicable date. As of September 30, 1998,
5,606,913 shares of the issuer's common equity were outstanding.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Incorporated in 1981, Gilman & Ciocia, Inc. (the "Company" or "Gilman &
Ciocia(R)") provides federal, state and local tax preparation services to
individuals predominantly in the middle and upper income brackets through 127
offices operating in 16 states. To complement its tax preparation services, the
Company also makes financial planning services available to its tax preparation
customers. These financial planning services include securities brokerage
services and insurance agency services. The Company also operates a direct mail
service, which provides advertizing and other mail services for the Company as
well as third party customers.
During the Company's fiscal year ended June 30, 1998 ("Fiscal 1998"),
Gilman & Ciocia prepared approximately 95,000 tax returns, which represents an
increase of 5.5% from the approximately 90,000 tax returns it prepared during
its fiscal year ended June 30, 1997 ("Fiscal 1997"). Also in Fiscal 1998, Gilman
& Ciocia received approximately $16,578,032 in commissions from financial
planning services purchased by its customers, an increase of 33% over the
approximately $12,464,284 received from financial planning services in Fiscal
1997.
While preparing tax returns, clients often consider other aspects of
their financial needs, such as insurance, investments, pension and estate
planning. The Company capitalizes on this situation by introducing its tax
clients, if appropriate, to financial planners. The Company provides tax clients
with questionnaires about their financial goals, and the tax clients then have
the opportunity to request the Company's assistance with their financial
planning needs. When requested, the Company introduces the client to a financial
planner. Each of the financial planners to whom a client might be introduced is
a registered representative ("Registered Representative") of Royal Alliance
Associates, Inc., an independent registered securities broker/dealer ("Royal
Alliance") and/or an authorized agent of an insurance underwriter. Each
financial planner who provides financial planning services to clients of the
Company has agreed to share commissions with the Company in return for the
Company's referral of these new clients and, accordingly, is referred to in this
Form 10-KSB as affiliated with the Company. Approximately 20% of the Company's
tax preparers are also financial planners affiliated with Royal Alliance as
Registered Representatives and/or with an insurance company as an authorized
agent. If clients do utilize the services of the financial planner, the Company
earns a portion of the commission from the services that the financial planner
provides to the client. The amount of commission earned by the Company depends
on the products which are purchased by the Company's client. Substantially all
of the financial planners are also authorized agents of insurance underwriters,
and the Company earns a portion of commission revenues from these insurance
services as well.
The Company's direct mail service division assembles, packages and
sends direct mail materials of third-party customers as well as the Company's
own marketing materials. This division also provides limited consulting services
in connection with the design, creation and testing of direct mail materials.
INDUSTRY OVERVIEW
The United States Internal Revenue Service (the "IRS") reported that
from January 2, 1998 to August 28, 1998, approximately 121 million individual
1997 federal income tax returns were filed in the United States. According to
the IRS, over one-half of the tax returns filed in the United States each year
are
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completed by a paid preparer. Among paid preparers, H&R Block, Inc. ("H&R
Block") dominates the low-cost tax preparation business with approximately 8,000
offices located throughout the United States. According to information released
by H&R Block, H&R Block prepared an aggregate of approximately 14.8 million
United States tax returns during the 1998 tax season, which represented
approximately 13.1% of all tax returns filed in the United States for the 1997
tax year. Other than H&R Block, the tax preparation industry is highly
fragmented and includes regional tax preparation services, accountants,
attorneys, small independently owned companies, and financial service
institutions that prepare tax returns as ancillary parts of their businesses.
The ability to compete in this market depends in large part on the geographical
area, specific location of the tax preparation office, local economic
conditions, quality of on-site office management and the ability to file tax
returns electronically with the IRS.
According to data from the National Association of Securities Dealers,
Inc. (the "NASD"), approximately 600,000 registered representatives of
securities broker/dealers are registered in the United States, some of which
provide financial planning services similar to those offered by the Company. A
large number of these registered representatives are affiliated with larger
financial industry firms. The remaining portion of the financial planning
industry is highly fragmented with services provided by certified financial
planners, stock brokers and accountants. The Company believes that no
multi-state tax preparation firm has combined tax preparation and financial
planning services to the same extent as the Company.
TAX RETURN PREPARATION
Customers. The Company prepares federal, state and local income tax
returns for individuals, predominantly in the middle and upper income brackets.
The Company believes that customers are attracted to the Company's tax
preparation services because they prefer not to file their own tax returns and
are unwilling to pay the fees charged by most accountants and tax attorneys.
Tax Preparation Services. The preparation of a tax return by the
Company generally begins with a personal meeting at a Company office between a
client and an employee of the Company. At the meeting, the Company's employee
solicits from the client the information concerning income, deductions and
family status necessary to prepare the client's tax return. After the meeting,
the employee prepares drafts of the client's tax returns. After review and final
correction by the tax preparer, the returns are delivered to the client for
filing.
The Company believes that it offers clients a cost-effective tax
preparation service compared to services provided by accountants, attorneys and
independent tax preparers. The Company's volume allows it to provide uniform
service at competitive prices. In addition, as compared to certain of its
competitors that are open only during tax season, most of the Company's offices
are open year round due to the demand for financial planning services.
Since 1990, the IRS has made electronic filing available throughout the
United States. The IRS has announced its intention to increase the number of tax
returns filed electronically and is currently reviewing various proposals to
encourage the growth of its electronic filing program. The Company has qualified
to participate in the electronic filing program with the IRS and offers clients
the option of filing their federal income tax returns electronically. Under this
system, the final federal income tax return is transmitted to the IRS through a
publicly available software package. As part of its electronic filing program,
Refund Anticipation Loans ("RALs") are also available to 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 or her federal refund
(less fees charged by the Company and banking institutions) drawn on an approved
bank, at the office
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where he or she had his or her return prepared. RALs are recourse loans secured
by the taxpayer's refund. 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. None of
the Company's funds are used to finance these loans, and the Company has no
liability for repayment of these loans.
Tax Preparers. 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. Substantially all of the Company's professional tax
preparers have a college degree or its equivalent and two years of tax
preparation experience, and each one is specifically tested and trained by the
Company to meet the required level of expertise to properly prepare tax returns.
A majority of the Company's seasonal employees return in the next year. The
Company generally utilizes advertisements in local newspapers to recruit the
remainder of its seasonal work force.
The Company's tax preparers generally are not certified public
accountants. 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 tax
preparation business subjects it to potential civil liabilities under the
Internal Revenue Code. Although the Company believes that it complies with all
applicable laws and regulations, no assurance can be given that the Company will
not incur material fines or penalties. In addition, the Company does not
maintain professional liability or malpractice insurance policies. Although the
Company seeks to comply with all applicable laws and regulations, no assurance
can be given that the Company will not be subject to professional liability or
malpractice suits.
FINANCIAL PLANNING
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. To capitalize on this situation, the Company
offers every client the opportunity to complete a questionnaire that requests
information on his/her financial situation. These questionnaires are
subsequently reviewed by financial planners to evaluate whether the client may
need financial planning services. Upon request, the clients are then introduced
to a financial planner. Of all of the financial planners who provide financial
planning services for clients of the Company, approximately 66% also perform tax
preparation services as employees of the Company. Approximately 20% of the
Company's tax clients also utilize financial planning services provided by an
affiliated financial planner.
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 a financial planner (who may
also be the tax preparer) who is an authorized agent of an insurance
underwriter. If clients seek mutual fund products or other securities for
investment, they are referred to a financial planner (who may also be the tax
preparer) who is a Registered Representative of Royal Alliance. The Registered
Representatives of Royal Alliance providing financial planning services for
clients of the Company generally do not effect transactions in securities of
individual issuers, but rather deal only with packaged products such as mutual
funds, annuities and insurance. See "--Relationship with Registered
Representatives of Broker/Dealer" and "--Relationship with Authorized Agents of
Insurance Underwriters."
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The Company does not have affiliated financial planners at all of its
offices. Approximately 73% of the Company's offices provide both tax preparation
and offer the services of a financial planner. The remaining Company offices
provide predominantly tax preparation services and have no regular financial
planner associated with them, although financial planners from other offices
work with clients from all of these offices. In the offices that provide both
tax preparation and the availability of a financial planner to provide financial
planning services, approximately one-third of these offices have only one person
who provides both tax preparation and financial planning services. No office has
more than a total of ten tax preparers and affiliated financial planners.
Relationship with Registered Representatives of Securities
Broker/Dealer. The financial planners that provide mutual fund or securities
financial planning services to the Company's clients are all Registered
Representatives of Royal Alliance, an unaffiliated corporation, which is a
registered securities broker/dealer and a member of the NASD. Registered
Representatives are the affiliates of a securities brokerage firm that are
authorized to broker securities transactions for clients on behalf of the firm.
To become a Registered Representative, a person must pass one or more of a
series of qualifying exams administered by the NASD that test the person's
knowledge of securities and related regulations.
Prior to January 1, 1998, three of the Company's officers acted as
Registered Representatives of Gilman & Ciocia Securities, Inc. d/b/a JT
Securities, Inc., a wholly-owned subsidiary of the Company ("JT Securities"),
providing financial planning and brokerage services directly to a limited number
of clients of the Company. At that time, JT Securities was registered as a
securities broker/dealer under the Exchange Act. Such services provided by JT
Securities in the aggregate have never been material to the Company's overall
operations and, effective January 1, 1998, all financial planning services and
securities transactions in connection with clients of the Company have been and
will be effected by Registered Representatives of Royal Alliance and not JT
Securities.
All of the affiliated financial planners providing financial planning
services for clients of the Company are, to the extent they provide mutual fund
or securities planning services, Registered Representatives of Royal Alliance
who work with Royal Alliance and are supervised by Royal Alliance with regard to
all regulatory matters. Royal Alliance is ultimately responsible for all
supervision and record keeping in connection with the Registered Representatives
and their activities, although the Company also maintains records and supervises
the Registered Representatives. In addition to certain mandatory background
checks required by the NASD, the Company also requires that each Registered
Representative respond in writing to a background questionnaire.
If clients of the Company inquire about the acquisition or sale of
investment securities, they are directed to a Registered Representative of Royal
Alliance. In order to maintain the financial planning services of Royal
Alliance's Registered Representatives separate from the Company, such Registered
Representatives orally explain to clients that their services as financial
planners are delivered on behalf of Royal Alliance. In addition, Royal Alliance
maintains a separate telephone number at each office and a separate nameplate or
sign on the door of each office, uses separate stationery and deposits all
revenues in separate bank accounts. The Registered Representatives are able 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. 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.
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Ninety-nine percent of the securities transactions effected by
Registered Representatives of Royal Alliance who provide financial planning
services for clients of the Company involve packaged products, including
interests in mutual funds and variable annuities, and do not involve corporate
equities and bonds and other securities of operating issuers. Registered
Representatives of Royal Alliance do not provide advice regarding particular
securities nor do they transact any investments in particular securities, except
in very limited cases on the specific initiative and request of a client.
For a securities transaction effected through Royal Alliance, Royal
Alliance retains approximately 6% of the total commission on average, and the
Company and the individual Registered Representative receive the remaining 94%.
Each of the Registered Representatives of Royal Alliance who provides financial
planning services for clients of the Company, except the officers of the
Company, has entered into a commission sharing agreement with the Company, which
generally provides that a specified percentage of the commissions earned by the
Registered Representative is paid to the Company. The distribution of the
aggregate commission retained by the Company and the Registered Representative
varies for each Registered Representative; however, in Fiscal 1998, the Company
retained an average of approximately 47% of the aggregate commission and the
Registered Representatives also retained an average of approximately 47%. The
Registered Representatives and the Company are each paid their share of
financial planning commissions directly by Royal Alliance. Accordingly, the
Registered Representatives of Royal Alliance do not receive compensation either
as employees or independent contractors of the Company in regard to their
receipt of these commissions.
The commission sharing agreements between the Registered
Representatives of Royal Alliance who provide financial planning services for
clients of the Company 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, and are renewed annually.
Although Royal Alliance is not affiliated with the Company by contract,
ownership, common directors or officers, approximately 91 of the Company's
tax-preparer employees are also Registered Representatives of Royal Alliance.
Such individuals, who have two separate roles, divide their time based upon the
needs of clients who come to the offices of the Company with which they are
affiliated. They are compensated by the Company based on the hours they work
preparing tax returns and on the number of returns prepared, as well as for
other services provided to the Company and they are compensated by Royal
Alliance through commissions based on transactions completed for clients of the
Company. Substantially all of the Registered Representatives of Royal Alliance
who provide financial planning services for clients of the Company work
exclusively in connection with the offices of the Company.
The Company has no written agreement with Royal Alliance, and either
the Company or Royal Alliance can terminate this relationship at any time. The
Company believes that other broker/dealers 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, they are directed to one of these authorized agents.
These agents are able, through several insurance underwriters, to sell insurance
products to 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. In approximately 20% of the cases where a tax preparation client of
the
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Company is referred to an insurance agent, such authorized agent is the same
person as the tax preparer working with such client.
Each of the insurance agents (except the Company's officers) has
entered into a commission sharing agreement with the Company. Each such
agreement generally provides that a specified percentage of the commissions
earned by the agent is paid to the Company. In the commission sharing
agreements, the agents also agree to maintain certain Company information as
confidential and not to compete with the Company. Each agreement with an
insurance agent has a duration of no greater than one year from the date of the
agreement, and are renewed annually.
Credit Cards. The Company recently entered into a Bankcard Agreement
with First USA Bank (the "Credit Card Bank") for the Credit Card Bank to issue
MasterCard and/or Visa credit cards denominated as "Gilman & Ciocia" credit
cards. The Company supplies a list of the names and addresses of its customers
to the Credit Card Banks which is utilized in direct mail solicitations for
credit card applications. The Company receives, among other consideration,
$15.00 for each "Gilman & Ciocia" credit card issued under a Credit Card Bank
marketing plan, $30.00 for each "Gilman & Ciocia" credit card issued under a
Company marketing plan, and 5% of all finance charges collected by the Credit
Card Bank from holders of a "Gilman & Ciocia" credit card. The Company bears no
risk of loss from default on any of the credit cards issued under this
arrangement. As of June 30, 1998, revenues from this arrangement were less than
.01% of the Company's total revenue.
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 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 competitive factors are
timeliness, accurate service and price.
At September 30, 1998, the Company employed 29 people on a full-time
basis in its Progressive Mailing division.
MARKETING
The Company markets its services principally through direct mail and
promotions. The majority of clients in each office return to the Company for tax
preparation services during the following years. The Company estimates its
client retention rate to be approximately 75%. In addition, older offices tend
to have higher retention rates than new offices.
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 to each residence in the area surrounding the
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Company's offices. 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. In Fiscal 1997 and Fiscal 1998,
this program resulted in approximately 500 new clients per year.
Online. The Company currently has a web site on the Internet at:
http://www.gtax.com for income tax and financial planning advice and Company
information, including financial information and the latest news releases.
Other Marketing. The Company also prints and distributes brochures and
flyers about its services.
The Company believes that areas where Americans and other nationals are
migrating and/or retiring provide promising markets for tax preparation
expansion. 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 responsive to the direct mail advertising of the
Company's tax preparation services. Accordingly, in addition to expansion in its
existing markets, the Company has recently focused and plans to focus in the
future on expansion in such states as Florida and Arizona. 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, including H&R Block in the tax preparation
field and many well-known brokerage firms in the financial services field, have
significantly greater financial and other resources than the Company. The
Company believes that the primary elements of competition are convenience,
location, local economic conditions, quality of on-site management, quality of
service and price. There is no assurance 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 who may take clients with them.
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 addition, the Company depends on the
availability of employees willing to work for a period of approximately three
months for relatively low hourly wages, and minimal benefits. The Company's
success in managing the expansion of its business depends in large part upon its
ability to hire, train, and supervise seasonal personnel. If this labor pool is
reduced or if the Company is required to provide its employees higher wages or
more extensive and costly benefits, due to competitive reasons, the expenses
associated with the Company's operations could be substantially increased
without the Company's receiving offsetting increases in revenues.
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TRADEMARKS
The Company has registered its "Gilman & Ciocia" trademark with the
U.S. Patent and Trademark Office. There is no assurance 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.
REGULATION
The Company, as a preparer of federal income tax returns, is subject to
civil liabilities for violations of the Internal Revenue Code or other
regulations of the IRS. The Internal Revenue 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 Internal Revenue 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.
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. None of the full-year employees and
only several of the seasonal employees of the Company meet such requirements.
Most of the Company employees are limited to representing 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 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 vehicles available for savings, investment and planning for retirement and
death, disability and other contingencies. Furthermore, any advice given by
employees of the Company or affiliated financial planners is incidental to their
work in connection with the purchases and sales of mutual fund shares and other
securities. In this capacity, such employees or affiliated financial planners
are Registered Representatives of a broker/dealer and work under the supervision
of such broker/dealer.
The Registered Representatives themselves are subject to regulation in
their activities as Registered Representatives of a broker/dealer under the
Exchange Act, state regulation, the rules of the NASD and the rules and
regulations of the broker/dealer.
The Company has not registered as a broker/dealer in any state and
believes that it is not currently required to so register. The State of
Washington made written inquiries in 1996 regarding possible requirements for it
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.
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EMPLOYEES
As of September 30, 1998, the Company employed 183 persons on a
full-time full-year basis, including the Company's four officers. The Company's
full-time employees include 50 professional tax preparers, 81 clerical and
support staff persons (which include persons performing clerical work while in
training for other positions), 23 administrative personnel (who include the
Company's executive officers), and 29 employees who are part of the Company's
direct mail services division. During peak season the Company employs
approximately 700 full-time employees, of which approximately 500 of these
employees are seasonal and do only tax preparation. A majority of the Company's
seasonal employees return the following year, and the Company uses
advertisements in the local newspapers to meet the balance of its recruiting
needs. The minimum requirements for a tax preparer at the Company are generally
a college degree or its equivalent, two years of tax preparation experience and
a passing grade on an examination given by the Company.
Approximately 138 financial planners have entered into commission
sharing agreements with the Company while serving as Registered Representatives
of Royal Alliance and/or as insurance agents. Of such 138 financial planners, 47
perform only financial planning services. The remaining 91 provide financial
planning services and perform tax preparation, management and other services for
the Company.
The Company's offices are partially staffed by affiliated financial
planners who have entered into commission sharing agreements with the Company,
particularly during the off season. During a portion of the year, approximately
ten of the Company's offices are not staffed full-time by employees and/or
full-time affiliated financial planners who provide services for clients of the
Company. During such periods, such offices are staffed part-time by affiliated
financial planners and/or calls to such offices when no personnel are present
are forwarded automatically to an office of the Company that is fully staffed.
RISK FACTORS
This Form 10-KSB contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Form 10-KSB, the
words "anticipate," "believe," "estimate," "expect" and similar expressions, as
they relate to the Company or its management, are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed below.
Risk of Acquiring Broker/Dealers and Expanding into Financial
Planning. The Company plans to continue to expand into the area of financial
planning, both through the acquisition of independent securities broker/dealers
and by recruiting financial planners. The Company's continued revenue growth
will in large part depend upon successful integration and continued
profitability of the broker/dealers acquired. The Company's growth will also
depend on the successful operation of independent financial planners who are
recruited to join the Company. The financial planning segment of the Company's
business has generated an increasing portion of the Company's revenues during
the past few years, and if such segment does not continue to be successful, the
Company's rate of growth may decrease.
Risk of Acquisition of Small Tax Preparation Practices. As
part of its strategy, the Company intends to pursue the acquisition of small tax
preparation practices. The success of the Company will in part depend upon the
successful operation of the practices acquired and the integration of the
acquired businesses into the Company. A rapid expansion of offices which do not
become profitable would reduce the Company's
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net income and could depress future operating results. If the acquired companies
do not perform as expected or the Company could not effectively integrate the
acquired companies, the Company's operating results could be materially
adversely affected.
Risk of Opening New Offices. 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 results could be materially
adversely affected in any year that the Company opens a significant number of
new offices.
Seasonality. The last fiscal quarters, during tax season, are
the Company's strongest. The Company has significantly reduced earnings during
the remainder of the year. Due to the historical losses from July 1st to
December 31st each year, the Company generally requires substantial financing to
fund operations during tax season. If the Company was not able to secure such
financing or if such financing was not available on terms favorable to the
Company, the Company's operating results could be materially adversely affected,
and the Company would have to curtail its operations.
Highly Competitive Nature of the Tax Preparation and Financial
Planning Services Industry. The income tax preparation and financial planning
services industries are highly competitive. The Company's competitors include
companies specializing in income tax preparation as well as companies that
provide general financial services. The Company's principal competitor is H&R
Block, Inc. in the tax preparation field and many well-known national brokerage
and insurance firms in the financial services field. Many of these competitors
have larger market shares and significantly greater financial and other
resources than the Company. The Company may not be able to compete successfully
with such competitors. Competition could cause the Company to lose existing
clients, slow the growth rate of new clients and increase advertising
expenditures, all of which could have a material adverse effect on the Company's
business or operating results.
Potential Competition from Departing Employees and Affiliated
Financial Planners. Departing employees and affiliated financial planners may
compete with the Company. 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. If a substantial amount of such
competition occurs, the corresponding reduction of revenue may materially
adversely affect the Company's operating results.
Dependence on Key Personnel. The Company believes that its
ability to successfully implement its business strategy and operate profitably
depends on the continued employment of James Ciocia, its President, Thomas
Povinelli, its Chief Operating Officer, Stephen B. Sacher, its Chief Financial
Officer, and Kathryn Travis, its Secretary. If any of these individuals become
unable or unwilling to continue in his or her present positions, the Company's
business and financial results could be materially adversely affected. The
Company currently maintains $2.0 million key-man life insurance policies on each
of Thomas Povinelli and James Ciocia.
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<PAGE> 12
Potential Liability under the Internal Revenue Code. The
Company's business of preparing tax returns subjects it to potential civil
liabilities for violations of the Internal Revenue Code or other regulations of
the IRS. Penalties could range from $50 to $25,000 per violation. The Company
has never been assessed with material civil penalties or fines. However, if a
Company violation resulted in a material fine or penalty, the Company's
operating results could be materially adversely affected. In addition, the
Company does not maintain any professional liability or malpractice insurance
policies. The Company has never been the subject of a malpractice claim.
However, the significant uninsured liability and legal and other costs relating
to such claims could materially adversely affect the Company's business and
operating results.
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. If the Company were to be charged with a
criminal offense and found guilty or if any of its employees or executives were
convicted of a criminal offense, in addition to the costs of defense and
possible fines, the Company would likely experience an adverse affect to its
reputation, which could directly lead to a decrease in revenues from the loss of
clients.
Inability of the Company to Provide Services of a Certified
Public Accountant. The Company generally utilizes seasonal employees who are not
certified public accountants or tax attorneys to provide tax preparation
services. The Company employs only two full-time certified public accountants,
who do not work as tax preparers. Under state law, the Company is not allowed to
provide legal tax advice, and the Company does not employ or retain any tax
attorneys on a full-time basis. Because most of the Company's employees who
prepare tax returns are not certified public accountants, tax attorneys or
otherwise enrolled to practice before the IRS, such employees of the Company are
strictly limited as to the roles they may take in assisting a client in an audit
with the IRS. These limitations on services that the Company may provide could
hinder the Company's ability to market its services.
Furthermore, the small percentage of certified public
accountants or tax attorneys available to provide assistance and guidance to the
Company's tax preparers may increase the risk of the improper preparation of tax
returns by the Company. The improper preparation of tax returns could result in
significant defense expenses and civil liability.
Failure to Register as a Broker/Dealer or an Investment
Adviser. Registered Representatives of Royal Alliance, an independent
broker/dealer, reside in the Company's office and share a portion of their
commissions with the Company. From July 1, 1994 through September 30, 1998,
commission revenue was received by JT Securities. JT Securities was registered
as a securities broker/dealer with the Securities and Exchange Commission (the
"Commission") and was a member of the NASD. JT Securities was also registered as
a broker/dealer in the State of New York, and was a registered investment
advisor in the States of New York and Florida. JT Securities withdrew its
registration as a broker/dealer in 1998 at the request of the NASD. The Company
does not believe that it is required to register as a broker/dealer in any
states based upon its current activities. However, if such state officials
consider the Company to be acting as an unregistered broker/dealer in such
states, the Company could be subject to fines, enforcement actions and related
defense costs.
In addition, the Company believes that prior to the
registration of JT Securities, the Company did not act as a broker/dealer of
securities. However, if the Company was acting as a broker/dealer prior to
12
<PAGE> 13
such registration, then it would have been required to register with the
Commission, with the NASD and possibly with various state authorities. If such
registration was required, the fact that the Company did not register in the
past could subject it to civil liabilities or a final order barring
participation by the Company and its principals in the securities industry.
Infringement and Loss of Trademark and Other Proprietary
Rights. The Company has registered its "Gilman & Ciocia" trademark with the U.S.
Patent and Trademark Office. However, the actions taken by the Company to
establish and protect its trademarks and other proprietary rights may be
inadequate to prevent imitation of its services and products by others or to
prevent others from claiming violations of their trademarks and proprietary
rights by the Company.
Control of the Company by Current Management. The Company's
Chief Executive Officer, Chief Operating Officer and Secretary beneficially own
approximately 44% of the outstanding Company common stock, par value $.01 per
share (the "Common Stock"). Accordingly, these officers control the Company and
have the practical ability to elect a majority of the directors and therefore
appoint management. The interests of these officers could conflict with the
interests of the other stockholders of the Company. In addition, their ownership
could pose an obstacle to a purchase of the Company that might be desirable to
other stockholders and/or to a change in management if the Company is not
operating profitably in the future.
Lack of Dividends. Since its initial public offering of
securities in 1994, the Company has not paid dividends, and it does not plan to
pay dividends in the foreseeable future. The Company currently intends to retain
any earnings to finance the growth of the Company. It is very likely that
dividends will not be distributed in the near future, which may reduce the
marketability of the Company's Common Stock.
Certain Anti-takeover Provisions; Preferred Stock. Certain
provisions of the Certificate of Incorporation could make it more difficult for
a third party to acquire control of the Company, even if such change in control
would be beneficial to stockholders. The Certificate of Incorporation allows the
Company to issue preferred stock without stockholder approval. Such issuances
could make it more difficult for a third party to acquire the Company. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of such shares of preferred stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
serving other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or may discourage a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Company. The Company has no present intention to issue such additional shares of
preferred stock. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the DGCL, which will prohibit it from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could delay or prevent a change in control
of the Company.
Possible Volatility of Stock Price. Since December 1997, the
market price of the Common Stock has almost tripled and then fallen to
approximately its December 1997 range. During that period, the average daily
trading volume of the Common Stock has varied significantly. Although the Common
Stock currently trades on The Nasdaq Stock Market, prior to August 28, 1998, the
Common Stock traded on The Nasdaq SmallCap Market. As a result, historical
market prices may not be indicative of market prices in the
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<PAGE> 14
future. There is no assurance that an active trading market for the Common Stock
will be sustained in the future. In addition, the stock market has recently
experienced extreme stock price and volume fluctuation. These fluctuations have
often been unrelated to the operation performance of particular companies. The
Company's market price may be impacted by changes in earnings estimates by
analysts, economic and other external factors and the seasonality of the
Company's business. Fluctuations or decreases in the trading price of the Common
Stock may adversely affect the ability to buy and sell the Common Stock and the
ability to raise money in a future offering of Common Stock. See "Market for
Common Equity and Related Stockholder Matters".
Possible Tax Liability. Of the financial planners affiliated
with the Company, approximately 66% also perform tax preparation, managerial or
other services for the Company and receive compensation as employees of the
Company for such services ("Employee/Planners"). Three Employee/Planners also
received compensation from the Company for tax preparation, managerial and/or
other services as independent contractors. If the Internal Revenue Service were
to consider these three Employee/Planners as employees, then the Company may
have tax liabilities in connection with past compensation paid to these three
Employee/Planners. The Company believes that it is unlikely that such contingent
tax liabilities, if any, would have a material effect on the financial position,
results of operations or cash flows of the Company.
The financial planners affiliated with the Company receive
their portion of commissions earned in connection with securities sales of
behalf of the Company's clients directly from Royal Alliance as independent
contractors and Registered Representatives of Royal Alliance. The Company
believes that this tax reporting method is appropriate. However, no assurance
can be given that the IRS or State authorities will not attempt to assert
payroll tax claims in respect of such commissions, and if such claims were
ultimately decided against the Company, the payment of such tax liabilities
could have a material adverse affect on the Company's financial condition.
Restrictions on Possible Future Sales. Various restrictions on
the possible future sale of Common Stock may have an adverse affect on the
market price of the Common Stock. Approximately 3,500,000 shares of Common Stock
outstanding are "restricted securities" under Rule 144 of the Securities Act of
1933, as amended (the "Act"). In general, under Rule 144, a person who has
satisfied a one-year holding period may, under certain circumstances, sell,
within any three-month period, a number of shares of "restricted securities"
that do not exceed the greater of one percent of the then outstanding shares of
Common Stock or the average weekly trading volume of such shares during the four
calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares of Common Stock by a person who is not an
"affiliate" of the Company (as defined in Rule 144) and who has satisfied a
two-year holding period, without any volume or other limitation. 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, and
about 1,400,000 of the "restricted" shares have been held for longer than two
years and are not owned by "affiliates" of the Company.
The Company has granted 2,148,000 options to purchase shares of Common
Stock to 31 individuals in addition to the 619,779 granted to employees in
conjunction with the 1993 Joint Incentive and Nonqualified 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 statements on Form S-8 filed on October 28, 1996 and April 13, 1998
14
<PAGE> 15
and in the Company's registration statement on Form SB-2 declared effective by
the Commission on September 28, 1998.
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 and reduce the marketability of the Common Stock.
New Rules Limiting Broker/Dealer Sales. New rules limiting
Broker/Dealer sales of Common Stock could affect the Company's ability to sell
its securities and discourage Broker/Dealers from dealing in the Company's
Common Stock. For example, the Company's Common Stock is not currently 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 a net worth in excess of $1,000,000 or annual
income exceeding $200,000 individually, or $300,000 jointly with their spouse).
However, if the market price of the Common Stock were to fall substantially, the
Common Stock may be governed by such a rule in the future. For transactions
covered by such a rule, the broker/dealer must determine whether certain
potential purchasers are suitable and then receive the purchaser's written
agreement to the transaction prior to sale.
Moreover, there is an another Commission rule that imposes
additional disclosure requirements on broker/dealers in "penny stock"
transactions. An underwriter's participation in the trading market of the Common
Stock and the Redeemable Public Warrants could be governed by this rule if the
price of the Common Stock were to fall. The Common Stock is currently outside
the definition of a "penny stock" under the applicable rules. However, 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 will be required to make extensive disclosures to such
clients in certain circumstances regarding the Common Stock. Such additional
burdens imposed upon broker/dealers may discourage broker/dealers from
transacting 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.
Limitations on Director Liability. With limited exceptions,
under Delaware law directors of the Company are not liable individually to the
Company or to its stockholders for corporate decisions. Specifically, directors
of the Company are not liable to the Company or its stockholders for monetary
damages for breach of their fiduciary duty unless such actions were a breach of
the duty of loyalty, acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or in any transaction in which a
director derived an improper personal benefit. Therefore, the Directors have
broad discretion over actions made on behalf of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
As of June 30, 1998, the Company provides services to its clients at
127 local offices in sixteen states: forty-two in New York, fifteen in New
Jersey, twelve in Florida, nine in Arizona, nine in Ohio, seven in Maryland,
seven in Connecticut, seven in Washington, seven in Massachusetts, five in
Nevada, two in Pennsylvania, one in Virginia, one in Kentucky, one in Texas, one
in Illinois and one in Georgia. 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 seven offices are leased on an oral
month-to-month basis. Although
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<PAGE> 16
the leases range in terms remaining from one to seven years. The Company's
rental expense during Fiscal 1998 was $2,037,117. The Company believes that any
of its offices could be replaced with comparable office space, location and
convenience are important factors 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 an office that is not replaced with a nearby
office could adversely affect the Company's business at that office.
The Company needs less than 1,000 square feet of usable floor space to
operate an office, and its needs can be flexibly met in a variety of real estate
environments. Therefore, the Company believes that its facilities are adequate
for its current needs.
The Company also owns two buildings housing two of its offices, one in
Babylon, New York and the other in Palmer, Massachusetts.
ITEM 3. LEGAL PROCEEDINGS
In April 1998, Texas Capital Securities, Inc. and its assignee, Harbor
Financial, Inc. instituted a suit in the U.S. District Court in Austin, Texas,
demanding issuance, collectively, of 100,000 warrants to purchase the Company's
Common Stock at $5.125 per share (alleged to have been issuable under an
investment banking agreement pursuant to which Texas Capital Securities, Inc.
was to have provided investment banking services to the Company), as well as
attorneys' fees and exemplary damages. The Company believes, among other
defenses, that Texas Capital Securities, Inc. defaulted under such agreement and
provided no material services to the Company. The Company has answered the
complaint and intends to defend such suit vigorously. In addition, the Company
has received a demand letter from Euromarket Advisory, Inc. (an entity believed
to be affiliated with Texas Capital Securities, Inc.) demanding the issuance of
150,000 warrants to purchase the Company's Common Stock at $5.13 per share,
alleged to have been issuable under a consulting agreement pursuant to which
Euromarket Advisory, Inc. was to have provided consulting services to the
Company. The Company believes that Euromarket Advisory, Inc. defaulted under
such agreement and provided no material services to the Company. The Company has
denied such demand.
On August 21, 1998, Mercedes-Benz Credit Corporation, Allianz
Insurance Company, and Allianz Underwriters, Inc. filed a complaint against the
Company in New York Supreme Court, Nassau County. The complaint seeks
indemnification in the amount of up to approximately $3.5 million from Gilman &
Ciocia, Inc. The allegations in the complaint are based upon a $1.7 million
payment made by the plaintiffs in a settlement reached on October 3, 1996 with
the Estate of Thomas Gilman in a wrongful death action, upon an additional
approximately $1.8 million payment made to the estate in the settlement for
which plaintiffs ultimately may be held liable. (An action is currently pending
in New York Supreme Court Nassau County to determine the liability allocation
between the settlors with the estate.) Gilman & Ciocia, Inc. served its answer
on September 18, 1998. In the answer, Gilman & Ciocia, Inc. asserted numerous
defenses which it believes are meritorious. However, the case is currently
entering the discovery phase, and, therefore, it is not possible to determine at
this time the ultimate success of any asserted allegation or defense.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market on which the Company's Common Stock trades is The
Nasdaq Stock Market under the symbol "GTAX." Prior to August 28, 1998, the
principal market on which the Company's Common Stock traded was The Nasdaq
SmallCap Stock Market. 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>
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
December 31, 1997 $ 8 3/8 $ 4 3/8
March 31, 1998 $14 7/8 $ 7
June 30, 1998 $26 3/8 $ 13 3/4
</TABLE>
As of September 30, 1998, there were approximately 244 registered
holders of Common Stock. On September 30, 1998, the closing price of the Common
Stock was $6 1/4 per share.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Company's financial statements and related notes thereto of this Annual Report.
Except for the historical information contained herein, this and other sections
of this Annual Report contain certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Annual Report, the words
"anticipate," "believe," "estimate," "expect", and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. The Company's actual results, performance, or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements.
OVERVIEW
During Fiscal 1998, approximately 36% of the Company's revenues were
earned from tax preparation services, 58% were earned from financial planning
and related services and 6% were earned from direct mail and related services.
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<PAGE> 18
Direct mail services historically have not materially contributed to
the Company's net income. The Company's tax return preparation business and the
financial planning services provided to the Company's clients are closely linked
together. These lines of business generally use the same individuals, assets,
marketing and facilities. In addition, the financial planning customers
generally are introduced to the financial planners through the Company's tax
preparation services. The Company believes that its tax return preparation
business is inextricably intertwined with, and a necessary adjunct to, the
financial planning services provided to the Company's clients, that neither
segment would operate profitably by itself and that the two segments can be
viewed meaningfully only as a whole.
The Company opened fifteen new offices in January 1994, twenty-two
new offices in January 1995, forty-three new offices in January 1996, eight new
offices in January 1997 and seven new offices in January 1998. From time to time
the Company merges offices in similar geographic areas in order to take
advantage of economies of scale. During Fiscal 1998 the Company closed its two
offices in California.
PLAN OF OPERATION
Tax Preparation and Financial Planning
During the Company's fiscal year ended June 30, 1996 ("Fiscal 1996"),
Fiscal 1997 and Fiscal 1998, the Company opened 58 new offices, which represents
approximately 46% of all offices at June 30, 1998. New offices have historically
attracted more tax preparation clients, which have resulted in increased
revenues and have contributed to the Company's growth. In addition, each of the
new tax preparation clients are potential new financial planning clients. The
Company plans to continue to expand and open new offices during the next year
(although no specific target has been set), recruit successful financial
planners and acquire tax preparation practices. In addition, the Company
anticipates that it may acquire existing securities broker/dealers to increase
the number of financial planners who provide financial planning services to
clients of the Company. The Company anticipates funding this growth through the
proceeds of future offerings of equity securities, if any, operating profits and
use of its short-term line of credit.
During Fiscal 1996 and Fiscal 1997, the Company purchased two
buildings in connection with the acquisition of two tax preparation practices.
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. Although the Company anticipates opening new
offices, the Company will also focus on expanding its tax preparation base in
its current markets.
Direct Mail Division
During Fiscal 1998, the Company continued its operations of a direct
mail division in order to control the substantial costs of advertising its many
offices. This division was acquired to specifically reduce the costs of
advertising for the Company. 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
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<PAGE> 19
services. In Fiscal 1998, the direct mail division experienced an 18% decrease
in revenues from the prior fiscal year due primarily to the concentration of the
direct mail division services and resources for internal Company use, which
resulted in a loss of certain client accounts outside the Company. In Fiscal
1998, 43% of the direct mail division's revenues were from unaffiliated parties
as compared to 49% in Fiscal 1997.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
items from the Company's statements of income expressed as a percentage of
revenue and the percentage change in such items for Fiscal 1997 and Fiscal 1998.
The trends illustrated in the following table are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
------------------------------------
YEAR ENDED PERCENTAGE
JUNE 30, INCREASE (DECREASE)
---------- -------------------
1997 1998 1997 to 1998
------ ------ ------------
<S> <C> <C> <C>
Tax preparation fees ...................... 40% 36% (4%)
Financial planning commissions ............ 51% 58% 7%
Direct mail services ...................... 9% 6% (3%)
------ ------ ------
Total revenue ........................ 100% 100% --
Salaries and Commissions .................. 53% 51% (2%)
General and administrative expense ........ 15% 14% (1%)
Advertising ............................... 11% 10% (1%)
Direct Mail Costs ......................... 5% 3% (2%)
Rent ...................................... 8% 7% (1%)
Depreciation and amortization ............. 3% 3% 0%
------ ------ ------
Operating expenses ........................ 95% 88% (7%)
Other income (expense), net ............... 0% 0% 0%
------ ------ ------
Income before taxes ....................... 5% 12% 7%
Provision for income taxes ................ 2% 5% 3%
------ ------ ------
Net income ................................ 3% 7% 4%
------ ------ ------
</TABLE>
- --------------------------------
Fiscal 1998 Compared to Fiscal 1997
The Company's revenues for Fiscal 1998 were $28,533,083 as compared to
$24,574,571 for Fiscal 1997, an increase of $3,958,512 or 16%. This increase was
attributable primarily to increased commissions from increased sales of
financial planning services and additional affiliated financial planners.
The Company's total revenues for Fiscal 1998 consisted of $10,164,550
for tax preparation services, $16,578,032 for financial planning services and
$1,790,501 for direct mailing services. Tax preparation services consisted of
36%, financial planning services consisted of 58% and direct mailing
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<PAGE> 20
services consisted of 6% of the Company's total revenues for Fiscal 1998. The
Company's total revenues for Fiscal 1997 consisted of $9,921,967 for tax
preparation services, $12,464,284 for financial planning services and $2,188,320
for direct mailing services. Tax preparation services consisted of 40%,
financial planning services consisted of 51% and direct mailing services
consisted of 9% of the Company's total revenues for Fiscal 1997.
The growth in the tax preparation segment is primarily attributable to
the opening of seven new offices in January 1998. The growth in the financial
planning segment is primarily attributable to the addition of financial planners
who generated additional commissions from financial planning activities. The
remaining growth in financial planning revenues is a result of increased
securities and insurance transactions attributable to existing financial
planners. 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 Company has previously experienced a 6 to 12
month delay after the opening of a new office before such office generated
significant financial planning revenues, if ever.
The Company's operating expenses for Fiscal 1998 were $25,130,413, as
compared to operating expenses of $23,283,697 for Fiscal 1997. Operating
expenses as a percentage of total revenue for Fiscal 1998 were 88% compared to
95% for Fiscal 1997. The increase in operating expenses was attributable to
increases of $1,453,687 in salaries and commissions, $621,160 in general and
administrative expenses, $152,349 in rent and $72,469 in depreciation and
amortization, which were offset by decreases in direct mail costs of $365,875
and $87,074 in advertising. The increase in operating expenses was primarily
attributable to the costs associated with opening seven new offices in Fiscal
1998, an increase of financial planning services (including the number of
financial planners and the overall financial planning revenues) and, to a lesser
extent, increases in salaries.
The increase in salaries and commissions is primarily due to an
increase in commissions payable to financial planners as a result of the
increased sales of financial planning services and the addition of financial
planners.
The increase in general and administrative expenses from Fiscal 1997 to
Fiscal 1998 resulted principally from the Company's expansion of operations and
the opening of seven new offices in Fiscal 1998. Such increase was attributable
to various factors, including the increase in office expenses at the new offices
and increased costs in connection with presenting additional financial planning
seminars in Fiscal 1998.
The increased rent expense was principally attributable to the addition
of the Company's seven new offices during Fiscal 1998 and the offices opened in
the second half of Fiscal 1997.
The increase in depreciation and amortization expense is due primarily
to additions to property, plant and equipment of approximately $773,000. These
additions include updates to the Company's computer systems, including software
upgrades, hardware upgrades and additional computer hardware for the seven new
offices opened in Fiscal 1998.
The reduction of the Company's direct mail costs is related to the
decrease in revenue attributable to that segment of the Company's business.
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<PAGE> 21
The Company's income after provision for income taxes for Fiscal 1998
was $2,011,345, as compared to $875,994 for Fiscal 1997. The increase of 130% is
primarily attributable to higher net operating income generated from financial
planning and tax preparation services. These increases were offset by the slight
decrease in income from direct mail services.
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.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues have been, and are expected to be, highly
seasonal. As a result, the Company must generate sufficient cash during the tax
season, in addition to its available bank credit facility, to fund its operation
in the first half of the following fiscal year. Operations during the non-tax
season are primarily focused on financial planning services. Since its
inception, the Company has utilized funds from operations, proceeds from its
initial public offering and/or bank borrowings to support operations, finance
working capital requirements and complete acquisitions.
The Company's cash flows provided by operating activities were
$1,654,601 and $1,516,445 for Fiscal 1998 and Fiscal 1997, respectively. The
increase of approximately $138,156 is due primarily to increases in net income
from $875,994 in Fiscal 1997 to $2,011,345 in Fiscal 1998, which was offset by
an increase in Accounts Receivable from $174,375 in Fiscal 1997 to $1,141,576 in
Fiscal 1998.
Net cash used in investing activities was $1,115,824 and 1,129,500 for
Fiscal 1998 and Fiscal 1997, respectively. The decrease of approximately $13,676
is primarily due to additional amounts utilized in the purchase of new equipment
and additional costs associated with acquisitions. This was offset by decreased
costs associated with the acquisition of intangible assets and fewer proceeds
from the sale of investments.
Net cash used in financing activities was $1,753,435 in Fiscal 1998,
compared with net cash provided by financing activities of $311,749 in Fiscal
1997. The decrease of approximately $2,065,184 is primarily attributable to the
acquisition of approximately $180,000 of treasury stock in Fiscal 1998 as
compared to $730,000 in Fiscal 1997, the repayment of approximately $4,400,000
of outstanding bank loans in Fiscal 1998 as compared to approximately $2,900,000
in Fiscal 1997 and the incurrence of approximately $300,000 in Fiscal 1998 of
costs associated with the Company's Registration Statement on Form SB-2 related
to its outstanding publicly-traded Common Stock purchase warrants.
The Company has two credit facilities with State Bank of Long Island.
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
June 30, 1998, the Company had no outstanding principal balance on this line of
credit; however, the Company is currently negotiating an increase and extension
to this line of credit. The second credit facility was an installment note in
the principal amount of $1,000,000. The note was payable in 36 equal monthly
installments of approximately $28,000, plus interest at the bank's prime lending
rate plus 1 3/4%, through December 1999. At June 30, 1998, the note had been
repaid in full.
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 any dividends on its Common
Stock in the foreseeable future, but will apply any profits to fund the
Company's expansion.
RECENT DEVELOPMENTS
On September 28, 1998, the Company's Registration Statement on Form
SB-2 relating to the shares of Common Stock issuable upon exercise of the
Company's redeemable publicly traded warrants (the "Warrants") was declared
effective by the Commission. The Warrants are exercisable at $4.67 per
22
<PAGE> 23
share until October 30, 1998. The Company anticipates that substantially all of
the Warrants will be exercised prior to October 30, 1998. If all of the Warrants
are exercised, the Company would receive an aggregate of approximately
$2,372,014 from such exercises. However, such exercise of any of the outstanding
Warrants is not assured.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, FASB issued Statement No. 128, "Earnings Per Share,"
which is effective for periods ending after December 15, 1997. The Company has
adopted Statement No. 128 for its Fiscal 1998 and has restated its
weighted-average shares for all prior periods.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and display of comprehensive
income, its components and accumulated balances. SFAS No. 130 is effective for
periods beginning after December 15, 1997 and requires comparative information
for earlier years to be restated. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 requires entities to
disclose financial and detailed information about their operating segments in a
manner consistent with internal segment reporting used by the Company to
allocate resources and assess financial performance. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997 and
requires comparative information for earlier years to be restated.
The Company has adopted SFAS No. 130 and 131 for the fiscal year ending
June 30, 1998. SFAS No.'s 130 and 131 expand and modify financial statement
disclosures and, accordingly, have no impact on the Company's results of
operations, earnings per share or financial position.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting Costs of Start-Up
Activities" ("SOP 98-5"), which establishes standards for the accounting of
start-up costs. SOP 98-5 states that costs of start-up activities, including
organization costs, should be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998,
although earlier application is encouraged. The Company has adopted SOP 98-5
during Fiscal 1998. The effects of this standard have no material
impact on the Company's results of operations earnings per share or financial
position.
YEAR 2000 COMPLIANCE
The Company is currently finalizing the installation of the Great
Plains accounting system, which is year 2000 compliant. The Company does not
anticipate any material additional costs with regard to its year 2000
compliance. The year 2000 issue is not expected to affect the systems of various
entities with which the Company interacts. However, there can be no assurance
that the systems of other companies on which the Company relies will be timely
converted, or that a failure by another Company's systems to be year 2000
compliant would not have a material adverse effect on the Company.
23
<PAGE> 24
ITEM 7. FINANCIAL STATEMENTS
The information required in response to this item is set forth on pages F-1
through F-20 hereto and is incorporated by reference herein. An index of the
financial statements is set forth below.
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 Cash Flows .................. F-5
Consolidated Statements of Stockholders' Equity ........ F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............. F-8
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
24
<PAGE> 25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James Ciocia .............. 42 President, Chief Executive Officer and Director
Thomas Povinelli .......... 38 Chief Operating Officer, Executive Vice President
and Director
Kathryn Travis ............ 50 Secretary, Vice President and Director
Stephen B. Sacher ......... 39 Chief Financial Officer
Seth A. Akabas ............ 42 Director
Louis P. Karol ............ 40 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
James Ciocia, Chief Executive Officer, President and Director
Mr. Ciocia is a principal founder of the Company. He opened the
Company's 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 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, Executive Vice President 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 Royal Alliance. He graduated from
Iona College with a B.S. 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 a Registered Representative of Royal Alliance. Ms. Travis graduated
from the College of New Rochelle with a B.A. in mathematics.
25
<PAGE> 26
Stephen B. Sacher, Chief Financial Officer
Mr. Sacher joined the Company as its Chief Financial Officer in January
1998. Mr Sacher is a Certified Public Accountant and has been practicing in the
public accounting profession since 1981. He is a graduate of Queens College of
the City University of New York with a B.A. in accounting. He is a member of the
SEC Committee of the New York State Society of Certified Public Accountants and
a Member of the American Institute of Certified Public Accountants.
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.
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.
He has also received an LLM degree in Taxation from New York University School
of Law. Mr. Karol is a Certified Public Accountant serves on the Board of
Directors of the Long Island Chapter of the International Association of
Financial Planning.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, as to the Chief Executive Officer and
the three other executive officers whose annual salary and bonus exceeded
$100,000 in Fiscal 1998 (collectively, the "Named Executive Officers"),
information with respect to annual and long-term compensation earned during the
last three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------------
NAME AND OTHER ANNUAL NUMBER OF SHARES
PRINCIPAL POSITION YEAR SALARY BONUS* COMPENSATION UNDERLYING OPTIONS
- ---------------------------- ---- -------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
James Ciocia
Chief Executive Officer, 1996 $267,200 $240,000 $ 30,500(l) --
President and Director 1997 $251,200 $240,000 $ 9,580(2) 10,000
1998 $ 40,000 -- $ 12,393(11) --
Thomas Povinelli
Chief Operating Officer, 1996 $339,300 $145,000 $ 78,600(3) --
and Director 1997 $199,951 $210,000 $ 9,951(4) 10,000
1998 $ 40,000 -- $ -- --
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C>
Gary Besmer (9)
Vice President and 1996 $168,800 $ 3,000 $ 19,000(5) --
Director 1997 $142,149 $ 1,000 $ 7,149(6) 10,000
1998 $ 74,782 -- $ 5,908(11) --
Kathryn Travis
Secretary, Vice Pres 1996 $166,200 $ 19,000 $ 49,300(7) --
and Director 1997 $142,149 $ 3,000 $ 7,149(8) 10,000
1998 $ 85,000 -- $ 10,758(11) --
Stephen B. Sacher
Chief Financial Officer 1998 $ 36,667 -- 125,717(10) 220,000
</TABLE>
- ------------------------------
* Represents commission earned from non-affiliated entities. See "Certain
Relationships and Related Transactions."
(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.
(9) On May 19, 1998 Mr. Besmer announced that he was retiring from the
Company effective immediately.
(10) Includes professional fees paid to Sacher & Co., PC, a company of which
Mr. Sacher is President. See "Certain Relationships and Related
Transactions."
(11) Auto expense.
Messrs. Ciocia, Povinelli and Besmer and Ms. Travis earned commissions
from the sale of securities and insurance products to clients of the Company as
Registered Representatives of Royal Alliance which are reflected in the table
above. See "Certain Relationships and Related Transactions."
Key Man Insurance
The Company maintains $2.0 million key-man life insurance policies on
both Thomas Povinelli and James Ciocia.
Directors
Directors of the Company receive no compensation for serving as a
director of the Company.
Option Grants
The following table sets forth information regarding options to
purchase shares of Common Stock granted to the Named Executive Officers during
Fiscal 1998.
27
<PAGE> 28
OPTION GRANTS IN FISCAL 1998
Individual Grants
<TABLE>
<CAPTION>
Number of Percent of
Securities Total
Underlying Options/SARs
Options/ Granted to Exercise of
SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- -------------------------------------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Stephen B. Sacher -- Chief Financial Officer 20,000 1.1% $ 7.00 1/15/08
20,000 1.1% $ 7.50 1/15/08
20,000 1.1% $ 8.00 1/15/08
20,000 1.1% $ 8.50 1/15/08
20,000 1.1% $ 9.00 1/15/08
20,000 1.1% $ 9.50 1/15/08
100,000 5.7% $20.00 1/15/08
</TABLE>
Option Exercises and Holdings
The following table sets forth information concerning the number and
value of unexercised options to purchase shares of Common Stock held by the
Named Executive Officers as of June 30, 1998. No Named Executive Officer
exercised any options to purchase shares of Common Stock during Fiscal 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT OPTIONS
UPON VALUE FISCAL YEAR-END(#) FISCAL YEAR-END($)
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- -------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
James Ciocia................ -- -- 135,370/-- $2,056,265/--
Thomas Povinelli............ -- -- 135,370/-- $2,056,265/--
Gary Besmer................. -- -- 85,223/-- $1,295,274/--
Kathryn Travis.............. -- -- 104,039/-- $1,580,810/--
Stephen B. Sacher .......... -- -- 20,000/200,000 $222,500/$962,500
</TABLE>
- -------------------------
(1) Based on a year-end fair market value of the underlying securities
equal to $18.125.
STOCK OPTION PLANS
On September 14, 1993, the Company adopted the 1993 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"
("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 ("NonQualified Options").
28
<PAGE> 29
The 1993 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 Stock
Options or Non-Qualified Options, and other terms and provisions of the options.
The exercise price of the Incentive Stock Options granted under the 1993 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 1993 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 1993
Plan.
As of September 18, 1998, 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 1993 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 1993 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 1993 Plan to James Ciocia, Thomas Povinelli, Gary
Besmer and Kathryn Travis, respectively. The Company has granted Incentive Stock
Options to purchase 20,000 shares at $7.00, 20,000 shares at $7.50, 20,000
shares at $8.00, 20,000 shares at $8.50, 20,000 shares at $9.00, 20,000 shares
at 9.50 and 100,000 shares at $20.00 to Stephen Sacher. Mr. Besmer's options
expired subsequent to his resignation as a director of the Company. In total,
the Company has granted options that are still outstanding to purchase 619,779
shares and options to purchase 196,221 shares remain to be granted under the
1993 Plan.
On May 19, 1997, the Company adopted 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 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 stockholders 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.
The Company recently adopted a program under the 1997 Plan that will
entitle each employee and those affiliated financial planners who have entered
into commission sharing agreements with the Company, including officers and
directors, to be granted options to purchase 100 shares of Common Stock for each
whole $25,000 of revenues for tax preparation and commissions generated by such
individual for the Company in 1998, 1999 and 2000. Each option will be
exercisable for a period of five years to acquire one share of Common Stock at
the market price on the date of grant of the option. Options will be granted
following the
29
<PAGE> 30
end of each calendar year. The Company anticipates that it will grant between
50,000 and 100,000 options per year under this program.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of September 30, 1998, 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.
30
<PAGE> 31
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------ ----------------------------------------- ----------------
<S> <C> <C>
James Ciocia 1,050,473(1) 18.4%
c/o Gilman & Ciocia, Inc.
475 Northern Boulevard
Great Neck, NY 11021
Thomas Povinelli 1,093,473(2) 19.1%
c/o Gilman & Ciocia, Inc.
475 Northern Boulevard
Great Neck, NY 11021
Gary Besmer 548,480(3) 9.7%
35 Deer Run
East Islip, NY 11730
Kathryn Travis 368,185(4) 6.5%
c/o Gilman & Ciocia, Inc.
475 Northern Boulevard
Great Neck, NY 11021
Seth Akabas 8,966(5) *
245 West 107th Street
New York, NY 10025
Louis Karol 780 *
28 Fairview Avenue
East Williston, NY 11596
Steven Gilbert 771,154(6) 12.6%
2420 Enterprise Road, Suite 100
Clearwater, FL 34623
Stephen Sacher 20,000(7) *
c/o Gilman & Ciocia, Inc.
475 Northern Boulevard
Great Neck, NY 11021
All directors and officers
as a group (6 persons) 2,541,877 42.4%
</TABLE>
- ---------------------------
* Less than 1%.
(1) Includes 83,604 shares, 41,766 shares 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 shares 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) Does not include any shares of Common Stock issuable upon the exercise
of options that expired subsequent to Mr. Besmer's resignation as a
director of the Company.
(4) Includes 62,710 shares, 31,329 shares 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.
31
<PAGE> 32
(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,
100,000 shares issuable upon exercise of options at $4.75 per share and
75,000 shares issuable upon exercise of options at $13.75.
(7) Includes 20,000 shares issuable upon exercise of currently exercisable
options at $7.00 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each of James Ciocia, Thomas Povinelli and Kathryn Travis, acts and
Gary Besmer while he was a director of the Company acted, as a Registered
Representative for Royal Alliance and as an authorized agent for insurance
carriers. See "Executive Compensation".
The four principal stockholders, 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 stockholders 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
Operating Officer - $198,000, Thomas Povinelli, Sr., father of the present Chief
Operating 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 from the Partnership for Fiscal 1997. During Fiscal 1997
the Partnership began liquidating its investments and distributing its assets to
its partners. During Fiscal 1998, the Partnership was dissolved, and the Company
wrote-off a $100,000 loan to the Partnership.
The Company loaned the following individuals the following amounts:
$100,000 and $240,000 to James Ciocia, $100,000 and $240,000 to Thomas
Povinelli, $50,000 and $72,000 to Kathryn Travis, $50,000 to Gary Besmer and
$50,000 to Steven Gilbert. These loans are due in fully amortizing biweekly
installments (including interest at 7% per annum) through maturity on June 30,
2000, with the exception of the $240,000 loans to Messrs. Ciocia and Povinelli
and the $72,000 loan to Kathryn Travis, which have a maturity date of August 1,
2001.
In December 1997, the Company loaned $225,000 each to James Ciocia and
Thomas Povinelli. These loans were non-interest bearing loans and were repaid by
such officers/stockholders in March 1998.
From time to time the Company employs the professional services of
Sacher & Co. P.C. The President of Sacher & Co. P.C. is the Chief Financial
Officer of the Company. The amounts paid to Mr. Sacher in this capacity are set
forth above in "Executive Compensation."
The Company has also made two loans to Steven Gilbert, a stockholder of
the Company. The first loan is for $150,000, due in bi-weekly installments
through June 15, 1999. Interest is charged at 9% per annum. The second loan is
for $100,000, due on October 9, 1999. Interest on this loan is charged at 9%
per annum.
In addition, the Company holds notes receivable from Dominic Ciocia,
the brother of the Company's Chief Executive Officer. The notes receivable are
for $50,319 and $106,000 and are due on June 3, 1999 and June 19, 2000
respectively. Interest is charged at 8.5% and 6% per annum, respectively.
32
<PAGE> 33
ITEM 13. EXHIBITS, LIST AND REPORTS OF FORM 8-K
(a) Exhibits
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.
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
Right 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
10.1 Omitted
10.2 Omitted
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
33
<PAGE> 34
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
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
34
<PAGE> 35
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 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
35
<PAGE> 36
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 File No. 33-80627
10.30 Employment Agreement dated April 10, 1995 between
Armando Olivieri and Registrant in connection with
the opening of a new office, incorporated by
reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File No.
33-80627
10.31 Independent Employment Contract dated December 1993
between Abraham Dorfman and Registrant, incorporated
by reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File No.
33-80627
10.32 Form of Subscription Letter representing stock
issuances to individuals, incorporated by reference
to the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-80627
10.33 Independent Contractor's Agreement dated September 6,
1995 between Howard Wilkin and the Registrant,
incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.34 Independent Contractor's Agreement dated September 6,
1995 between Alfred Schepis and the Registrant,
incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
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, 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 Arthur Andersen, LLP
27.1 Financial Data Schedule
b) Reports on Form 8-K
None.
36
<PAGE> 37
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GILMAN & CIOCIA, INC.
By: /s/ THOMAS POVINELLI
------------------------------------
Thomas Povinelli, Chief Operating
Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES CIOCIA Executive Officer and President October 13, 1998
- --------------------------------------------------- (principal executive officer)
James Ciocia and Director
/s/ STEPHEN SACHER Chief Financial Officer, October 13, 1998
- --------------------------------------------------- (principal financial officer and
Stephen Sacher principal accounting officer)
/s/ SETH AKABAS Director October 13, 1998
- ---------------------------------------------------
Seth Akabas
/s/ THOMAS POVINELLI Director October 13, 1998
- ---------------------------------------------------
Thomas Povinelli
/s/ KATHRYN TRAVIS Director October 13, 1998
- ---------------------------------------------------
Kathryn Travis
/s/ LOUIS KAROL Director October 13, 1998
- ---------------------------------------------------
Louis Karol
</TABLE>
<PAGE> 38
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 Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gilman & Ciocia, Inc.:
We have audited the accompanying consolidated balance sheet of Gilman & Ciocia,
Inc. and subsidiaries as of June 30, 1998, and the related consolidated
statements of income, stockholder' equity and cash flows for the years ended
June 30, 1998 and 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referrred to above present fairly, in
all material respects, the financial position of Gilman & Ciocia, Inc. and
subsidiaries as of June 30, 1998, and the results of their operations and their
cash flows for the years ended June 30, 1998 and 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
New York, New York
September 29, 1998
<PAGE> 40
GILMAN & CIOCIA, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,705,831
Marketable securities 114,359
Accounts receivable, net of allowance
for doubtful accounts of $87,500 2,251,111
Receivables from related parties, current portion 389,230
Prepaid expenses and other current assets, net of allowance
for doubtful collections of $100,000 1,138,721
Deferred tax assets, current portion 85,000
------------
Total current assets 5,684,252
Property and equipment, net 1,948,371
Intangible assets, net of accumulated amortization of $820,898 937,823
Receivables from related parties, net of current portion 789,030
Deferred tax assets 66,899
Other assets 324,812
------------
Total assets $ 9,751,187
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 50,000
Accounts payable and accrued expenses 520,711
Income taxes payable 162,889
------------
Total current liabilities 733,600
------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value - shares authorized
100,000; none issued and outstanding Common stock - $.01 par value -
shares authorized
9,000,000; issued and outstanding 5,606,913 shares 56,069
Paid-in capital 6,377,334
Retained earnings 3,604,714
------------
10,038,117
Less- Treasury Stock, at cost; 211,315 shares (784,782)
Stock subscriptions and accrued interest receivable (148,845)
Unrealized loss on marketable securities, net of income taxes (86,903)
------------
Total stockholders' equity 9,017,587
------------
Total liabilities and stockholders' equity $ 9,751,187
============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-3
<PAGE> 41
GILMAN & CIOCIA, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Tax preparation fees $ 10,164,550 $ 9,921,967
Financial planning commissions 16,578,032 12,464,284
Direct mail services 1,790,501 2,188,320
------------ ------------
Total revenues 28,533,083 24,574,571
------------ ------------
OPERATING EXPENSES:
Salaries and commissions 14,537,505 13,083,818
General and administrative expenses 4,194,061 3,572,901
Advertising 2,732,867 2,819,941
Direct mail costs 770,472 1,136,347
Rent 2,037,117 1,884,768
Depreciation and amortization 858,391 785,922
------------ ------------
Total operating expenses 25,130,413 23,283,697
------------ ------------
Operating income 3,402,670 1,290,874
------------ ------------
OTHER INCOME (EXPENSES):
Interest and investment income 107,953 163,697
Interest expense (175,536) (201,534)
Other income 83,068 16,557
------------ ------------
Total other income (expense) 15,485 (21,280)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,418,155 1,269,594
PROVISION FOR INCOME TAXES 1,406,810 393,600
------------ ------------
Net income $ 2,011,345 $ 875,994
============ ============
NET INCOME PER SHARE:
Basic $ 0.37 $ 0.16
Diluted 0.32 0.16
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES:
Basic 5,383,093 5,479,611
Diluted 6,315,345 5,572,854
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 42
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,011,345 $ 875,994
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensation expense recognized in connection
with the reissuance of treasury stock and the issuance
of stock options 61,831 41,551
Depreciation and amortization 858,391 785,922
Income from investment in partnership (25,051) (73,127)
Deferred tax provision (benefit) (124,000) 105,686
Gain (loss) on sale of marketable securities 16,213 (6,580)
Deferred compensation expense 162,477 235,013
Provisions for doubtful collections 100,000 41,526
Interest on stock subscriptions (13,546) (27,108)
Unrealized gain on marketable securities (105,172) (6,828)
Income tax benefit on exercise of stock options 63,000 --
Proceeds from sale of marketable securities 22,323 32,580
(Increase) decrease in:
Accounts receivable (1,141,576) (174,375)
Prepaid expenses and other current assets (243,974) (115,009)
Advances to affiliated financial planners (87,500) (78,214)
Security deposits (28,732) (16,872)
Accounts payable and accrued expenses 33,883 (109,312)
Income taxes payable 94,689 5,598
----------- -----------
Net cash provided by operating activities 1,654,601 1,516,445
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (772,930) (592,362)
Acquisition of intangible assets (145,176) (487,442)
Investments -- (150,000)
Deferred acquisition costs (54,955) --
Proceeds from sales of investments 214,652 378,009
Loan repayments from related parties 273,813 398,545
Loans to related parties (631,228) (676,250)
----------- -----------
Net cash used in investing activities (1,115,824) (1,129,500)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 43
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock $ (179,123) $ (733,200)
Proceeds from bank and other loans 3,000,000 3,602,000
Payments of bank and other loans (4,401,487) (2,859,262)
Proceeds from sale of common stock
and exercise of stock options 54,125 100,857
Proceeds from stock subscriptions 87,869 261,954
Incurrence of deferred registration costs (314,819) (60,600)
----------- -----------
Net cash (used in) provided by financing activities (1,753,435) 311,749
----------- -----------
Net (decrease) increase in cash (1,214,658) 698,694
CASH, beginning of year 2,920,489 2,221,795
----------- -----------
CASH, end of year $ 1,705,831 $ 2,920,489
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for-
Interest $ 188,592 $ 196,405
Income taxes 1,297,320 439,724
Noncash transactions-
Liquidation of investment in partnership into
marketable securities 110,793 68,830
Reissuance of treasury stock at fair value 32,897 94,644
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 44
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN RETAINED TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996 $5,550,582 $55,505 $6,184,075 717,375 - -
PAYMENTS RECEIVED ON STOCK
PURCHASE OF TREASURY STOCK 175,900 (733,200)
REISSUANCE OF TREASURY STOCK (53,093) (18,467) 94,644
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 28,331 284 100,573
ACCRUED INTEREST INCOME (27,108)
NET INCOME 875,994
----------
BALANCE AT JUNE 30, 1997 $5,578,913 $55,789 $6,231,555 $1,593,369 $157,433 $ (638,556)
========== ======= ========== ========== ======== ==========
BALANCE AT JULY 1, 1997 $5,578,913 $55,789 $6,231,555 $1,593,369 $157,433 $ (638,556)
PAYMENTS RECEIVED ON STOCK
PURCHASE OF TREASURY STOCK 60,700 (179,123)
UNREALIZED LOSS ON MARKETABLE SECURITIES
REISSUANCE OF TREASURY STOCK 28,934 (6,818) 32,897
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 28,000 280 53,845
ACCRUED INTEREST INCOME
INCOME TAX BENEFIT ON EXERCISE OF
STOCK OPTIONS 63,000
NET INCOME 2,011,345
----------
BALANCE AT JUNE 30, 1998 $5,606,913 $56,069 $6,377,334 $3,604,714 $211,315 $ (784,782)
========== ======= ========== ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS UNREALIZED
AND ACCRUED LOSS ON TOTAL
INTEREST MARKETABLE STOCKHOLDER'S
RECEIVABLE SECURITIES EQUITY
----------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1996 (458,014) $ - $6,498,941
PAYMENTS RECEIVED ON STOCK 261,954 261,954
PURCHASE OF TREASURY STOCK (733,200)
REISSUANCE OF TREASURY STOCK 41,551
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 100,857
ACCRUED INTEREST INCOME (27,108)
NET INCOME 875,994
----------
BALANCE AT JUNE 30, 1997 $ (223,168) $ - $7,018,989
========== ========== ==========
BALANCE AT JULY 1, 1997 $ (223,168) $ - $7,018,989
PAYMENTS RECEIVED ON STOCK 87,869 87,869
PURCHASE OF TREASURY STOCK (179,123)
UNREALIZED LOSS ON MARKETABLE SECURITIES (86,903) (86,903)
REISSUANCE OF TREASURY STOCK 61,831
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 54,125
ACCRUED INTEREST INCOME (13,546) (13,546)
INCOME TAX BENEFIT ON EXERCISE OF
STOCK OPTIONS 63,000
NET INCOME 2,011,345
----------
BALANCE AT JUNE 30, 1998 $ (148,845) $ (86,903) $9,017,587
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 45
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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
primarily to individuals, 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,
Gilman & Ciocia Securities, Inc. d/b/a JT Securities, Inc. ("JT"), was a
registered broker-dealer pursuant to the provisions of the Securities Exchange
Act of 1934 until October 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly-owned
subsidiaries. All significant intercompany transactions have been eliminated.
The Company has several insignificant investments in 20% to 50% owned companies
which 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include
investments in money market funds and are stated at cost, which approximates
market value.
Marketable Securities
F-8
<PAGE> 46
The Company has classified its short-term investments in debt instruments as
either trading securities or available for sale securities that are reported at
fair value with unrealized gains and losses included in earnings or
stockholders' equity, respectively.
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 $1,759,610 for June 30, 1998 to acquire
income tax businesses, lists of customer accounts and related covenants not to
compete. Amortization expense is computed on a straight-line basis over a period
of five years, and amounted to $354,649 and $274,613 for the years ended June
30, 1998 and 1997, 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 undiscounted
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
discounted estimated operating cash flows.
During fiscal 1998 and 1997, the Company acquired intangible assets for
approximately $145,000 and $487,000, respectively.
Impairment of Long-Lived Assets
The Company follows the Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of." This 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.
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 associated with income tax preparation and
direct mail services upon completion of the services. Securities transactions
and related commission revenue and expenses are
F-9
<PAGE> 47
recognized on a trade date basis. Commission revenue and expenses on sales of
life insurance policies are recognized when the policies are effective.
The consolidated statements of income includes as commission revenue from
financial planning services, commissions received from financial planning
services and insurance underwriters, received directly by the Company as well as
the commissions paid by Royal Alliance, Inc. ("Royal") to affiliated financial
planners representing the financial planners' share of commissions. Accordingly,
the payments made directly to the affiliated financial planners are also
included in salaries and commission expense.
Advertising
Costs to develop advertising are accumulated and expensed upon the first mailing
of such advertising in accordance with SOP 93-7. Costs to develop tax season
programs and associated printing and paper costs are deferred in the first and
second fiscal quarters and expensed in the third fiscal quarter upon the first
use of such advertisement in the advertising programs.
Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS No. 109 "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
estimated tax rates and laws to taxable years in which such differences are
expected to reverse.
Stock-based Compensation
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 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 follows SFAS No. 123 to account for stock-based
compensation awards to outside consultants. Accordingly, compensation costs for
stock option awards granted to outside consultants and non-employee financial
planners is measured at the date of grant based on the fair value of the award
using the Black-Scholes option pricing model (Note 6).
Net Income Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128 , "Earnings Per Share." This statement establishes new standards for
computing and presenting earnings per share (EPS), replacing the presentation of
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 No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, and earlier application is not
permitted. The Company has adopted Statement No. 128 for the year ended June 30,
1998 and has restated its weighted-average shares for all prior periods
presented. ( Note 7)
F-10
<PAGE> 48
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash, marketable
securities, accounts receivable, notes receivable, accounts payable and
borrowings, approximated fair value as of June 30, 1998 because of the
relatively short-term maturity of these instruments and their market interest
rates.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 is effective for financial statements for periods beginning after December
15, 1997 and requires comparative information for earlier years to be restated.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires entities to disclose
financial and detailed information about their operating segments in a manner
consistent with internal segment reporting used by the Company to allocate
resources and assess financial performance. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated (Note 9).
The Company has adopted SFAS No. 130 and 131 for the fiscal year ended June 30,
1998. SFAS No. 130 and 131 expand and modify financial statement disclosures
and, accordingly, have no impact on the Company's results of operations,
earnings per share or financial position.
In April 1998, the AICPA issued Statement of Position (SOP) 98-5 "Reporting
Costs of Start-Up Activities," which establishes standards for the accounting of
start-up costs. Costs of start-up activities, including organization costs,
should be expensed as incurred. SOP 98-5 is effective for financial statements
for fiscal years beginning after December 15, 1998, although earlier application
is encouraged. The Company has adopted SOP 98-5 during fiscal year 1998,
however, the effects of this standard have no material impact on the Company's
results of operations, earnings per share or financial position.
3. RECEIVABLES FROM RELATED PARTIES
<TABLE>
<CAPTION>
<S> <C>
Notes receivable from officers/stockholders of the Company that are
due in aggregate bi-weekly installments of $2,295 (including interest
at 7% per annum) through June 30,2000 $ 202,447
Notes receivable from officers/stockholders of the Company that are
due in aggregate monthly payments of $9,634 (including interest at 7%
per annum) commencing September 1, 1998 through August 1, 2001 552,000
Notes receivable of $50,319 and $106,000 from independent
contractors/stockholders of the Company due
</TABLE>
F-11
<PAGE> 49
<TABLE>
<CAPTION>
<S> <C>
on June 3, 1999 and June 19, 2000 respectively. Interest is charged at
8.5% and 6% per annum, respectively 156,319
Receivable from employee/stockholder of the Company, due in bi-weekly
installments of $3,156 through June 15, 1999. Interest is charged at
9% per annum 78,360
Note receivable from employee/stockholder of the Company due on
October 9, 1999. Interest is charged at 9% per annum 121,989
Other
67,145
----------
1,178,260
Less- Current portion 389,230
----------
$ 789,030
==========
</TABLE>
Interest income from these related party receivables was approximately $21,000
and $10,000, for the years ended June 30, 1998 and 1997, respectively.
4. PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment, net consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Buildings $ 405,866
Equipment 2,752,135
Furniture and fixtures 402,432
Leasehold improvements 204,000
----------
3,764,433
Less- Accumulated depreciation and amortization 1,816,062
----------
$1,948,371
==========
</TABLE>
For the years ended June 30, 1998 and 1997 depreciation and amortization expense
from property and equipment was approximately $504,000 and $394,000,
respectively.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under various noncancelable lease agreements for the
rental of office space through 2003. 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,
1998.
F-12
<PAGE> 50
<TABLE>
<CAPTION>
<S> <C>
1999 $1,501,617
2000 1,101,162
2001 657,848
2002 304,009
2003 85,325
</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
The Company is party to a clearing agreement with an unaffiliated correspondent
broker which states that JT will assume customer obligations should a customer
of JT default. At June 30, 1998, 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, 1998, JT had net capital of $142,320 , which was $117,320 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.
Litigation
In April 1998, an investment banker and its assignee, instituted a suit in the
U.S. District Court in Austin Texas, demanding issuance, collectively, of
100,000 warrants to purchase the Company's common stock at $5.13 per share
(alleged to have been issuable under an investment banking agreement pursuant to
which the investment banker was to have provided investment banking services to
the Company), as well as attorney's fees and exemplary damages. The Company
believes, among other defenses, that the investment banker defaulted under such
agreement and provided no material services to the Company. The Company is
defending such suit vigorously. In addition, the Company has received a demand
letter from a consultant (an entity believed to be affiliated with the
investment banker) demanding the issuance of 150,000 warrants to purchase the
Company's common stock at $5.13 per share, alleged to have been issuable under a
consulting agreement pursuant to which the consultant was to have provided
consulting services to the Company. The
F-13
<PAGE> 51
Company believes that the consultant defaulted under such agreement and provided
no material services to the Company. The Company has denied such demand.
Subsequent to June 30, 1998, a legal action was instituted against the Company
pertaining to a wrongful death matter allegedly sustained in a Company
automobile more than nine years ago. The complaint seeks indemnification in the
amount of up to $3.5 million. The allegations in the complaint are based upon a
$1.7 million payment made by the plaintiffs plus an additional $1.8 million
payment for which plaintiffs ultimately may be held liable. An additional action
is currently pending to determine the liability allocation. The Company answered
the complaint by asserting numerous defenses which it believes are meritorious.
The case is currently entering the discovery phase, and, therefore, the Company
is unable to determine at this time the ultimate success of any asserted
allegation or defense.
Payroll Taxes
The Company annually provides its employees with Form W-2 and its outside
consultants with Form 1099 and Royal provides the financial planners with Form
1099 all of which are in accordance with tax law and industry practices. While
the Company has not experienced any federal or state payroll tax audits, should
a taxing authority assert that an outside consultant is an employee, the Company
believes that it is unlikely that any such audit would have a material effect on
its consolidated financial position, results of operations or cash flows.
6. STOCKHOLDERS' EQUITY
Warrants
At June 30, 1998 the Company had 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 October 30, 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 June 30, 1998, 420,002 options have been granted under the Option Plan.
F-14
<PAGE> 52
The Company charged earnings for compensation expense of $134,823 for the year
ended June 30, 1998, in connection with the issuance of stock options to an
outside consultant. There were no compensatory stock options issued during
fiscal 1997.
The table below summarizes plan and nonplan stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise Price
---------------- --------------
<S> <C> <C>
Outstanding, July 1, 1996 1,392,002 3.89
Granted 273,000 2.70
Canceled (299,000) 4.21
---------
Outstanding, June 30, 1997 1,366,002 3.59
Granted 1,748,000 9.18
Exercised (28,000) 1.93
Cancelled (250,000) 5.13
---------
Outstanding, June 30, 1998 2,836,002 6.92
=========
Exercisable, June 30, 1997 1,093,002 3.81
=========
Exercisable, June 30, 1998 845,002 3.54
=========
</TABLE>
The weighted average grant date fair value of options granted during the years
ended June 30, 1998 and 1997 is $ 5.41 and $1.00 per option, respectively.
Options outstanding and exercisable at June 30, 1998 and related weighted
average exercise price and life information follows:
<TABLE>
<CAPTION>
Fiscal Year Options Outstanding Options Exercisable Remaining
Grant Date Shares Price Shares Price Life (Years)
---------- ------ ----- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
1994 420,002 $2.95 420,002 $2.95 1/4
1995 405,000 3.34 405,000 3.34 5
1996 -
1997 273,000 2.70 -- -- 4
1998 1,738,000 9.23 20,000 $7.00 8
</TABLE>
The Company has adopted the disclosure-only provision of SFAS No. 123.
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:
F-15
<PAGE> 53
<TABLE>
<CAPTION>
Years ended June 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Net income, as reported $ 2,011,345 $ 875,994
Net income (loss), pro forma (46,191) 832,418
Earnings per share, as reported 0.32 0.16
Earnings (loss) per share, pro forma (0.01) 0.15
</TABLE>
The pro forma effect on net income or loss for fiscal years 1998 and 1997 does
not take into consideration pro forma compensation expense related to grants
made prior to fiscal year 1996.
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
<S> <C>
Expected life (years) 3
Interest rate 7.00%
Volatility:
June 30, 1998 73.6%
June 30, 1997 61.9%
Dividend yield 0%
</TABLE>
During fiscal 1998, the Company granted a total of 1,176,000 non-compensatory
options to thirteen financial planners who also serve the Company in various
employment capacities. Six of these thirteen individuals receiving a total of
362,000 options earn much of their total compensation directly from Royal for
security transactions.
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 1998, the Company acquired 60,700 shares of its common stock for
an aggregate cost of $179,123 and reissued 6,818 of these shares to employees
and consultants. The reissuance gave rise to the recognition of compensation
expense in the amount of $61,831 representing the excess of the fair value of
these shares at reissuance over their cost.
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.
F-16
<PAGE> 54
Stock Subscriptions and
Accrued Interest Receivable
Stock subscriptions receivable of $148,845 at June 30, 1998, bear interest at a
rate of 9% per annum. For the years ended June 30, 1998 and 1997, the Company
recognized interest income of $13,546 and $27,108, respectively. At June 30,
1998 accrued interest receivable was $22,860.
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>
<CAPTION>
Year ending June 30:
<S> <C>
1999 $ 80,735
2000 45,250
--------------
$ 125,985
==============
</TABLE>
7. EARNINGS PER SHARE
In accordance with SFAS No. 128, a reconciliation between the numerators and
denominators of the basic and diluted EPS computations for net earnings is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
------------------------ ------------------------
Per Share Per Share
--------- ---------
Net Income Shares Amounts Net Income Shares Amounts
---------- ------ ------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $2,011,345 5,383,093 $ 0.37 $ 875,994 5,479,611 $ 0.16
Dilutive Stock options
& warrants 932,252 93,243
--------- ---------
Dilutive EPS $2,011,345 6,315,345 $ 0.32 $ 875,994 5,572,854 $ 0.16
</TABLE>
The potentially dilutive shares that were not included in the computation of
diluted earnings per share because to do so would be antidilutive consist of
stock options and warrants as follows:
<TABLE>
<CAPTION>
Options/Warrants
----------------
<S> <C>
Year Ended June 30, 1998 675,000
Year Ended June 30, 1997 2,026,277
</TABLE>
8. RELATED PARTY TRANSACTIONS
Investment in ATM Partners, L.P.
F-17
<PAGE> 55
In July 1995, the Company, together with one of its former officers and five
individuals who are relatives of the officers of the Company formed ATM
Partners, LP former (the "Partnership"), an Investment Partnership. All
investment transactions were executed through JT. At June 30, 1997, the Company
had approximately a 41%, interest in the Partnership. The Company recognized
income of approximately, $73,000 from the Partnership for the year ended June
30, 1997. Such partnership began liquidating its investments and distributing
its assets to its partners in the Company's 1997 fiscal year, and fully
liquidated its remaining investment in fiscal 1998. During fiscal 1998, the
Company wrote-off a $100,000 receivable due from the Partnership.
Professional Fees
During fiscal 1998 and 1997, professional firms related to officers and
directors of the Company charged the Company fees totaling approximately
$200,000 and $75,000, respectively.
9. SEGMENTS OF BUSINESS
The Company is a provider of income tax preparation and financial planning
services to individuals and businesses in various states across the country.
Direct mail services are provided primarily to businesses and individuals in the
New York metropolitan area.
The following presents financial information by segment for the years ended June
30, 1998 and 1997:
<TABLE>
<CAPTION>
Tax Financial
Preparation Planning Direct Mail Eliminations Consolidation
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998:
Revenues from unaffiliated customers $10,164,550 $16,578,032 $ 1,790,501 $ -- $28,533,083
Intersegment revenues -- -- 2,369,447 (2,369,447) --
----------- ----------- ----------- ----------- -----------
Total revenues 10,164,550 16,578,032 4,159,948 (2,369,447) 28,533,083
Direct costs 6,608,421 9,868,394 3,553,154 (2,369,447) 17,660,522
Depreciation and amortization 311,418 508,102 38,871 -- 858,391
General corporate expenses 2,427,443 3,960,564 223,493 -- 6,611,500
----------- ----------- ----------- ----------- -----------
Operating income $ 817,268 $ 2,240,972 $ 344,430 $ -- $ 3,402,670
=========== =========== =========== =========== ===========
Interest expense $ 89,207 $ 86,329 $ -- $ -- $ 175,536
=========== =========== =========== =========== ===========
Identifiable assets $ 6,245,447 $ 6,043,903 $ 593,101 $(3,131,264) $ 9,751,187
=========== =========== =========== =========== ===========
Capital expenditures $ 772,930 $ -- $ 79,867 $ -- $ 852,797
=========== =========== =========== =========== ===========
Direct costs consist of the following:
Direct mail costs $ -- $ -- $ 770,472 $ -- $ 770,472
Advertising 1,376,457 1,332,030 2,393,827 (2,369,447) 2,732,867
Rent 746,906 1,218,636 71,575 -- 2,037,117
Salaries and commissions 4,485,058 7,317,728 317,280 -- 12,120,066
----------- ----------- ----------- ----------- -----------
Total direct costs $ 6,608,421 $ 9,868,394 $ 3,553,154 $(2,369,447) $17,660,522
=========== =========== =========== =========== ===========
</TABLE>
<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 $12,464,284 $ 2,188,320 $ -- $24,574,571
Intersegment revenues -- -- 2,275,000 (2,275,000) --
----------- ----------- ----------- ----------- -----------
Total revenues 9,921,967 12,464,284 4,463,320 (2,275,000) 24,574,571
Direct costs 6,025,407 9,729,797 4,162,670 (2,275,000) 17,642,874
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
=========== =========== =========== =========== ===========
</TABLE>
F-18
<PAGE> 56
<TABLE>
<S> <C> <C> <C> <C> <C>
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 7,844,812 618,490 -- 11,801,818
----------- ----------- ----------- ----------- -----------
Total direct costs $ 6,025,407 $ 9,729,797 $ 4,162,670 $(2,275,000) $17,642,874
=========== =========== =========== =========== ===========
</TABLE>
Intersegment sales are recognized upon the completion of the services associated
with direct mail services.
10. TAXES ON INCOME
Provisions for income taxes in the consolidated financial statements consist of
the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Current:
Federal $ 1,247,828 $ 211,903
State and local 282,982 76,011
----------- -----------
Total current 1,530,810 287,914
----------- -----------
Deferred:
Federal (90,304) 82,025
State and local (33,696) 23,661
----------- -----------
Total deferred tax (benefit) (124,000) 105,686
----------- -----------
$ 1,406,810 $ 393,600
=========== ===========
</TABLE>
Deferred tax assets as of June 30, 1998 consist of the following:
<TABLE>
<S> <C>
Compensation expense recognized for financial reporting purposes in $ 114,400
connection with common
stock option grants issued at below market value
Book amortization of intangibles in excess of tax
144,400
Provision for bad debts
75,200
Provision for deferred rent liability
27,600
Book depreciation in excess of tax (146,717)
Investments accounted for under the equity method (62,984)
---------
$ 151,899
=========
</TABLE>
F-19
<PAGE> 57
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>
1998 1997
------------------- --------------------
<S> <C> <C> <C> <C>
Year ended June 30:
Federal income taxes computed at statutory rates $1,162,173 34.0% $ 431,662 34.0%
State and local taxes, net of federal tax benefit 205,089 6.0 76,176 6.0
Reversal of under/(over) accruals 22,810 0.7 (156,000) (12.3)
Other 16,738 0.5 41,762 3.3
---------- ---- ---------- ----
$1,406,810 41.2% $ 393,600 31.0%
========== ==== ========== ====
</TABLE>
F-20
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-KSB, into the Company's previously filed
Registration Statements on Form S-8, File Nos. 333-14915 and 333-50089.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
New York, New York
October 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,705,831
<SECURITIES> 114,359
<RECEIVABLES> 2,338,611
<ALLOWANCES> 87,500
<INVENTORY> 0
<CURRENT-ASSETS> 5,684,252
<PP&E> 1,948,371
<DEPRECIATION> 1,816,062
<TOTAL-ASSETS> 9,751,187
<CURRENT-LIABILITIES> 733,600
<BONDS> 0
0
0
<COMMON> 56,069
<OTHER-SE> 8,961,518
<TOTAL-LIABILITY-AND-EQUITY> 9,751,187
<SALES> 28,533,083
<TOTAL-REVENUES> 28,533,083
<CGS> 0
<TOTAL-COSTS> 25,130,413
<OTHER-EXPENSES> (191,021)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175,536
<INCOME-PRETAX> 3,418,155
<INCOME-TAX> 1,406,810
<INCOME-CONTINUING> 2,011,345
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,011,345
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.32
</TABLE>
