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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
Amendment No. 3 to Form 10-KSB
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended June 30, 1997.
__ Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from _______ to _______
Commission file number 000-22996
GILMAN & CIOCIA, INC.
(Name of small business issuer in its charter)
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<S> <C>
Delaware 11-2587324
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
475 Northern Boulevard, Great Neck, NY 11021
(Address of principal executive offices) (Zip Code)
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(516) 482-4860
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Securities registered under Section 12(g) of the Act:
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<CAPTION>
Title of each class Name of each exchange
on which registered
<S> <C>
Common Stock, par value
$.01 Per share N/A
Redeemable Warrants to purchase
Common Stock N/A
</TABLE>
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. $21,710,0413
The aggregate market value of the voting stock held by non-affiliates
as of September 30, 1997 was $15,128,289 based on a sale price of $5.0625.
State the number of shares outstanding of each class of the issuer's
classes of common equity, as of the latest practicable date. As of September 30,
1997, 5,588,913 shares of the issuer's common equity were outstanding.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
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FORM 10-KSBA
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Gilman & Ciocia, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on September 3, 1993, the successor in interest to
Gilman & Ciocia, Inc., a New York corporation organized on November 4, 1981, and
is a preparer of federal, state and local income tax returns for individuals
predominantly in middle and upper income brackets.
The preparation of a tax return by the Company usually involves a
personal meeting at the office between a client and an employee of the Company.
In addition, 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 providing financial
planning questionnaires to all of its tax preparation clients.
After review of such questionnaires by financial planners, if
appropriate, financial planners will recommend the tax preparer to introduce the
tax preparation client to a financial planner. Each of the financial planners to
which a client might be introduced is a registered representative of an
independent registered securities broker/dealer, Royal Alliance Associates, Inc.
("Royal Alliance"), and each has agreed to share commissions with the Company.
In approximately 22% of the cases, such financial planner is the tax preparer
himself.
If such clients do utilize the financial planners to assist them on
their other financial needs, the Company earns commissions (depending on what
service is provided) from the services that the financial planners provide to
the client. More than 99% of the financial planners are also authorized agents
of insurance underwriters, and approximately 2% of the financial planners are
also authorized to act as mortgage brokers, and thus, the Company also earns
revenues from commissions for acting as an insurance agent and a mortgage
broker.
All commissions on sales and purchases of securities are earned by the
Company's wholly owned subsidiary, JT Securities, Inc. (a registered securities
broker/dealer)("JT Securities").
Royal Alliance, unaffiliated with the Company, is a corporation which
is a registered securities broker/dealer and a member of the National
Association of Security Dealers, Inc. ("NASD").
The Company also has a division operating as a direct mail service. It
assembles, packages and mails, but does not design, create or draft the test for
direct mail materials, however, it provides limited consulting services in these
areas.
Based on the Company's total revenues during its 1997 fiscal year,
approximately 40% of the Company's business is tax preparation services;
approximately 51% of the Company's business is commission sharing on financial
planning services (with approximately 32% from securities transactions and 19%
from mortgage brokerage, insurance and other related services); and
approximately 9% of the Company's business is direct mail and related services.
The Company has a total of one hundred twenty eight offices: forty
three in New York, fifteen in New Jersey, fourteen in Florida, nine in Arizona,
nine in Ohio, seven in Maryland, seven in
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Connecticut, seven in Washington, seven in Massachusetts, five in Nevada, two in
Pennsylvania, one in Virginia, one in Illinois and one in Georgia, and it
maintains its principal executive office at 475 Northern Boulevard, Great Neck,
NY 11021, telephone (516) 482-4860.
Out of the total number of offices: 34 offices provide predominantly
tax preparation services and have no regular financial planner associated with
them (although financial planners from other offices do work with clients from
all of such 34 offices); and 94 offices provide both tax preparation and regular
financial planning services.
Out of the 94 offices that provide both tax preparation and financial
planning services: 21 of these offices have only one person who provides both
tax preparation and financial planning services; and 73 of these offices have
two or more persons who perform tax preparation and financial planning services.
No office has more than a total of ten tax preparers and financial planners.
The Company opened fifteen new offices in January 1994, twenty two new
offices in January 1995, forty four new offices in 1996 (closing four in the
first half of 1996), eight new offices in 1997 and seven new offices in 1998.
HISTORY
Following its organization in 1981, most of the Company's expansion was
effected through separate corporations under common control with the Company. In
December 1992, the Company merged with fifteen of such affiliated corporations
conducting the same business as the Company. Several of such affiliated
corporations, which did not participate in the merger, were liquidated prior to
such merger. Their clients and territories were absorbed by other nearby offices
of the Company. The Company opened fifteen offices in January 1994, twenty two
offices in January 1995, forty four offices in 1996 (closing four in the first
half of 1996), eight in 1997 and seven in 1998. The Company now has a total of
128 offices.
In December 1994, the Company consummated its initial public offering
("IPO") of 507,926 units, including the underwriter's overallotment option, of
its securities to the public for $7.00 per unit. Each unit consisted of two
shares of the Company's common stock and a warrant to purchase another share of
common stock at $4.67 per share. Proceeds of the offering less underwriting
discounts of approximately $278,000 were approximately $3,277,000. Expenses for
the IPO totaled approximately $190,000, resulting in net proceeds to the Company
of approximately $3,087,000. In connection with the IPO, the Company issued
warrants to purchase 50,783 units to the underwriter at an exercise price of
$8.40.
On February 10, 1995, effective November 1, 1994, the Company acquired
all the outstanding stock of Gilbert Financial Services Inc. (a Florida
corporation) in exchange for 203,428 shares of the Company's common stock.
In May 1995, all of the Company's class a bridge loan warrants ("Class
A Bridge Loan Warrants"), which were registered under the Company's IPO, were
exercised at $2.08 per share, generating additional capital of $748,800 for the
Company.
On June 30, 1995, the Company acquired certain assets in order to
commence a direct mail service business under the name of "Progressive Mailing."
The Company uses direct mail as its main form of advertising and has expanded
its Progressive Mailing operations into an independent business.
MARKET AND STRATEGIC OVERVIEW
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The Company believes that most middle and upper income Americans
require services for preparing income tax returns. Other financial services,
such as brokerage for mutual fund investment and the sale of insurance products,
have historically been supplied by segmented firms, but the Company believes
that the current trend to multiservice firms that provide clients with the
convenience of personalized, "one-stop" financial shopping will enable the
Company to extend the services that it delivers to its existing tax preparation
clients and to attract more clients for its full range of services.
TAX RETURN PREPARATION
The Company prepares federal, state and local income tax returns for
individuals, predominantly in the middle and upper income brackets. The
preparation of a tax return by the Company usually involves a personal meeting
at the office between a prospective client and an employee of the Company. At
the meeting the Company's employee solicits from the client the information on
income and deductions and family status necessary to prepare the client's tax
return. After the meeting, drafts of the client's tax returns are prepared.
After review and final correction by the tax preparer, the returns are delivered
to the client for filing.
The Company employs only two full-time certified public accountants,
and only approximately 7% of the Company's seasonal tax preparers are certified
public accountants or tax attorneys. Most of the Company's tax preparers are,
therefore, limited in the representation that they can provide to clients of the
Company on an audit by the IRS. Ninety-nine percent 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.
In keeping with the trend toward increasingly automated filing of
income tax returns, the Company offers to clients the option of filing their
federal income tax returns electronically. Under this system, the final federal
income tax return is transmitted to the Internal Revenue Service ("IRS") through
a publicly available software package.
Refund Anticipation Loans are also available to the clients of the
Company through arrangements with approved banking institutions. Using this
service, a client is able to receive a check in the amount of his federal
refund, drawn on an approved bank, at the office where he or she had his or her
return prepared. The Company acts only as a facilitator between the client and
the bank in preparing and submitting the loan documentation and receives a fee
for these services payable upon consummation of the loan. The Company has no
liability in connection with these loans. The Company makes no loans, and its
funds are not disbursed in any fashion to reimburse customers.
The Company's business of preparing income tax returns subjects it to
potential civil liabilities under the Internal Revenue Code (the "Code").
Although the Company believes that it complies with all applicable laws and
regulations, no assurance can be given that the Company will never incur any
material fines or penalties.
In addition, the Company does not maintain any professional liability
or malpractice insurance policy. Although the Company complies with all
applicable laws and regulations, no assurance can be given that the Company will
not be subject to professional liability or malpractice suits.
SEASONALITY
The Company's tax preparation business is conducted predominantly in
the months of February, March and April when most individuals prepare their
federal, state and local income tax returns. The Company hires approximately 300
seasonal employees in conjunction with the utilization of its existing
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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. Approximately 75% of the Company's seasonal employees return in the
next year, and the Company uses predominantly advertisements in local newspapers
to recruit the remainder its seasonal work force.
To assist in funding operations during the off season and to facilitate
its plans for expansion, the Company has a credit facility in the form of a line
of credit up to $2,500,000 with State Bank of Long Island. Borrowings under this
line are in the form of short-term notes with interest charged monthly at the
bank's prime lending rate plus 1-1/2% to 1-3/4%.
BROKER/DEALER SUBSIDIARY
JT Securities is registered as a securities broker/dealer under the
Securities Exchange Act of 1934, as amended, and has been a member of the
National Association of Securities Dealers, Inc. ("NASD") since July 1994. In
addition, JT Securities has effected all filings under New York State law to
register as a broker/dealer in New York and Florida. See "DESCRIPTION OF
BUSINESS--Regulation."
JT Securities receives the commission sharing payments from Royal
Alliance (approximately 47% of the total commissions) that are generated from
commissions earned by financial planners providing services at the Company's
offices. Prior to January 1, 1998, three of the Company's officers acted as
registered representatives (each financial planner is a registered
representative -- for an explanation of the role of registered representatives,
see "--Relationship With Registered Representatives of Broker/Dealer" below) of
JT Securities in providing financial planning and brokerage services directly to
a limited number of clients of the Company.
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. JT Securities, however,
will continue to receive the commission sharing payments from Royal Alliance
that are generated from commissions earned by financial planners providing
services at the Company's offices.
Although Royal Alliance is not affiliated with the Company by contract,
ownership, common directors or officers, approximately 90, or 82%, of the
Company's full-year 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, and
they are compensated by Royal Alliance based on approximately 47% of the total
commissions earned on transactions effected for clients of the Company. Almost
all of the registered representatives of Royal Alliance who are affiliated with
the Company through commission sharing agreements work exclusively in connection
with the offices of the Company. For a detailed breakdown of the different
services by the number of employees see "DESCRIPTION OF BUSINESS --Employees".
FINANCIAL PLANNING SERVICES
While preparing tax returns, clients often consider other aspects of
their financial needs, such as insurance, investments and pension and estate
planning. The Company attempts to capitalize on this situation by offering to
every client the opportunity to complete a questionnaire that requests
information on his/her financial situation. These questionnaires are
subsequently reviewed by financial planners (who have entered into commission
sharing agreements with the Company and who are registered representatives of
Royal Alliance) to evaluate if the client may need financial planning services.
If the
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financial planners recommend that these clients be referred to a financial
planner and if the clients agree, the Company introduces such clients of its tax
preparation business to one of the financial planners who are registered
representatives of Royal Alliance and/or authorized agents of insurance
carriers. In approximately 22% of the cases of tax preparation clients referred
to financial planners, the tax preparer and the financial planner/registered
representative are the same person. Of all of the financial planners affiliated
with the Company, approximately 66% also perform tax preparation services as
employees of the Company.
Most middle and upper income individuals require a variety of financial
planning services. If clients seek insurance products in connection with the
creation of a financial plan, they are referred to an employee or affiliated
financial planner of the Company (who may be the tax preparer himself) who is an
authorized agent of an insurance underwriter. If clients seek mutual fund
products or other securities for investment, they are referred to an affiliated
financial planner of the Company (who may be the tax preparer himself) who is a
registered representative of Royal Alliance, an independent securities
broker/dealer. The financial planners affiliated with the Company do not effect
transactions in securities of individual issuers, but rather deal only with
packaged products such as mutual funds and annuities. See "DESCRIPTION OF
BUSINESS--Relationship with Registered Representatives of Broker/Dealer;" and
"--Relationship with Authorized Agents of Insurance Underwriters."
Out of the total number of offices: 34 offices provide predominantly
tax preparation services and have no regular financial planner associated with
them (although financial planners from other offices do work with clients from
all of such 34 offices); and 94 offices provide both tax preparation and regular
financial planning services.
Out of the 94 offices that provide both tax preparation and financial
planning services: 21 of these offices have only one person who provides both
tax preparation and financial planning services; and 73 of these offices have
two or more persons who perform tax preparation and financial planning services.
No office has more than a total of ten tax preparers and financial planners.
The financial planners affiliated with the Company perform all
financial planning services as registered representatives of Royal Alliance.
(For an explanation of the role of registered representatives, see
"--Relationship With Registered Representatives of Broker/Dealer" below.) 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. For further information on the number of employees and
those employees that have entered into commission sharing agreements with the
Company see "DESCRIPTION OF BUSINESS -- Employees."
RELATIONSHIP WITH REGISTERED REPRESENTATIVES OF BROKER/DEALER
The Company's affiliated financial planners are all registered
representatives ("Registered Representatives") of Royal Alliance Associates,
Inc. ("Royal Alliance"), an unaffiliated corporation, which is a registered
securities broker/dealer and a member of the NASD. Registered Representatives
are the general employees 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.
Registered Representatives who work with Royal Alliance are supervised
by Royal Alliance with regard to all regulatory matters. Royal Alliance is
exclusively responsible for all supervision and record keeping in connection
with the Registered Representatives and their activities.
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If clients of the Company inquire about the acquisition or sale of
investment securities, they are directed to one of such Registered
Representatives. Such Registered Representatives are able, through Royal
Alliance, 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.
When a client of the Company requests to meet with a financial planner,
as part of the financial planner's discussion with such client, the financial
planner may initiate a discussion regarding the purchase of securities as part
of the client's overall financial investment plan, but not in regard to a
particular security of an issuer. Ninety-nine percent of the securities
transactions effected by Registered Representatives who are affiliated with 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 do not provide
advice regarding particular securities nor do they transact any investments in
such particular securities except in very limited cases on the specific
initiative and request of a client.
All security transactions are introduced and cleared on a fully
disclosed basis through a correspondent broker that is a member of the New York
Stock Exchange.
For a securities transaction effected through Royal Alliance, Royal
Alliance retains approximately 6% of the total commission, and a majority of the
individual Registered Representatives and JT Securities each receives
approximately 47% of the total commission. Each of the Registered
Representatives except the officers of the Company has entered into an
commission sharing agreement with the Company, which generally provides that a
specified percentage of the commissions earned by the Registered Representative
(generally one-half, or 47% of the total commission) is paid by Royal Alliance
at the direction of such financial planner to JT Securities. All Registered
Representatives have agreements that contain covenants requiring them to
maintain strict confidentiality and to refrain from certain competition with the
Company. Each agreement with a Registered Representative has a duration of no
more than one year from the date of the agreement.
The financial planners are paid their share of securities commissions
directly by Royal Alliance and therefore do not receive compensation either as
employees or independent contractors of the Company in regard to their receipt
of a share of securities commissions. 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").
The Company has no written agreement with Royal Alliance, and either
the Company or Royal Alliance could terminate their relationship at any time.
The Company believes that other broker/dealers, including JT Securities, could
be found to affiliate with and supervise the Registered Representatives if the
Company's relationship with Royal Alliance were terminated.
RELATIONSHIP WITH AUTHORIZED AGENTS OF INSURANCE UNDERWRITERS
Certain of the Company's full-time employees and affiliated financial
planners are authorized agents of insurance underwriters. If clients of the
Company inquire about insurance products, then they are directed to one of such
authorized agents. Such agents are able, through several insurance underwriters,
to sell insurance products at the request of clients and retain a certain
percentage of the commissions earned on such sales. The Company is an authorized
insurance agent under both New York and Florida law. In approximately 22% of the
cases where a tax preparation client of the Company is referred to an insurance
agent, such authorized agent is the same person as the tax preparer working with
such client.
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Each of the insurance agents (except the Company's officers) has
entered into an 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. The agreements also contain
covenants requiring the agent to maintain strict confidentiality and to refrain
from certain competition with the Company. Each agreement with an insurance
agent has a duration of no greater than one year from the date of the agreement.
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. Pursuant
to such agreement, the Company will supply a list of the names and addresses of
its customers for the purpose of the Credit Card Bank's doing a direct mail
solicitation for applications for such credit cards, and the Company will
receive, 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, plus 5% of all
finance charges collected by the Credit Card Bank from holders of such "Gilman &
Ciocia" credit cards. The Company bears no risk of loss from default on any of
the cards issued under this agreement. The Company cannot at this time estimate
the amount of revenues that may result from such agreement, however, the Company
does not anticipate that any material cost will be imposed on the Company in
connection with such agreement.
MARKETING
Most of the Company's clients are repeat clients from prior years. The
majority of clients in each office return to the Company for tax preparation
services during the following years, and the retention rate is approximately
75%. In addition, the Company markets its services principally through direct
mail and promotions.
Direct Mail. Each year prior to the "tax season" when individuals file
federal, state and local income tax returns, the Company sends direct mail
advertisements. The direct mail advertising solicits business principally for
the Company's tax preparation services. A large majority of the Company's new
clients each year are first introduced to the Company through its direct mail
advertising.
Promotions. The Company offers a $50 U.S. Savings Bond to any client
that refers another two clients to the Company. The program has resulted in
approximately 300 new clients per year.
Online. The Company currently has a web site on the Internet:
http://www.gtax.com for income tax and financial planning advice, 10K/Q
information and the latest news releases.
Other Marketing. The Company also prints and distributes brochures and
flyers about its services.
The Company believes that its most promising market for expansion may
lie in areas where Americans and other nationals are migrating. Individuals
usually retain a local tax preparer in connection with their personal tax
returns. When people move, therefore, they usually seek to find a new income tax
preparer. At or shortly after the time that they move, therefore, individuals
are most susceptible to the direct mail advertising of the Company's tax
preparation services. The Company has not conducted any analysis of demographic
data or any formal market surveys.
COMPETITION
The income tax preparation and financial planning services industry is
highly competitive. The
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Company's competitors include companies specializing in income tax preparation
as well as companies that provide general financial services. Many of these
competitors, which include H + R Block, Inc., HD Vest, Inc., Jackson Hewitt Tax
Service, Inc. and Triple Check Income Tax Service, Inc. in the tax preparation
field and many well-known brokerage firms in the financial services field, have
significantly greater financial and other resources than the Company. Although
the Company attempts to restrict such competition contractually as a practical
matter, enforcement of contractual provisions prohibiting small scale
competition by individuals is difficult.
TRADEMARKS
The Company has registered its "Gilman & Ciocia" trademark with the
U.S. Patent and Trademark Office. No assurance can be given that the Company
would be able successfully to defend its trademark if forced to litigate its
enforceability. The Company believes that its trademark "Gilman & Ciocia"
constitutes a valuable marketing factor. If the Company were to lose the use of
such trademark, its sales could be adversely affected.
DIRECT MAIL DIVISION
The Company commenced operations of a direct mail service division in
July 1995 under the name "Progressive Mailing". Progressive Mailing does not
design, create or draft the text for direct mail materials, but does provide
limited consulting services in these areas. The Progressive Mailing division
uses equipment acquired from a liquidated company and is operated by certain
personnel hired from that company.
The Company's principal marketing medium is direct mail solicitation,
and the Company's solicitations constitute the majority of Progressive Mailing's
services. Currently, Progressive Mailing is soliciting business solely through
word of mouth and referrals. The Company has hired a salesperson to help market
its services.
The direct mail business is highly competitive with many large and
small entities competing for business. The principal factors of competition are
timeliness, accurate service and price.
At September 1, 1998, the Company employed twenty nine persons on a
full-time basis in its Progressive Mailing division: one executive person, one
clerical personnel, and nineteen staff personnel.
REGULATION
The Company, as a preparer of federal income tax returns, is subject to
the regulations of the Code and regulations promulgated thereunder. The Code
requires, for example, that tax preparers comply with certain ministerial
requirements with respect to the preparation and filing of tax returns and rules
on the maintenance of taxpayer records. The Code also imposes regulations
relating to the truthfulness of the contents of tax returns, the confidentiality
of taxpayer information, and the proper methods of negotiating taxpayer refund
checks. Penalties for violations are specified in the Code.
To represent a taxpayer before the IRS after the initial audit, an
individual must meet certain
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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
employees of the Company meet such requirements. Most of the full-time employees
of the Company, therefore, are limited in that they may appear as a
representative of a taxpayer only through the stage of an audit examination at
the office of a District Director, and then only upon complying with applicable
regulations.
Tax preparers are prohibited by regulations promulgated by the IRS from
using information on a taxpayer's tax return for certain purposes involved in
the solicitation of other business from such taxpayer without the consent of
such taxpayer. The Company believes that it complies with all applicable IRS
regulations.
Neither the employees of the Company nor its affiliated financial
planners generally give investment advice about particular investments to
clients. Instead, financial planning services involve making clients aware of
the types of vehicles available for savings, investment and planning for
retirement and death, disability and other contingencies. Furthermore, any
advice given by employees of the Company or affiliated financial planners is
incidental to their work in connection with the purchases and sales of mutual
fund shares and other securities. They are registered representatives of a
broker/dealer and work under the supervision of such broker/dealer.
If the Commission were to determine that, prior to the registration of
JT Securities as a securities broker/dealer , the Company was required to be
registered as a broker/dealer, then the Company may be subject to regulatory
action.
The registered representatives themselves are strictly regulated in
their activities as registered representatives of a securities broker/dealer
under the Securities Act of 1934, as amended, and the rules and regulations
promulgated thereunder, state regulation, the rules of the NASD and by the rules
and regulations of the broker/dealer.
JT Securities, is a registered broker/dealer under the Securities
Exchange Act of 1934, as amended, and a member of the NASD, is subject to
detailed rules and regulations, including extensive record keeping requirements,
incumbent upon registered broker/dealers.
JT Securities has not registered as a broker/dealer in any states other
than New York and Florida, although the Company has offices in 11 other states.
The Company does not believe that JT Securities is currently required to so
register. The State of Washington made written inquiries in 1996 regarding
possible requirements for JT Securities to register as a securities
broker/dealer in the State of Washington. The Company responded to such
inquiries and has not received any further communication from the State of
Washington in this regard.
EMPLOYEES
At September 1, 1998, the Company employed 183 persons on a full-time
full-year basis, including the Company's four officers. See "DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS." The Company's full-time
employees include 50 professional tax preparers, 81 clerical and support staff
persons (which includes persons performing clerical work while in training for
other positions), and 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 500
full-time employees, of which approximately 300 of these employees are seasonal
and do only tax preparation. Approximately 75% 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
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a passing grade of an examination given by the Company. See
"BUSINESS--Seasonality."
The Company also is affiliated with approximately 138 financial
planners who 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 do only financial planning,
and the others serve separately as employees of the Company performing tax
preparation, managerial and other services for the Company. Of the total number
of financial planners who have entered into the commission sharing agreements
with the Company, 91 do tax preparation, management and other services for the
Company ("Employee/Planners").
The Company's offices are partially staffed by 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
financial planning affiliates 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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company provides services to its clients at 128 local offices in
fourteen states: Forty three in New York, fifteen in New Jersey, nine in
Arizona, fourteen in Florida, 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 Illinois and one in Georgia. Seven of such
offices opened in January 1998. A majority of the offices are leased in
commercial office buildings. Most of the Company's offices are leased pursuant
to standard form office leases, although ten offices are leased on an oral
month-to-month basis. The leases range in remaining terms from one to seven
years. The Company's rental expense during its fiscal year ended June 30, 1997
was $1,884,768. The Company believes that any of its offices could be replaced
with comparable office space, however location and convenience is an important
factor in marketing the Company's services to its clients. Since the Company
advertises in the geographic area surrounding the office location, the loss of
such a office that is not replaced with a nearby office could adversely affect
the Company's business at that office.
The Company needs less than 1,000 square feet of usable floor space to
operate an office, and its needs can be flexibly met in a variety of real estate
environments. Therefore, the Company believes that its facilities are adequate
for its current needs.
The Company also owns two buildings housing two of its offices, one in
Babylon, New York and the other in Palmer, Massachusetts.
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
attorney's 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
11
<PAGE> 12
Euromarket Advisory, Inc. defaulted under such agreement and provided no
material services to the Company. The Company has denied such demand.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY VOTERS
No matter was submitted during the fourth quarter of the Company's 1997
fiscal year to a vote of security holders.
12
<PAGE> 13
PART II
ITEM 5. MARKET INFORMATION.
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
Company's Common Stock traded on the Nasdaq Small Cap 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>
December 31, 1994 $ 3 3/4 $ 3 1/2
March 31, 1995 $ 4 $ 2 1/4
June 30, 1995 $ 4 1/8 $ 2 1/4
September 30, 1995 $ 5 5/8 $ 3 1/8
December 31, 1995 $ 7 1/2 $ 5 1/4
March 31, 1996 $ 7 7/16 $ 5 1/2
June 30, 1996 $ 7 1/4 $ 5 3/8
September 30, 1996 $ 6 1/2 $ 5 1/4
December 31, 1996 $ 3 1/2 $ 2
March 31, 1997 $ 2 3/16 $ 2 1/16
June 30, 1997 $ 2 1/16 $ 1 15/16
September 30, 1997 $ 5 1/8 $ 4 1/8
December 31, 1997 $ 8 3/8 $ 4 3/8
March 31, 1998 $14 7/8 $ 7
June 30, 1998 $24 1/2 $13 3/4
</TABLE>
From December 1997 to September 1998, the market price of the Common
Stock of the Company has tripled and fallen to approximately its December 1997
range. The Company, however, has no basis for knowing the cause of such
volatility or how long it will continue, and no assurance can be given that the
Company's performance during recent periods is predictive of its future
performance.
As of September 15, 1998, the approximate number of holders of record of
the Common Stock was 263.
The Company has not paid dividends to its shareholders since its
initial public offering and does
13
<PAGE> 14
not plan to pay dividends in the foreseeable future. The Company currently
intends to retain any earnings to finance the growth of the Company.
The Company's NASDAQ symbols are:
<TABLE>
<S> <C>
Common Stock........................... GTAX
Redeemable Warrants.................... GTAX-W
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
GENERAL
Gilman & Ciocia, Inc. (the "Company") is a preparer of federal, state and
local income tax returns for individuals predominantly in middle and upper
income brackets. In addition, 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 making
available affiliated financial planners. These financial planners are registered
representatives of an independent registered securities broker/dealer, Royal
Alliance Associates, Inc. ("Royal Alliance"), and each has agreed to share
commissions with the Company.
More than 99% of the affiliated financial planners are also authorized
agents of insurance underwriters and approximately 2% of the financial planners
are authorized to act as mortgage brokers, and thus the Company also earns
revenues from commissions for acting as an insurance agent and a mortgage
broker.
The Company earns a share of commissions (depending on what service is
provided) from the services that the financial planners provide to the clients
in transactions for securities, insurance and related products.
The Company also has a division operating as a direct mail service.
During its 1997 fiscal year, approximately 40% of the Company's revenues
were earned from tax preparation services; 51% were earned from all financial
planning and related services (with 32% from securities transactions and 19%
from mortgage brokerage, insurance and other related services); and 9% were
earned from direct mail and related services.
Direct mail services have not historically made any material contribution
to the Company's net income. The Company's tax return preparation business and
its financial planning business are closely linked together in that such various
lines of business generally use the same individuals, assets, marketing and
facilities. The Company believes that its tax return preparation business is
inextricably intertwined with, and a necessary adjunct to, its financial
planning activities, 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 four new offices in 1996 (closing four in the
first half of 1996), eight new offices in 1997 and seven new offices in 1998.
PLAN OF OPERATION
Tax Preparation and Financial Planning
14
<PAGE> 15
During the 1996 and 1997 fiscal years, the Company opened 48 new offices,
which represents 40% of all offices at June 30, 1997. New offices attract more
potential tax preparation clients, resulting in increased revenues and
contributing to the Company's growth. In addition, an increase in the clients
for whom the Company prepares tax returns also directly increases the potential
for the Company to earn a share of commissions from financial planning for such
clients. The Company plans to continue its expansion and open new offices during
the next year (although no specific target has been set), recruit successful
financial planners and acquire existing tax preparation practices. The Company
anticipates funding this growth through operating profits and use of its
short-term line of credit, but anticipates that additional funds may be
available through the exercise of outstanding options and warrants because the
sale and/or resale of the common stock underlying such securities is being
registered. However, there can be no assurance that the offering will be
consummated or that any of such options or warrants will be exercised.
During the 1996 and 1997 fiscal year, in connection with the acquisitions
of two practices, the Company bought the building in which the practice had
offices. The Company may purchase other real estate in connection with future
acquisitions, but it has no plans to invest in real estate apart from its other
businesses.
The Company anticipates that opening new offices will increase its
revenues, but will involve a substantial increase in costs. The Company has no
basis to predict whether its new offices will have a material effect on its net
income. The Company believes that its new offices can ultimately be operated
profitably, but expansion may initially reduce the Company's profits or result
in an overall loss in future years.
Direct Mail Division
During the Company's 1997 fiscal year, the Company continued its
operations of a direct mail division in order to control the substantial costs
of advertising its many offices. 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 services. From the first quarter to the second quarter of 1998,
the direct mail division has experienced a 250% increase in revenues due to new
accounts of unrelated parties.
No events or transactions have occurred subsequent to March 31, 1998 and
the Company is not aware of any material trend, that would materially affect an
investor's understanding of the Company's financial condition or its results of
operations.
RESULTS OF OPERATIONS
1997 and 1996 Fiscal Years Compared
The Company's revenues for the fiscal year ended June 30, 1997 were
$24,574,571 as compared to revenues of $21,521,537 for the prior fiscal year.
The increase in revenues for its 1997 fiscal year from its 1996 fiscal year is
attributable to: (1) the Company's opening of eight new offices in January 1997
(the "1997 New Offices") and the acquisition of ten customer lists which
resulted in increased revenues from tax preparation services of $476,518; (2)
continued growth of the existing offices which resulted in increased revenues
from tax preparation services of approximately $1,297,000; and (3) increased
financial planning revenues of approximately $1,780,000 over all offices; offset
partially by (4) a decrease of revenues of approximately $502,000 from its
direct mailing services resulting from the loss of a few customers.
15
<PAGE> 16
The Company's total revenues for the year ended June 30, 1997 consist of
$9,921,967 for tax preparation services, $12,464,284 for financial planning
services and $2,188,320 for direct mailing services. The Company's total
revenues for the year ended June 30, 1996 consist of $8,147,986 for tax
preparation services and $10,683,765 for financial planning services; and
$2,689,786 for direct mailing services.
The consolidated statements of operations for the years ended June 30,
1997 and 1996 have been restated to reflect the total of the commission revenue
received by the Company and of the commissions paid by Royal Alliance directly
to the financial planners (who are registered representatives of Royal Alliance
but are affiliated with the Company) as the Company's revenue from financial
planning services. The resulting increase in commission revenue is offset by an
increase in commission expense equal to the same amount. Accordingly, this
restatement had no effect on the Company's consolidated financial position, net
income (loss) or cash flows.
The growth in the tax preparation segment is primarily attributable to
the additional revenues generated by the 1997 New Offices, the continual growth
of the existing offices, and the increase of production from the tax preparers.
The growth in the financial planning segment is also attributable to the
continual growth of the existing offices and the increase of production from the
acquisition of new financial planners.
The remaining growth in financial planning revenues is a result of the
Company's benefiting from a year of rapidly rising equity security prices in the
marketplace, which induced clients to invest funds with financial planners
affiliated with the Company, generating commission revenues for the Company. Any
reduction in the rate of increase of equity securities' prices in the
marketplace could reduce the increase in investments that the Company's clients
make through financial planners affiliated with the Company, and falling market
prices of securities could result in a reduction that would offset other sources
of growth in the Company's financial planning revenues. The 1997 growth of the
financial planning services was not significantly affected by the opening of the
1997 New Offices. The Company has normally experienced a 6 to 12 month delay
after the opening of a new office before such office generates significant
financial planning revenues.
The Company's operating expenses for the 1997 fiscal year were
$23,283,697 as compared to operating expenses of $20,927,008 for the 1996 fiscal
year. The increase of 11.3% in the Company's operating expenses for its 1997
fiscal year from its 1996 fiscal year was attributable to increases of
$1,381,867 and commissions; $518,333 in general and administrative expenses;
$234,816 in advertising; $381,980 in rent; and $260,454 in depreciation and
amortization; and the absence of any reimbursement of financial planning
expenses ($125,000 in 1996); and offset by a reduction in direct mail costs of
$545,761.
The reasons for the increases in operating expenses are the increase in
financial planning services, the addition of the 1997 New Offices and having a
full year of operating expenses for the 40 net new offices opened in January of
1996.
The increase in salaries and commissions is due to increased tax
preparation salaries and financial planning activities (which generate
commissions that are generally shared between the Company and those affiliated
financial planners that have entered into commission sharing agreements with the
Company). The increase in salaries and commissions pertains to the personnel
working at the 1997 New Offices as well as the commissions that resulted from
increased financial planning activities, which are predominantly the result of
increased investments by clients that resulted in increased commissions.
The increase in depreciation and amortization is due primarily to the
acquisition of ten customer lists for approximately $487,000 and the capital
expenditures of approximately $592,000 made during the Company's 1997 fiscal
year including the purchase of two buildings. The increase in advertising is
primarily due to the 1997 New Offices. The increase in rent is due to
approximately $46,000 for the
16
<PAGE> 17
1997 New Offices, approximately $17,000 for the direct mail division and
approximately $319,000 for existing offices.
The increase of $518,333 in general and administrative expenses from the
Company's 1996 to its 1997 fiscal years resulted from the Company's expansion of
operations. Such increase was primarily the result of the inclusion of six
months of expenses for the eight new offices opened in January 1997, as well as
a full year of expenses for the 40 net new offices opened in January 1996. These
offices generated increases of approximately $15,000 in office supplies, $14,000
in office expenses and $19,000 in telephone charges. In addition, increased
financial planning activities resulted in an increase of approximately $120,000
in clearing fees, and the direct mail division incurred $350,000 of general and
administrative expenses during the Company's 1997 fiscal year.
The decrease in other income of $314,124 or 107% is due to the decrease
in income from the Company's investment in partnership of approximately
$125,000, a decrease in realized gains of approximately $84,000 on the sale of
marketable securities and an increase in interest expense of approximately
$95,000. In July 1995, the Company, together with an officer of the Company and
one of its former officers, formed an investment partnership, which yielded
income of approximately $73,000 during the Company's 1997 fiscal year as
compared to $198,000 for the 1996 fiscal year. Such partnership began
liquidating its investments and distributing its assets to its partners in the
Company's 1997 fiscal year, and is in the process of liquidating its remaining
investments.
The Company's income after provision for income taxes for its 1997 fiscal
year is $875,994 as compared to $534,726 for its 1996 fiscal year. The increase
of 63.8% is primarily attributable to increases in the Company's tax preparation
segment of approximately $396,000 and financial planning segment of
approximately $367,000. These increases are offset by a decrease in the
Company's direct mail division of approximately $68,000 and by a decrease in
other income of approximately $314,000.
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.
LIQUIDITY AND CAPITAL RESOURCES
1997 and 1996 Fiscal Years Compared
The Company's cash flows provided by operating activities was $1,516,445
and 2,621,862 for the years ended June 30, 1997 and 1996, respectively. The
decrease of approximately $1,105,000 is due primarily to a decrease in proceeds
from the sale of marketable securities of approximately $2,154,000, an increase
in prepaid expenses and other current assets of approximately $142,000, a
decrease in accounts payable, accrued expenses and other current liabilities,
and income taxes payable of approximately $566,000. This decrease was offset by
an increase in net income plus non-cash adjustments of approximately $576,000 in
advances to financial planners, a decrease in accounts receivable of
approximately $267,000 and a decrease in security deposits of approximately
$84,000.
Net cash used in investing activities was $1,129,500 and $2,420,386 for
the years ended June 30, 1997 and 1996, respectively. The decrease of
approximately $1,290,000 is primarily due to decreases in capital expenditures
of approximately $308,000, due to a decrease in acquisitions of intangible
assets of approximately $243,000 and a increase in investment in partnership of
$378,000 and by an increase in proceeds from related party transactions of
approximately $246,000. The decrease is offset by an increase in payments of
related parties of approximately $182,000.
Net cash provided by financing activities decreased by $372,808 from
$684,557 to $311,749 due to the acquisition of treasury stock for approximately
$733,000 and a decrease in net proceeds from the
17
<PAGE> 18
issuance of common stock and collections of stock subscriptions totaling
approximately $86,000. The decrease is offset by an increase in net borrowings
of approximately $446,000.
Financial Condition
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
March 31, 1998, the Company had an outstanding principal balance of $1,500,000.
The second credit facility is an installment note in the principal amount of
$1,000,000. The note is payable in 36 equal monthly installments of
approximately $28,000, plus interest at the bank's prime lending rate plus 1
3/4%. The final installment is due December 1999. At March 31, 1998, the note
had an outstanding principal balance amounting to $583,336.
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 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 the nine months ended March 31,1998 and has
restated its weighted-average shares for all prior periods represented.
YEAR 2000 COMPLIANCE
The Company is currently in the process of installing 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 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.
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<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS...................... F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet............................. F-3
Consolidated Statements of Income...................... F-4
Consolidated Statements of Stockholders' Equity........ F-5, F-6
Consolidated Statements of Cash Flows.................. F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................... F-9 - F-23
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no changes in or disagreement with accountants on accounting
and financial disclosure in the last quarter of the Company's fiscal year ended
June 30, 1997. However, on September 9, 1997, the Company dismissed its
principal independent accountants, as disclosed in the Form 8-K that was filed
with the Securities and Exchange Commission on September 16, 1997.
19
<PAGE> 20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER OR
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- ----------
<S> <C> <C> <C>
James Ciocia 41 Chief Executive Officer, 11/81
President and Director
Thomas Povinelli 37 Chief Operating Officer, 11/84
and Director
Kathryn Travis 49 Secretary, Vice President
and Director 11/89
Stephen B. Sacher 38 Chief Financial Officer 1/98
Seth A. Akabas 41 Director 4/95
Louis P. Karol 39 Director 4/95
</TABLE>
James Ciocia, Chief Executive Officer, President and Director
Mr. Ciocia is a principal founder of the Company. He opened his first
office in 1981 and has served in his current capacity since that time. In
addition to serving the company as its Chief Executive Officer, he prepares tax
returns, serves as a life insurance agent and sells life and other insurance
products to clients of the Company. Mr. Ciocia is a Registered Representative of
JT Securities and is a Registered Representative of Royal Alliance. A graduate
of St. John's University with a B.S. degree in accounting, he is a member of the
International Association for Financial Planners.
Thomas Povinelli, Chief Operating Officer, and Director
Mr. Povinelli began his tenure with the Company as an accountant in
1983 and has served as an executive officer since November 1984. In addition to
supervising the opening of all new offices, he prepares tax returns, serves as a
life insurance agent, selling life and other insurance products to clients as
well as effecting transactions in mutual funds shares and other securities. Mr.
Povinelli is a Registered Representative of JT Securities and Royal Alliance. He
graduated from Iona College with a B.S. in accounting.
Kathryn Travis, Secretary, Vice President and Director
Ms. Travis began her career with the Company in 1986 as an accountant
and has served as Vice President and a director since November 1989. She
prepares tax returns and manages the company's Great Neck office. She also
serves as President, a director and a Registered Representative of JT
20
<PAGE> 21
Securities and is a Registered Representative of Royal Alliance. Ms. Travis
graduated from the College of New Rochelle with a B.A. in mathematics.
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
and has received an LLM degree in Taxation from New York University School of
Law. Mr. Karol is a Certified Public Accountant. Mr. Karol is on the Board of
Directors of the Long Island Chapter of the International Association of
Financial Planning.
BOARD OF DIRECTORS
Each director is elected for a period of one year at the Company's
annual meeting of stockholders and serves until his or her successor is duly
elected by the stockholders. Officers are elected by and serve at the will of
the Board of Directors. The Company has a stock option plan committee and an
audit committee of its Board of Directors. The Company has no nominating,
compensation or other committees. The Stock Option Plan Committee administers
the Company's 1993 Joint Incentive and Non-Qualified Stock Option Plan and the
1997 Common Stock and Incentive and Non-Qualified Stock Option Plan of Gilman &
Ciocia, Inc. The audit committee is responsible for carrying out the functions
specified in Section 6 of Schedule E of the NASD by-laws. These functions
include: (i) review of the scope of each audit of the Company, (ii) review, with
the independent auditors, of the Company's accounting practices and policies,
(iii) review, with the independent auditors, of their final report, (iv) review
of the Company's overall accounting and financial controls with internal and
independent auditors, and (v) consultation, as needed, with the independent
auditors.
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<PAGE> 22
REMUNERATION OF OFFICERS AND DIRECTORS
MANAGEMENT
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Fiscal Annual Other Options
Position Year Salary Bonus* Compensation (Shares)
------ ------ ----- ------------ --------
<S> <C> <C> <C> <C> <C>
James Ciocia 1995 $267,200 $163,000 -0- 18,850
Chief Executive 1996 $267,200 $240,000 $30,500(1) -0-
Officer, 1997 $251,200 $240,000 $9,580(2) 10,000
President and Director
Thomas Povinelli 1995 $259,600 $125,000 -0- 18,850
Chief Operating Officer, 1996 $339,300 $145,000 $78,600(3) -0-
and Director 1997 $199,951 $210,000 $ 9,951(4) 10,000
Gary Besmer (9) 1995 $145,100 $ 2,000 -0- 11,310
Vice President and 1996 $168,800 $ 3,000 $19,000(5) -0-
Director 1997 $142,149 $ 1,000 $ 7,149(6) 10,000
Kathryn Travis 1995 $156,300 $ 4,000 -0- 14,170
Secretary, Vice Pres. 1996 $166,200 $ 19,000 $49,300(7) -0-
and Director 1997 $142,149 $ 3,000 $ 7,149(8) 10,000
</TABLE>
* Represents commission earned from non-affiliated entities. 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 $8,100 for health insurance.
(8) Auto expense.
(9) On May 19, 1998 Mr. Besmer announced that he was retiring from the
Company effective immediately.
22
<PAGE> 23
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs
Fiscal Year-End(#) Fiscal Year-End($)
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ---- ------------------------- -----------------------------
<S> <C> <C>
James Ciocia 133,370 / - $279,200 / -
Thomas Povinelli 135,370 / - 279,200 / -
Gary Besmer 85,223 / - 175,772 / -
Kathryn Travis 104,039 / - 214,580 / -
</TABLE>
(1) Based on a year-end fair market value of the underlying securities equal to
$2 1/16.
Messrs. Ciocia, Povinelli and Besmer and Ms. Travis earned commissions
from the sale of securities and insurance products to clients of JT Securities
out of which commissions such individuals compensate JT Securities for clerical
and support services and client references. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
DIRECTORS
Directors of the Company receive no compensation for serving as a
director.
STOCK OPTION PLAN
On September 14, 1993, the Company adopted the Company's 1993 Joint
Incentive and NonQualified Stock Option Plan, as amended October 14, 1993 (the
"Plan"), pursuant to which the Company may grant options to purchase up to an
aggregate of 816,000 shares. Such options may be intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or they may be intended not to qualify under
such Section ("Non-Qualified Options").
The Plan is administered by the committee of two independent directors
of the Board of Directors of the Company, which has authority to determine the
persons to whom the options may be granted, the number of shares of Common Stock
to be covered by each option, the time or times at which the options may be
granted or exercised, whether the options will be Incentive Options or
Non-Qualified Options, and other terms and provisions of the options. The
exercise price of the Incentive Stock Options granted under the Plan may not be
less than the fair market value of a share of Common Stock on the date of grant
(110% of such value if granted to a person owning in excess of ten percent of
the Company's securities). Options granted under the Plan may not have a term
longer than 10 years from the date of grant (five years if granted to a person
owning in excess of ten percent of the Company's securities) and may not be
granted more than ten years from the date of adoption of the Plan.
Non-Qualified Options to purchase 83,604 shares, 83,604 shares, 50,163
shares, and 62,710 shares of Common Stock at the price of $2.60 per share have
been granted under the Plan to James Ciocia, Thomas Povinelli, Gary Besmer and
Kathryn Travis, respectively; Non-Qualified Options to purchase 41,766 shares,
41,766 shares, 25,060 shares, and 31,329 shares of Common Stock at the price of
$3.65 per share have been granted under the Plan to James Ciocia, Thomas
Povinelli, Gary Besmer and Kathryn Travis, respectively; Non-Qualified Options
to purchase 18,850 shares, 18,850 shares, 11,310 shares, and 14,170 shares of
Common Stock at the price of $2.50 per share have been granted under the Plan to
James Ciocia, Thomas Povinelli, Gary Besmer and Kathryn Travis, respectively.
The company has granted Incentive Options to purchase 20,000 shares at $7.00,
20,000 shares at $7.50, 20,000 shares
23
<PAGE> 24
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 629,779
shares and options to purchase 186,221 shares remain to be granted under the
Plan.
On May 19, 1997, the Company adopted the Company's 1997 Common Stock and
Incentive and Non-Qualified Stock Option Plan of Gilman & Ciocia, Inc. (the
"1997 Plan"). Under the 1997 Plan, the Company may issue shares of Common Stock
and grant options to purchase up to an aggregate of 300,000 shares. Such options
may be intended to qualify as "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive
Options"), or they may be intended not to qualify under such Section
("Non-Qualified Options"). No Incentive Options will be issued pursuant to the
1997 Plan until such 1997 Plan is approved by the shareholders of the Company.
The 1997 Plan is administered by the committee of two independent directors
of the Board of Directors of the Company, which has authority to determine the
persons to whom stock is issued, the persons to whom the options may be granted,
the number of shares of Common Stock to be covered by each option, the time or
times at which the options may be granted or exercised, whether the options will
be Incentive Options or Non-Qualified Options, and other terms and provisions of
the options. The exercise price of the Incentive Stock Options granted under the
Plan may not be less than the fair market value of a share of Common Stock on
the date of grant. Options granted under the Plan may not have a term longer
than 10 years from the date of grant and may not be granted more than ten years
from the date of adoption of the Plan.
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 end of each calendar year. The Company anticipates that it will
grant between 50,000 and 100,000 options per year under this program.
INDEMNIFICATION
The Company's Certificate of Incorporation includes a provision that
eliminates or limits the personal financial liability of the Company's
directors, except in situations where there has been a breach of the duty of
loyalty, failure to act in good faith, intentional misconduct or violation of
the law.
In addition, the Company's By-laws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against such persons by reason of serving or having served
as officers, directors or in other capacities, except in relation to matters
with respect to which persons shall be determined to have acted not in good
faith, unlawfully or not in the best interests of the Company. With respect to
matters as to which the Company's officers and directors and others are
determined to be liable for misconduct or negligence in the performance of their
duties, the Company's By-laws provide for indemnification only to the extent
that the Company determines that such person acted in good faith and in a manner
not opposed to the best interests of the Company.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR
PERSONS CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING
24
<PAGE> 25
PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES
AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS
EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth, as of September 1, 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.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
- ------------------- -------------------- ----------
<S> <C> <C>
James Ciocia 1,050,473 (1) 18.4%
17 Folgers Lane
Dix Hills, NY 11746
Thomas Povinelli 1,093,473 (2) 19.1%
3427 Bayfront Place
Baldwin, NY 11510
Gary Besmer 405,580 (3) 7.2%
35 Deer Run
East Islip, NY 11730
Kathryn Travis 368,185 (4) 6.5%
31 Wood Lane
Lattingtown, NY 11560
Seth Akabas 8,966 (5) .2%
245 West 107th Street
New York, NY 10025
Louis Karol 780 .01%
28 Fairview Avenue
East Williston, NY 11596
Steven Gilbert 686,154 (6) 11.4%
2420 Enterprise Road; Suite 100
Clearwater, FL 34623
Stephen Sacher 20,000 (7) .4%
2677 Broadview Drive
Yorktown Heights, NY 10598
All directors and officers
as a group (6 persons) 2,541,877 42.4%
</TABLE>
25
<PAGE> 26
(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.
(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 and 100,000
shares issuable upon exercise of options at $4.75 per share.
(7) Includes 20,000 shares issuable upon exercise of currently
exercisable options at $7.00 per share.
26
<PAGE> 27
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.
Mr. Ciocia earned gross commissions from sales of securities and
insurance products in connection with his work with the Company equal to
approximately $271,000 in the Company's 1997 fiscal year and $250,000 in the
Company's 1996 fiscal year and paid approximately $103,000 and $95,000 in such
years to the Company for clerical, support staff, office space and client
references.
Mr. Povinelli earned gross commissions from sales of securities and
insurance products in connection with his work with the Company equal to
approximately $210,000 in the Company's 1997 fiscal year and $145,000 in the
Company's 1996 fiscal year and paid approximately $80,000 and $55,000 in such
years to the Company for clerical, support staff, office space and client
references.
Mr. Besmer earned gross commissions from sales of securities and
insurance products in connection with his work with the Company equal to
approximately $1,000 in the Company's 1997 fiscal year and $3,000 in the
Company's 1996 fiscal year and paid approximately $500 and $1,000 in such years
to the Company for clerical, support staff, office space and client references.
On May 19, 1998 Mr. Besmer announced that he was retiring from the Company
effective immediately.
Ms. Travis earned gross commissions from sales of securities and
insurance products in connection with her work with the Company equal to
approximately $3,000 in the Company's 1997 fiscal year and $19,000 in the
Company's 1996 fiscal year and paid approximately $1,000 and $7,000 in such
years to the Company for clerical, support staff, office space and client
references.
In 1991, the four principal shareholders, Messrs. Ciocia, Povinelli and
Besmer and Ms. Travis, personally agreed to purchase the Common Stock of a
former stockholder and executed and delivered a promissory note in the original
principal amount of $360,000 in connection with such purchase. From 1991 through
1994, annual payments thereunder, in the amount of approximately $75,000 with
interest, were advanced by the Company, and each shareholder's allocable portion
thereof was deducted from his or her salary that would otherwise be payable by
the Company. In January 1995, the Company paid such former shareholder in full
on behalf of the four principal shareholders. In January and July 1995, the four
principal shareholders agreed to surrender a total of 96,964 shares of Common
Stock in lieu of repayment of such loans advanced by the Company. In such
transactions, such Common Stock was valued at its then current market price.
The four principal shareholders, Messrs. Ciocia, Povinelli and Besmer
and Ms. Travis, personally guaranteed the repayment of the Company's long-term
loan in the amount of $500,000 from State Bank of Long Island as well as the
seasonal loans in the form of lines of credit as described in the Management's
Discussion and Analysis Section. Such shareholders received no consideration for
such guarantees other than their salaries and other compensation.
On July 1, 1995, the Company, Ralph Esposito, who was then its Chief
Financial Officer, Kathryn Travis, a executive officer of the Company, four
individuals who are relatives of the officers and an employee of the Company
formed ATM Partners, LP (the "Partnership"). Such individuals and their initial
investments are as follows: Madeline Esposito, the wife of the former Chief
Financial Officer - $196,000, Anna Saras, the wife of the present Chief
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 and $198,000 from the Partnership for the years ended June
30, 1997 and 1996. During fiscal year 1997 the Partnership began
27
<PAGE> 28
liquidating its investments and distributing its assets to its partners. The
liquidation of the Partnership is expected to be completed during fiscal year
1998.
In November 1995, the four executive officers and Ralph Esposito, then
the Company's chief financial officer, sold options to purchase a total of
65,000 shares at $2.50 per share to Rummco, Ltd., a Cayman Islands company. In
connection with such sale, the Company agreed to consent to such sale and
register shares underlying such options with the registration statement. These
options to purchase shares of common stock were subsequently sold to Rozel
International Holding, Ltd. in an agreement dated June 10, 1996.
The Company holds term loans due from officers/stockholders aggregating
$350,000. These loans are due in fully amortizing biweekly installments
(including interest at 7% per annum) commencing October 3, 1997 through maturity
on June 30, 2000.
In December 1997, the Company loaned $450,000 to two officers
/stockholders. These loans are non-interest bearing loans and have been
repaid by such officers/stockholders in March 1998.
28
<PAGE> 29
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Company's Articles of Incorporation, as
amended, incorporated by reference to the
like numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
3.2 Company's By-Laws, incorporated by reference
to the like numbered exhibit in the
Company's Registration Statement on Form
SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
4.1 Resolution of Designation, Powers,
Preferences and Rights of Series A Preferred
Stock, incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
4.2 Omitted
4.3 Form of Warrant included in Units,
incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
4.4 Form of Underwriter's Warrant, incorporated
by reference to the like numbered exhibit in
the Company's Registration Statement on Form
SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
10.1 Restated and Amended Agreement and Plan of
Merger dated December 23, 1992 among the
Registrant and 15 participating
corporations, incorporated by reference to
the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.2 Asset Sale Agreement dated December 31,
1992, incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.3 Escrow letter regarding certain shares of
Common Stock of the Registrant, incorporated
by reference to the like numbered exhibit in
the Company's Registration Statement on Form
SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
10.4 Omitted.
10.5 Warrant Agreement dated December 12, 1994
between the Registrant and the Warrant
Agent, incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.6 Omitted.
29
<PAGE> 30
10.7 1993 Joint Incentive and NonQualified Stock
Option Plan of the Registrant, incorporated
by reference to the like numbered exhibit in
the Company's Registration Statement on Form
SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
10.8 Documents involved in the repurchase of
shares and settlement with Frank Pasatieri,
a former shareholder of the Registrant,
incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.9 Documents involved in the repurchase of
shares and settlement with Alan Grad, a
former shareholder of the Registrant,
incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.10 Omitted.
10.11 Term-loan Promissory Note to State Bank of
Long Island, incorporated by reference to
the like numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.12 Documents involved in the repurchase of
shares and settlement with Bernard McGee and
Jay Cruice, former shareholders of the
Registrant, incorporated by reference to the
like numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.13 Omitted.
10.14 Form of guaranty of Term-loan Promissory
Note to State Bank of Long Island,
incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.15 Agreement among Registrant and James Ciocia,
Thomas Povinelli, Gary Besmer and Kathryn
Travis regarding the repayment of advances,
incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.16 Underwriting Agreement between the
Registrant and Patterson Travis, Inc.,
incorporated by reference to exhibit number
1.1 in the Company's Registration Statement
on Form SB-2 under the Securities Act of
1933, as amended, File No. 33-70640-NY
10.17 Stock Purchase Agreement dated February 10,
1995 between Registrant and Steven Gilbert,
incorporated by reference to exhibit 99.1 to
the Company's Current Report on Form 8-K,
dated February 10, 1995
10.18 Noncompetition Agreement dated February 10,
1995 between
30
<PAGE> 31
Registrant and Steven Gilbert, incorporated
by reference to exhibit 99.2 to the
Company's Current Report on Form 8-K, dated
February 10, 1995
10.19 Employment Agreement dated February 10, 1995
between Steven Gilbert Financial Corp. and
Steven Gilbert, incorporated by reference to
exhibit 99.3 to the Company's Current Report
on Form 8-K, dated February 10, 1995
10.20 Registration Rights Agreement dated February
10, 1995 between Registrant and Steven
Gilbert, incorporated by reference to
exhibit 99.4 to the Company's Current Report
on Form 8-K, dated February 10, 1995
10.21 Letter Agreement dated April 26, 1995
between and Steven Gilbert, incorporated by
reference to exhibit 10.20 in the Company's
quarterly report on Form 10-Q for the fiscal
quarter ended March 31, 1995
10.22 Joint Venture Agreement dated December 28,
1994 between Midwood Tax Service, Inc. and
Registrant, incorporated by reference to the
like number exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-80627
10.23 Promissory notes delivered by James Ciocia,
Thomas Povinelli, Gary Besmer and Kathryn
Travis in payment for cash value of life
insurance policies held by Registrant on the
lives of such officers, incorporated by
reference to the like numbered exhibit in
the Company's Registration Statement on Form
SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.24 Omitted.
10.25 Omitted.
10.26 Agreements dated November , 1995 among
Rummco, Ltd., five executive officers of
Registrant, and Registrant in connection
with the sale of stock options, incorporated
by reference to the like numbered exhibit in
the Company's Registration Statement on Form
SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.27 Omitted.
10.28 Employment Agreement dated April 10, 1995
between Dominick Riolo and Registrant in
connection with the opening of a new office,
incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-80627
10.29 Employment Agreement dated April 10, 1995
between Gregory Ferone and Registrant in
connection with the opening of a new office,
incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-80627
31
<PAGE> 32
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
11.01 Calculation of Net Income Per Share,
incorporated by reference to the like
numbered exhibit in the Company's
Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, File
No. 33-80627
21 List of Subsidiaries, incorporated by
reference to Exhibit 21 in the Company's
Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1995
23.1 Consent of Arthur Andersen, LLP
32
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this Amendment No.3 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 Amendment No.3 has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ James Ciocia Chief Executive Officer, President September 18, 1998
- ---------------------------------------- and Director
James Ciocia
/s/ Thomas Povinelli Chief Operating Officer September 18, 1998
- ---------------------------------------- and Director
Thomas Povinelli
/s/ Kathryn Travis Secretary, Vice President and Director September 18, 1998
- ----------------------------------------
Kathryn Travis
/s/ Stephen Sacher Chief Financial Officer September 18, 1998
- ----------------------------------------
Stephen Sacher
/s/ Robert Hayes Controller September 18, 1998
- ----------------------------------------
Robert Hayes
/s/ Seth Akabas Director September 18, 1998
- ----------------------------------------
Seth Akabas
/s/ Louis Karol Director September 18, 1998
- ----------------------------------------
Louis Karol
</TABLE>
33
<PAGE> 34
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-4
Consolidated Statements of Income F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-23
</TABLE>
<PAGE> 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gilman & Ciocia, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Gilman & Ciocia,
Inc. and subsidiaries as of June 30, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1997 and 1996 as restated - see Note 2(i). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with 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 referred to above present fairly, in
all material respects, the financial position of Gilman & Ciocia, Inc. and
subsidiaries as of June 30, 1997, and the results of their operations and their
cash flows for the years ended June 30, 1997 and 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
April 3, 1998 (except with respect to
the matter discussed in Note 2(i), as
to which the date is September 15, 1998).
F-3
<PAGE> 36
GILMAN & CIOCIA, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 2,920,489
Marketable securities 49,658
Accounts receivable, net of allowance
for doubtful accounts of $87,500 1,109,535
Receivables from related parties, current portion 373,039
Prepaid expenses and other current assets 451,968
-------------
Total current assets 4,904,689
PROPERTY AND EQUIPMENT, net 1,679,106
Intangible assets, net of accumulated amortization of $468,249 1,147,297
Advances and notes receivable from financial planners, net of current portion 169,239
Receivables from related parties, net of current portion 447,806
Deferred tax assets 27,899
Other assets 649,540
-------------
Total assets $ 9,025,576
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 899,487
Accounts payable 168,210
Accrued expenses and other current liabilities 318,690
Income taxes payable 68,200
-------------
Total current liabilities 1,454,587
-------------
LONG-TERM LIABILITIES:
Long-term borrowings 552,000
-------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value - shares authorized
100,000; none issued and outstanding -
Common stock - $.01 par value - shares authorized
9,000,000; issued and outstanding 5,578,913 55,789
Paid-in capital 6,231,555
Retained earnings 1,593,369
Less- Treasury Stock, at cost; 157,433 shares (638,556)
-------------
7,242,157
Stock subscriptions and accrued interest receivable (223,168)
-------------
Total stockholders' equity 7,018,989
-------------
Total liabilities and stockholders' equity $ 9,025,576
=============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-4
<PAGE> 37
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
(Restated) (Restated)
<S> <C> <C>
REVENUES:
Tax preparation fees $ 9,921,967 $ 8,147,986
Financial planning commissions 12,464,284 10,683,765
Direct mail services 2,188,320 2,689,786
------------ ------------
Total revenues 24,574,571 21,521,537
------------ ------------
OPERATING EXPENSES:
Salaries and commissions 13,083,818 11,701,951
General and administrative expenses 3,572,901 3,054,568
Advertising 2,819,941 2,585,125
Direct mail costs 1,136,347 1,682,108
Rent 1,884,768 1,502,788
Depreciation and amortization 785,922 525,468
Reimbursement of financial planning expenses -- (125,000)
------------ ------------
Total operating expenses 23,283,697 20,927,008
------------ ------------
Operating income 1,290,874 594,529
------------ ------------
OTHER INCOME (EXPENSES):
Income from investment in partnership 73,127 198,165
Interest income 77,162 91,435
Interest expense (201,534) (107,111)
Rental income 16,557 19,180
Realized gain on sale of marketable securities 6,580 91,175
Unrealized gain on marketable securities 6,828 --
------------ ------------
Total other income (expense) (21,280) 292,844
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,269,594 887,373
PROVISION FOR INCOME TAXES 393,600 352,647
------------ ------------
Net income $ 875,994 $ 534,726
============ ============
NET INCOME PER SHARE:
Basic $ .16 $ .10
Diluted $ .16 $ .09
============ ============
WEIGHTED AVERAGE SHARES:
Basic 5,479,611 5,606,804
Diluted 5,572,854 6,168,870
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Stock
Subscriptions
and
Common Stock Additional Retained Accrued Interest
Shares Amount Paid-in Capital Earnings Receivable
------ ------ --------------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, July 1, 1995 5,634,864 $ 56,348 $ 5,815,194 $ 660,838 $(773,980)
Purchase of treasury stock -- -- -- -- 67,590
Retirement of treasury stock (127,558) (1,276) -- (478,189) --
Issuance of common stock 26,307 263 53,063 -- --
Exercise of stock options 10,000 100 23,100 -- --
Compensation recognized in connection
with the issuance of stock options -- -- 232,782 -- --
Repayments of stock subscriptions -- -- -- -- 310,809
Issuance of stock subscriptions 6,969 70 39,930 -- (40,000)
Accrued interest income -- -- -- -- (22,433)
Accrued tax benefit related to exercise
of common stock options -- -- 20,006 -- --
Net income -- -- -- 534,726 --
---------- -------- ----------- ----------- ---------
BALANCE, June 30, 1996 5,550,582 $ 55,505 $ 6,184,075 $ 717,375 $(458,014)
Purchase of treasury stock -- -- -- -- --
Reissuance of treasury stock -- -- (53,093) -- --
Issuance of common stock 28,331 284 100,573 -- --
Repayments of stock subscriptions -- -- -- -- 261,954
Accrued interest income -- -- -- -- (27,108)
Net income -- -- -- 875,994 --
---------- -------- ----------- ----------- ---------
BALANCE, June 30, 1997 5,578,913 $ 55,789 $ 6,231,555 $ 1,593,369 $(223,168)
========== ======== =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stock Stockholder's
Shares Amount Equity
------ ------ ------
<S> <C> <C> <C>
BALANCE, July 1, 1995 116,964 $(411,875) $ 5,346,525
Purchase of treasury stock 10,594 (67,590) --
Retirement of treasury stock (127,558) 479,465 --
Issuance of common stock -- -- 53,326
Exercise of stock options -- -- 23,200
Compensation recognized in connection
with the issuance of stock options -- -- 232,782
Repayments of stock subscriptions -- -- 310,809
Issuance of stock subscriptions -- -- --
Accrued interest income -- -- (22,433)
Accrued tax benefit related to exercise
of common stock options -- -- 20,006
Net income -- -- 534,726
-------- --------- -----------
BALANCE, June 30, 1996 -- $ -- 6,498,941
Purchase of treasury stock 175,900 (733,200) (733,200)
Reissuance of treasury stock (18,467) 94,644 41,551
Issuance of common stock -- -- 100,857
Repayments of stock subscriptions -- -- 261,954
Accrued interest income -- -- (27,108)
Net income -- -- 875,994
-------- --------- -----------
BALANCE, June 30, 1997 157,433 $(638,556) $ 7,018,989
======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 39
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 875,994 $ 534,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensation expense recognized in connection 41,551 232,782
with the reissuance of treasury stock and the issuance
of stock options
Depreciation and amortization 785,922 525,468
Income from investment in partnership (73,127) (198,165)
Deferred tax provision (benefit) 105,686 (133,585)
Compensation expense recognized in connection -- 123,899
with the forgiveness of officers' loans
Gain on sale of marketable securities (6,580) (91,175)
Compensation expense recognized in connection 235,013 79,851
with amortization of advances to financial planners
Provisions for doubtful accounts 41,526 99,175
Interest on stock subscriptions (27,108) (22,433)
Gain on disposal of property and equipment -- (9,000)
Unrealized gain on marketable securities (6,828) --
(Increase) decrease in:
Proceeds from sale of marketable securities 32,580 2,186,925
Accounts receivable (174,375) (441,136)
Advances to financial planners (78,214) (653,768)
Security deposits (16,872) (100,486)
Prepaid expenses and other current assets (115,009) 26,786
Accounts payable, accrued expenses and other (109,312) 461,998
current liabilities
Income taxes payable 5,598 --
----------- -----------
Net cash provided by operating activities 1,516,445 2,621,862
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (592,362) (900,385)
Acquisition of intangible assets (487,442) (730,076)
Investments (150,000) (448,360)
Proceeds from sales of investments 378,009 --
Proceeds from related party transactions 398,545 152,655
Payments to related parties (676,250) (494,220)
----------- -----------
Net cash (used in) investing activities $(1,129,500) $(2,420,386)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 40
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock $ (733,200) $ --
Proceeds from bank and other loans 3,602,000 2,297,222
Payments of bank and other loans (2,859,262) (2,000,000)
Proceeds from sale of common stock 100,857 76,526
and exercise of stock options
Proceeds from stock subscriptions 261,954 310,809
Incurrence of deferred registration costs (60,600) --
----------- -----------
Net cash provided by financing activities 311,749 684,557
----------- -----------
Net increase in cash 698,694 886,033
CASH, beginning of year 2,221,795 1,335,762
----------- -----------
CASH, end of year $ 2,920,489 $ 2,221,795
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for-
Interest $ 196,405 $ 107,184
Income taxes 439,724 449,276
Noncash transactions-
Liquidation of investment in partnership into 68,830 --
marketable securities
Reissuance of treasury stock at fair value 94,644 --
Issuance of common stock in exchange for stock subscriptions
receivable -- 40,000
Acquisition of treasury stock and write-off of stock subscriptions -- 67,590
receivable
Retirement of all outstanding treasury stock -- 479,465
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 41
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND
NATURE OF BUSINESS
Business
Gilman & Ciocia, Inc. and subsidiaries (the "Company"), which is incorporated in
Delaware, provides income tax preparation and financial planning services to
individuals and businesses as well as direct mail services through its
Progressive Mailing Services ("Progressive") division. The Company has three
wholly owned subsidiaries, two of which are inactive. The active subsidiary, JT
Securities, Inc. ("JT"), is a registered broker-dealer and investment advisor,
pursuant to the provisions of the Securities Exchange Act of 1934 and the
Investment Advisors Act of 1940.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of all majority-owned
subsidiaries. All significant intercompany transactions have been eliminated.
The Company's investments in 20% to 50% owned companies in which it has the
ability to exercise significant influence over operating and financial policies
are accounted for on the equity method. Accordingly, the Company's share of the
earnings of these companies is included in consolidated net income.
(b) 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.
(c) Marketable Securities
The Company has classified its short-term investments in debt instruments as
trading securities which are reported at fair value with unrealized gains and
losses included in earnings.
F-9
<PAGE> 42
(d) Advances to Financial Planners
The Company entered into agreements with independent financial planners
("Planners"), which require the Planners to become captive agents of the
Company. In connection therewith, the Company advanced funds to financial
planners. The agreements require the advances to be forgiven over three years as
long as the Planners remain with the Company. As such, all advances are
amortized on a straight-line basis over three years.
(e) 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.
(f) Intangible Assets
Intangible assets represent the costs of $1,615,546 to acquire lists of customer
accounts and related covenants not to compete. Amortization is computed on a
straight-line basis over a period of five years and amounted to $274,613 and
$190,817 for the years ended June 30, 1997 and 1996, respectively.
The Company's operational policy for the assessment and measurement of any
impairment in the value of the intangible assets acquired which is other than
temporary is to evaluate the recoverability and remaining life of the intangible
assets and determine whether the intangible assets should be completely or
partially written-off or the amortization period accelerated. The Company will
recognize an impairment in the value of the intangible assets if the estimated
future operating cash flows of the relevant assets acquired are determined to be
less than their carrying amount. If the Company determines that impairment has
occurred, the measurement of the impairment will be equal to the excess of the
carrying amount of the intangible assets over the amount of the undiscounted
estimated operating cash flows.
During fiscal 1997 and 1996, the Company acquired customer lists and entered
into non-competition agreements for approximately $487,000 and $730,000,
respectively.
(g) Impairment of Long-Lived Assets
During March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of." The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that full recoverability is questionable. Management
evaluates the recoverability of its intangible assets and other long-lived
assets and several factors are used in the valuation including, but not limited
to, management's plans for future operations, recent operating results and
projected cash flows. The Company adopted SFAS No. 121 in fiscal 1997, the
adoption of which did not have any effect on the results of operations or
financial condition.
(h) Deferred Rent
Certain of the Company's lease agreements provide for scheduled rent increases
during the lease term or for rental payments commencing at a date other than
initial occupancy. Provision has
F-10
<PAGE> 43
been made for the excess of operating lease rental expense, computed on a
straight-line basis over the lease term, over cash rentals paid.
(i) Revenue Recognition
The Company recognizes all revenues upon completion of the services associated
with income tax preparation and direct mail services. Commission revenue on
securities transactions are on a trade date basis.
The consolidated statements of operations for the years ended June 30, 1997 and
1996, respectively, have been restated to reflect the total of the commission
revenue received (approximately 47% and the commissions paid by Royal Alliance,
Inc. ("Royal") directly to the financial planners (approximately 53%) as the
Company's revenue from financial planning services. The increase in commission
revenue of $5,502,682 and $5,011,860 for the years ended June 30, 1997 and 1996,
respectively, is offset by an increase in commission expense by the same amount.
Accordingly, this restatement had no effect on the Company's consolidated
financial position, net income (loss) or cash flows.
(j) Advertising
Costs to develop the program 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
program.
(k) Reimbursement of Financial Planning Expenses
Based on an employment agreement between the Company and one of its managers,
the manager was required to reimburse the Company for certain expenses incurred
on behalf of the Company should he fail to achieve certain gross revenue
criteria. Based on these criteria, the Company was entitled to be reimbursed for
$125,000 of these expenses in fiscal 1996. The Company offset the manager's
earnings by this amount in fiscal 1997.
(l) Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS No. 109 "Accounting for Income Taxes." Under SFAS 109, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
estimated tax rates and laws to taxable years in which such differences are
expected to reverse.
(m) Stock-based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation awards to
employees using the intrinsic value method prescribed in Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation costs for stock options
awarded to key employees and directors is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee or director must pay to acquire the stock.
As required, the Company has adopted SFAS No. 123 to account for stock-based
compensation awards to outside consultants. Accordingly, compensation costs for
stock option awards granted to outside consultants 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 9).
F-11
<PAGE> 44
(n) Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash, marketable
securities, accounts receivable, notes receivable, accounts payable and
borrowings, approximated fair value as of June 30, 1997, because of the
relatively short-term maturity of these instruments and their market interest
rates.
(o) Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share." This
statement establishes new standards for computing and presenting earnings per
share (EPS), replacing the presentation of primary EPS with a presentation of
basic EPS. For entities with complex capital structures, the statement requires
the dual presentation of both basic EPS and diluted EPS on the face of the
statement of operations. Under this new standard, basic EPS is computed based on
weighted average shares outstanding and excludes any potential dilution. Diluted
EPS reflects potential dilution from the exercise or conversion of securities
into common stock or from other contracts to issue common stock. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997.
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, 1997 Year Ended June 30, 1996
------------------------ ------------------------
Per Share Per Share
Net Income Shares Amounts Net Income Shares Amounts
---------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 875,994 5,479,611 $ 0.16 $ 534,726 5,606,804 $ 0.10
Dilutive Stock
options & warrants 93,243 562,066
------ -------
Dilutive EPS $ 875,994 5,572,854 $ 0.16 $ 534,726 6,168,870 $ 0.09
========= =========
</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:
Options/Warrants
----------------
Year Ended June 30, 1997 2,026,277
Year Ended June 30, 1996 2,282,277
3. RECEIVABLES FROM RELATED PARTIES
<TABLE>
<CAPTION>
<S> <C>
Notes receivable from officers/stockholders of the Company that are due
in aggregate bi-weekly installments of $2,295 (including interest at
7% per annum) commencing October 3, 1997 through June 30, 2000.
$350,000
Notes receivable of $52,250 and $100,000 from independent contractors/stockholders of 152,250
the Company due on December 18, 1997 and June 19, 1999, respectively. Interest
is charged at 9% and 6% per annum, respectively.
Receivable from stockholder of the Company, due in bi-weekly installments of $3,156
through June 15, 1999. 147,362
Note receivable from stockholder of the Company due on October 9, 1997. Interest is
charged at 8% per annum. 113,989
Other 57,244
--------
820,845
Less- Current portion 373,039
--------
$447,806
========
</TABLE>
F-12
<PAGE> 45
For the years ended June 30, 1997 and 1996, interest income from these
receivables was approximately $10,000 and $13,000, respectively.
4. ADVANCES AND NOTES RECEIVABLE-
FINANCIAL PLANNERS
Advances and notes receivable - financial planners consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Unamortized portion of non-interest bearing advances $ 287,232
to financial planners.
Notes receivable from financial planner due December 4, 1998. Interest
is charged at 6% per annum. 57,500
----------
344,732
Less- Current portion 175,493
----------
$ 169,239
==========
</TABLE>
5. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Buildings $ 402,367
Equipment 2,038,237
Furniture and fixtures 367,484
Leasehold improvements 183,415
----------
2,991,503
Less- Accumulated depreciation and amortization 1,312,397
----------
$1,679,106
==========
</TABLE>
For the years ended June 30, 1997 and 1996, depreciation and amortization
expense from property and equipment was approximately $394,000 and $321,000,
respectively.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Investment in ATM Partners, LP (Note 10) $ 271,870
Security deposits 226,724
Other assets 150,946
----------
$ 649,540
==========
</TABLE>
7. BANK DEBT
Bank debt consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Bank line of credit $ 500,000
Term loan 833,333
Notes payable - other 118,154
----------
1,451,487
Less- Short-term borrowings 899,487
----------
$ 552,000
==========
</TABLE>
F-13
<PAGE> 46
The Company has a bank line of credit which provides for borrowings up to a
maximum amount of $2,500,000 and expires on October 31, 1997. The line of credit
is guaranteed by the four principal stockholders of the Company. At June 30,
1997, the Company had borrowings of $500,000 outstanding under this line of
credit. Interest is charged at the prime rate (8.5% at June 30, 1997) plus 1.5%.
The Company also has a $1,000,000 term loan with the bank which requires monthly
payments of $27,778 plus interest at the prime rate (8.5% at June 30, 1997) plus
1.75% through December 17, 1999. The loan is collateralized by all of the
Company's assets. At June 30, 1997, the Company's outstanding balance under this
loan was $833,333.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under various noncancelable lease agreements for the
rental of office space and equipment through 2002. The lease agreements for
office space contain escalation clauses based principally upon real estate
taxes, building maintenance and utility costs. The following is a schedule by
year of future minimum rental payments required under operating leases:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 1,512,988
1999 1,059,640
2000 723,293
2001 415,111
2002 129,104
--------------
$ 3,840,136
==============
</TABLE>
Professional Liability or Malpractice Insurance
The Company does not maintain any professional liability or malpractice
insurance policy. Although the Company believes it complies with all applicable
laws and regulations, no assurance can be given that the Company will not be
subject to professional liability or malpractice suits.
Clearing Agreements
The Clearing Agreement with the Broker states that JT will assume customer
obligations should a customer of JT default. At June 30, 1997, approximately
$25,000 of cash is held as a deposit requirement by the Broker.
Net Capital Requirements
JT is subject to the SEC's Uniform Net Capital Rule 15c 3-1, which requires the
maintenance of minimum regulatory net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. At June 30, 1997, JT had net capital of $2,007,331, which was $1,982,331 in
excess of its required net capital of $25,000.
F-14
<PAGE> 47
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.
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.
9. STOCKHOLDERS' EQUITY
Warrants
The Company has 507,926 and 50,783 warrants outstanding pertaining to those
issued to the public and the underwriter, respectively, in connection with the
Initial Public Offering in 1994. Each warrant issued to the public grants the
holder the right to purchase one share of common stock at an exercise price of
$4.67 and expires in September 1998. For an exercise price of $8.40 per warrant,
each of the warrants issued to the underwriter gives the holder two shares of
common stock and a warrant to purchase another share of common stock at an
exercise price of $4.67 and expires in September 1999.
Stock Option Agreements
and Stock Option Plan
The Company has granted stock options to employees, directors and consultants
pursuant to individual agreements or to its incentive and non-qualified stock
option plan.
In September 1993, the Company's Board of Directors and Stockholders adopted the
Company's Joint Incentive and NonQualified Stock Option Plan (the "Option
Plan"). The Option Plan provides for the granting, at the discretion of the
Board of Directors, of: (i) options that are intended to qualify as incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees and (ii) options not intended to so qualify to
employees, officers and directors. The total number of shares of common stock
for which options may be granted under the Option Plan is 816,000 shares. The
number of shares granted, prices, terms of exercise, and expiration dates are
determined by the Board of Directors. The Plan will terminate in September 2003.
At June 30, 1997, 420,002 options have been granted and are outstanding under
the Option Plan.
The Company charged earnings for compensation expense of $232,782, for the year
ended June 30, 1996, in connection with the issuance of stock options. There
were no compensatory stock options issued during fiscal 1997.
F-15
<PAGE> 48
The table below summarizes plan and nonplan stock option activity for the past
two years:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding, July 1, 1995 1,110,002 $3.48
Granted 355,000 4.43
Exercised (10,000) 2.00
Canceled (63,000) 3.50
---------
Outstanding, June 30, 1996 1,392,002 3.89
Granted 273,000 2.70
Canceled (299,000) 4.21
---------
Outstanding, June 30, 1997 1,366,002 3.59
=========
Exercisable, June 30, 1997 1,093,002 3.81
=========
</TABLE>
The weighted average grant date fair value of options granted during the year
ended June 30, 1997 is $.16 per option.
Options outstanding and exercisable at June 30, 1997 and related weighted
average exercise price and life information follows:
<TABLE>
<CAPTION>
Fiscal Year Options Outstanding Options Exercisable Remaining
Grant Date Shares Price Shares Price Life (Years)
---------- ------ ----- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
1994 420,002 $2.95 420,009 $2.95 1
1995 405,000 3.34 405,000 3.34 6
1996 268,000 4.88 268,000 4.88 3
1997 273,000 2.70 - - 4
</TABLE>
The Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the employee stock
options. Had compensation cost for the Company's employee stock options been
determined based on the fair value at the grant date for options granted in
fiscal years 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income, as reported $875,994 $534,726
Net income, pro forma 832,418 101,098
Earnings per share, as reported .16 .10
Earnings per share, pro forma .15 .02
</TABLE>
F-16
<PAGE> 49
The pro forma effect on net income for fiscal years 1997 and 1996 does not take
into consideration pro forma compensation expense related to grants made prior
to fiscal year 1996.
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
<S> <C> <C>
Expected life (years) 3
Interest rate 7.00%
Volatility 61.9%
Dividend yield 0%
</TABLE>
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 1995, the Board of Directors resolved to accept 85,930 and 11,034
shares, respectively, of the Company's common stock from four officers in lieu
of repayment of certain loans due to the Company. The shares were valued at the
approximate fair market value of $3.50 per share for an aggregate value of
$339,375. Of the 96,964 shares, 85,930 were returned to treasury stock on August
23, 1995. The remaining 11,034 shares were returned to treasury stock on
September 22, 1995.
During fiscal 1996, the Board of Directors of the Company resolved to cancel and
return all existing shares of the Company's treasury stock to authorized and
unissued shares of common stock.
During fiscal 1997, the Company acquired 175,900 shares of its common stock for
an aggregate cost of $733,200 and reissued 18,467 of these shares to employees
and consultants. The reissuance gave rise to the recognition of compensation
expense in the amount of $41,551 representing the excess of the fair value of
these shares at reissuance over their cost.
Stock Subscriptions and
Accrued Interest Receivable
Stock subscriptions receivable of $223,168 bear interest at a rate of 9% per
annum. For the years ended June 30, 1997 and 1996, the Company recognized
interest income of $27,108 and $35,879, respectively. At June 30, 1997 accrued
interest receivable was $23,518.
The Company is holding in escrow all of the shares of its common stock related
to the stock subscriptions receivable. The shares will be released when the
stock subscriptions receivables are collected.
The following is a schedule by year of principal payments to be received:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C> <C>
1998 $ 90,013
1999 64,387
2000 45,250
--------
$199,650
========
</TABLE>
F-17
<PAGE> 50
10. RELATED PARTY TRANSACTIONS
Investment in ATM Partners, L.P.
In July, 1995, the Company, together with one of its officers and five
individuals who are relatives of the officers of the Company formed ATM
Partners, LP (the "Partnership"). At June 30, 1997 and 1996, the Company had
approximately 41% and 35%, respectively, interest in the Partnership and
recognized income of approximately $73,000 and $198,000 respectively from the
Partnership for the years then ended. Such Partnership began liquidating its
investment and distributing its assets to its partners in the Company's 1997
fiscal year, and the Company expects that the investment of the Partnership will
be fully liquidated during the Company's 1998 fiscal year.
Commissions Earned by Officers
The Company's principal officers/stockholders act as registered representatives
of the Broker and authorized agents of insurance carriers. During fiscal 1997
and 1996, these individuals earned commissions of approximately $302,000
and $402,000 respectively, from sales of securities and insurance products.
Sale of Options by Officers/Stockholders
In November 1995, five executive officers sold options to purchase a total of
65,000 shares of the Company's common stock for $2.50 per option to Rummco, Ltd.
("Rummco"), a Cayman Islands company. In connection with such sale, the Company
agreed to consent to such sale. These options to purchase shares of common stock
were subsequently sold to Rozel International Holding. Ltd. ("Rozel") for $4.50
per option, in an agreement dated June 10, 1996. Both Rummco and Rozel are
independent of the Company.
Forgiveness of Indebtedness
of Officers/Stockholders
The four principal stockholders/officers were indebted to the Company under
demand loans totaling $123,899. The loans were converted to notes receivable
upon the Company's demand for repayment in March 1996, and then subsequently
forgiven and charged to compensation.
11. SEGMENTS OF BUSINESS
The Company is a provider of income tax preparation and financial planing
services to individuals and business in various states across the country.
Direct mail services are provided primarily to businesses and individuals in the
New York metropolitan area.
F-18
<PAGE> 51
The following presents financial information by segment for the years ended June
30, 1997 and 1996:
<TABLE>
<CAPTION>
Tax Financial
Preparation Planning Direct Mail Eliminations Consolidation
----------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Revenues from unaffiliated customers $9,921,967 $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
========== =========== ========== =========== ===========
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>
<TABLE>
<CAPTION>
Tax Financial
Preparation Planning Direct Mail Eliminations Consolidation
----------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996:
Revenues from unaffiliated customers $8,147,986 $10,683,765 $2,689,786 $ - $21,521,537
Intersegment revenues - - 2,000,000 (2,000,000) -
---------- ----------- ---------- ----------- -----------
Total revenues 8,147,986 10,683,765 4,689,786 (2,000,000) 21,521,537
Direct costs 4,260,631 8,064,597 4,429,177 (2,000,000) 14,754,405
Depreciation and amortization 302,304 210,076 13,088 - 525,468
General corporate expenses 3,182,122 2,215,025 249,988 - 5,647,135
---------- ----------- ---------- ----------- -----------
Operating income $ 402,929 $ 194,067 $ (2,467) $ - $ 594,529
========== =========== ========== =========== ===========
Interest expense $ - $ - $ - $ - $ 107,111
========== =========== ========== =========== ===========
Identifiable assets $5,519,630 $ 2,048,485 $ 298,386 $ - $ 7,866,501
========== =========== ========== =========== ===========
Capital expenditures $ 813,750 $ - $ 86,635 $ - $ 900,385
========== =========== ========== =========== ===========
Direct costs consist of the following:
Direct mail costs $ - $ - $1,682,108 $ - $ 1,682,108
Advertising 1,509,001 1,048,628 2,027,496 (2,000,000) 2,585,125
Rent- 831,303 577,685 93,800 - 1,502,788
Salaries and commissions 1,920,327 6,438,284 625,773 - 8,984,384
---------- ----------- ---------- ----------- -----------
Total direct costs $4,260,631 $ 8,064,597 $4,429,177 $(2,000,000) $14,754,405
========== =========== ========== =========== ===========
</TABLE>
Intersegment sales are recognized upon the completion of the services associated
with direct mail services.
F-19
<PAGE> 52
12. TAXES ON INCOME
Provisions for income taxes in the consolidated financial statements consist of
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current:
Federal $378,760 $ 362,297
State and local 66,840 123,935
-------- ---------
Total current 445,600 486,232
-------- ---------
Deferred:
Federal (44,200) (103,483)
State and local (7,800) (30,102)
-------- ---------
Total deferred tax (benefit) (52,000) (133,585)
-------- ---------
$393,600 $ 352,647
======== =========
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Compensation expense recognized for financial reporting purposes in $ 93,200
connection with common stock option grants issued at below
market value
Book amortization of intangibles in excess of tax 129,600
Provision for bad debts 35,200
Provision for deferred rent liability 29,200
Book depreciation in excess of tax (139,823)
Investments accounted for under the equity method (119,478)
---------
$ 27,899
=========
</TABLE>
No valuation allowance has been established against the deferred tax assets
because management believes that all of the deferred tax assets will be
realized.
A reconciliation of the federal statutory rate to the income taxes is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C> <C>
Year ended June 30:
Federal income taxes computed at
statutory rates $ 431,662 34.0% $301,706 34.0%
State and local taxes, net of federal
tax benefit 76,176 6.0 44,225 5.0
Reversal of overaccruals (156,000) (12.3) - -
Other 41,762 (3.3) 6,716 .7
--------- ----- -------- ----
$ 393,600 31.0% $352,647 39.7%
========= ==== ======== ====
</TABLE>
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<RESTATED>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,920,489
<SECURITIES> 49,658
<RECEIVABLES> 1,197,035
<ALLOWANCES> 87,500
<INVENTORY> 0
<CURRENT-ASSETS> 4,904,689
<PP&E> 2,991,503
<DEPRECIATION> 1,312,397
<TOTAL-ASSETS> 9,025,576
<CURRENT-LIABILITIES> 1,454,587
<BONDS> 0
0
0
<COMMON> 55,789
<OTHER-SE> 6,963,200
<TOTAL-LIABILITY-AND-EQUITY> 9,025,576
<SALES> 0
<TOTAL-REVENUES> 24,574,571
<CGS> 0
<TOTAL-COSTS> 23,148,392
<OTHER-EXPENSES> (180,254)
<LOSS-PROVISION> 135,305
<INTEREST-EXPENSE> 201,534
<INCOME-PRETAX> 1,269,594
<INCOME-TAX> 393,600
<INCOME-CONTINUING> 875,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 875,994
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
