U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly report under Section 13 or 15 (d) of the Securities
X Exchange Act of 1934 For the quarterly period ended 03/31/99
- ------
Transition report under Section 13 or 15 (d) of the Securities
- ------ Exchange Act of 1934 (No fee required)
For the transition period from --------- to --------
Commission file number 000-22996
GILMAN & CIOCIA, INC.
(Name of small business issuer in its charter)
Delaware 11-2587324
( State of jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
475 Northern Boulevard, Great Neck, NY 11021
(Address of principal executive offices) (Zip Code)
(516) 482-4860
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all 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
---------- ----------
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 May 13, 1999,
7,388,879 shares of the issuer's common equity were outstanding.
<PAGE>
PART I
ITEM 1. Consolidated Financial Statements. Page
----
Consolidated Balance Sheet as of March 31, 1999 F-1-F-2
Consolidated Statements of Operations for the three and nine-months
Ended March 31, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the nine months
Ended March 31, 1999 F-4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1999 and 1998 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-9
ITEM 2. Management's Discussion and Analysis
Plan of Operation
Over the past three fiscal years, the Company opened 62 new offices, which
represents 46% of all offices at March 31, 1999. During the nine months ended
March 31, 1999, the Company purchased six new tax practices, two of which are
located in Florida and four are located in New York. The Company plans to
continue its tax practice expansion and recruit successful financial planners.
In November, 1998, the Company acquired all of the outstanding stock of
North Ridge Securities Corp.,("North Ridge") a registered securities
broker/dealer and a member of the National Association of Securities Dealers,
Inc., and North Shore Capital Management Corp.,("North Shore"), a company that
supplies management services to North Ridge for $5,250,000 in cash and
short-term notes. The notes have subsequently been paid. The acquired companies
are a full-service financial organization, which provides its clients with a
wide range of financial investment services. The acquisition has been accounted
for by the purchase method. The results of operations of North Shore and North
Ridge have been included in the Company's operations from the date of
acquisition.
In March 1999, the Company completed its acquisition of e1040.com, a tax
preparation web site based in Tempe, Arizona. The Company is considering plans
of making additional capital investments in the site's infrastructure and
launching a major advertising campaign to promote its tax preparation and
financial planning capabilities.
In April 1999, the Company completed the acquisition of all of the issued
and outstanding capital stock of Prime Capital Services, Inc. ("PCS") and Asset
& Financial Planning, ltd.,("AFP"). The Company also incorporated Prime
Financial Services Inc. ("PFS") in Delaware to acquire selected assets of Prime
Financial Services, Inc., a New York corporation. PCS is a registered securities
broker/dealer and a member of the National Association of Securities Dealers,
Inc. AFP provides investment management services. PFS performs management
services for PCS, AFP operates a life insurance and fixed annuity brokerage
business. The Company, issued an aggregate of 751,004 shares as consideration
for the three acquisitions.
2
<PAGE>
The Company has funded its growth from the proceeds of equity offerings,
the proceeds received in October 1998 pursuant to the exercise of the Company's
public and underwriter warrants, operating profits and use of its short-term
line of credit and its revolving credit agreement.
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 by taking 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.
Forward looking information in this report concerning the Company's future
plans, business outlook, projections and similar matters, and statements about
assumptions made or expectations as to future events and conditions are
"forward-looking Statements" as that term is defined in Federal securities laws.
Such forward-looking statements are subject to risks, uncertainties and many
factors that are not predictable and could cause actual results, events, and
conditions to differ materially from those stated in such statements.
Results of Operations
Nine Months ended March 31, 1999 and 1998 Compared
The Company's revenues for the nine months ended March 31, 1999 were
$31,994,678 as compared to revenues of $21,710,413 for the comparable period of
the prior year. This increase was attributable primarily to increased
commissions from increased sales of financial planning services and additional
affiliated financial planners and additional revenues earned from tax
preparation fees.
The Company's total revenues for the nine months ended March 31, 1999
consist of $10,829,435 for tax preparation services, $20,027,735 for financial
planning services, and $1,137,508 for direct mail services. The Company's total
revenues for the nine months ended March 31, 1998 consist of $8,718,884 for tax
preparation services, $11,429,991 for financial planning services and $1,561,538
for direct mail services.
The increase in the Company's financial planning revenues for the nine
months ended March 31,1999 compared to the prior year's period is approximately
75%. The increase in such financial planning revenues is attributable to the
increase of production from new financial planners, increased securities and
insurance transactions attributable to existing financial planners and
additional revenues generated from the acquisition of North Ridge and North
Shore. The increase in the Company's revenues from tax preparation fees for the
nine months ended March 31, 1999 compared to the prior year's period is
approximately 24%. This increase is due to revenues generated from the new tax
offices acquired during the current period, an increase in the average fee per
return and tax returns prepared on the Company's e 1040. com web site.
The Company's operating expenses for the nine months ended March 31, 1999
were $26,430,080 as compared to operating expenses of $18,980,802 for the
comparable period of the prior year. The increase in operating expenses was
attributable to an increase in salaries and commissions in the amount of
$6,423,497, an increase in general and administrative expenses of $553,846, an
increase in advertising expenses of $268,195, an increase in depreciation and
amortization of $235,507 and an increase in rent expense of $203,179. These
increases in operating expenses were offset by a decrease in direct mail costs
of $234,946.
3
<PAGE>
The increase in operating expenses was primarily attributable to the costs
associated with the increase in financial planning commissions.
The increase in salaries and commissions is primarily due to an increase
in commissions payable to financial planners as a result of the increased sales
of financial planning services and the addition of financial planners from the
acquisition of North Ridge and North Shore and additional payroll costs
associated with the increase in the number of returns prepared.
The increase in general and administrative expenses is due primarily to
the Company's expansion of operations pertaining to the tax preparation and
brokerage operations acquired during the nine months ended March 31, 1999.
Advertising costs increased due to expenses associated with the mailing
costs relating to newsletters and financial planning seminars.
The increase in depreciation and amortization expense is due primarily to
the depreciation of new computer equipment and the amortization of additional
intangible assets.
The Company's net income for the nine months ended March 31, 1999 was
$3,244,308 as compared to $1,651,557 for the nine months ended March 31, 1998.
The increase of approximately 96% is primarily due to an increase in the
operating results of both the Company's tax preparation and financial service
businesses.
The Company's business is highly seasonal, with the majority of its revenue
earned in the first four months of the calendar year. The Company does not
consider inflation to be a risk to the cost of doing business in the current or
foreseeable future.
Three Months Ended March 31, 1999 and 1998 Compared
The Company's revenues for the three months ended March 31, 1999 were
$20,137,326 as compared to revenues of $13,097,727 for the comparable period of
the prior year. This increase was attributable primarily to increased
commissions from increased sales of financial planning services and additional
revenues received from tax preparation.
The Company's total revenues for the quarter ended March 31, 1999 consist
of $10,402,562 for tax preparation services, $9,375,196 for financial planning
services, and $359,568 for direct mail services. The Company's total revenues
for the quarter ended March 31, 1998 consist of $8,274,768 for tax preparation
services, $4,697,780 for financial planning services and $125,179 for direct
mail services.
The increase in the Company's financial planning revenues for the quarter
ended March 31, 1999 compared to the prior year's period is approximately 99%.
The increase in such financial planning revenues is attributable to the
production from new financial planners, increased securities and insurance
transactions attributable to existing financial planners and additional revenues
generated from the acquisition of North Ridge and North Shore. The increase in
the Company's revenue from tax preparation fees for the quarter ended March 31,
1999 compared to the comparable period of the prior year is approximately 26%,
predominately due to new tax offices acquired, an increase in the average fee
per return and the tax returns prepared on the Company's e1040. com web site.
The Company's operating expenses for the quarter ended March 31, 1999
were $14,227,927 as compared to operating expenses of $10,120,326 for the
comparable period of the prior year. The increase in operating expenses was
attributable to an increase in salaries and commissions in the amount of
$3,556,123, an increase in
4
<PAGE>
general and administrative expenses of $329,265, an increase in depreciation and
amortization expenses of $208,540, and an increase in rent expense of $182,462.
These increases in operating expenses were offset by a decrease in direct mail
costs of $823 and a decrease in advertising expenses of $167,966.
The increase in operating expenses was primarily attributable to the costs
associated with the increase in financial planning commissions and income tax
returns prepared.
The increase in salaries and commissions is primarily due to an increase
in commissions payable to financial planners as a result of the increased sales
of financial planning services and the addition of financial planners from the
acquisition of North Ridge and North Shore. Payroll costs increased due to the
additional tax preparers during the period necessary to prepare the additional
number of returns.
The increase in general and administrative expenses is due primarily to
the Company's expansion of operations pertaining to the tax preparation and
brokerage operations acquired.
Advertising costs increased due to expenses associated with the mailing
costs relating to newsletters and financial planning seminars.
The Company's net income for the three months ended March 31, 1999 was
$3,442,230 as compared to $1,834,231 for the three months ended March 31, 1998.
The increase of approximately 88% is primarily due to a net increase in overall
operating profits generated from tax preparation fees and financial planning
services.
The Company's business is highly seasonal, with the majority of its revenue
earned in the first four months of the calendar year. The Company does not
consider inflation to be a risk to the cost of doing business in the current or
foreseeable future.
Liquidity and Capital Resources
The Company's revenues have been, and are expected to be, highly seasonal.
As a result, the Company must generate sufficient cash during the tax season, in
addition to its available bank credit facility, to fund its operations.
Operations during the non-tax season are primarily focused on financial planning
services.
The Company's cash flows provided by (used in) operating activities was
$191,082 and $(666,351) for the nine months ended March 31, 1999 and 1998,
respectively. The increase of $857,433 is due primarily to an increase in net
income for the current period and offset by an increase in cash used to acquire
new businesses.
Net cash used in investing activities was $8,851,735 and $741,543 for the
nine months ended March 31, 1999 and 1998, respectively. The increase of
$8,110,192 is primarily due to an increase in cash used to acquire businesses of
$6,331,952, an increase in capital expenditures of $482,275 and an increase in
advances to related parties of $1,200,532.
Net cash provided by financing activities was $ 9,739,863 and $646,975 for
the nine months ended March 31, 1999 and 1998, respectively. The increase in net
cash provided by financing activities of $9,092,888 is primarily due to a net
increase in the proceeds of bank and other loans of $6,268,154 and an increase
in the proceeds from the sale of common stock and the exercise of stock options
and warrants of $2,809,750.
5
<PAGE>
At March 31, 1999, short-term borrowings consist of a $4.5 million line of
credit plus a $3.5 million revolving credit facility of which $2.5 million has
been borrowed. This bank debt is collateralized by significantly all of the
Company's assets and is also guaranteed by three principal shareholders.
During October and November 1998, the Company's public and underwriter
warrants were exercised resulting in gross proceeds of approximately $3,115,000.
The Company believes that it could continue to operate without any
additional financing (other than its seasonal bank loans) during the next 12
months. The Company anticipates that it will not pay dividends on its Common
Stock in the foreseeable future, but will apply any profits to fund the
Company's expansion.
Year 2000 Compliance
The Company's Great Plains accounting software, commission system, and
its' A+ tax preparation software is year 2000 compliant. Since the Company has
recently upgraded its computer software, it does not anticipate any material
additional costs with regard to its year 2000 compliance. The year 2000 issue is
not expected to affect the systems of various entities with which the Company
interacts. However, there can be no assurance that the systems of other
companies on which the Company relies will be timely converted, or that a
failure by another Company's systems to be year 2000 compliant would not have a
material adverse effect on the Company.
PART II
ITEM 1. Legal Proceedings
In April 1998, Texas Capital Securities, Inc. ("Texas Capital") and its
assignee, Harbor Financial, Inc. (Harbor Financial") 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 was to have provided investment banking services to the
Company), as well as attorney's fees and exemplary damages. The Company entered
into a settlement with Texas Capital and Harbor Financial whereby the Company
agreed to issue warrants to purchase 72,250 shares of Common Stock at $5.125 to
Harbor Financial and 12,750 shares of Common Stock to Woodward, Hall & Primm;
and Thomas Povinelli, the Company's Chief Operating Officer, agreed to transfer
1,875 shares of the Company's Common Stock to Woodward, Hall & Primm and 10,625
shares of the Company's Common Stock to Harbor Financial. The Company is to
reimburse Mr. Povinelli for such shares at the market value of the shares
transferred.
In addition, the Company has received a demand letter from Euromarket
Advisory, Inc. demanding the issuance of 150,000 warrants to purchase the
Company's common stock at $5.13 per share, alleged to have been issuable under a
consulting agreement pursuant to which Euromarket Advisory, Inc. was to have
provided consulting services to the Company. The Company believes that
Euromarket Advisory, Inc. defaulted under such agreement and provided no
material services to the Company. The Company has denied such demand.
6
<PAGE>
In August 1998, a legal action was instituted against the Company
pertaining to a wrongful death matter allegedly sustained in a Company
automobile more than ten years ago. The complaint seeks indemnification in the
amount of up to $3.5 million. The allegations in the complaint are based upon a
$1.7 million payment made by the plaintiffs plus an additional $1.8 million
payment for which plaintiffs ultimately may be held liable. An additional action
is currently pending to determine the liability allocation. The Company answered
the complaint by asserting numerous defenses which it believes are meritorious.
The Company is unable to determine at this time the ultimate likelihood of
success of any asserted allegation or defense.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Registrant's Articles of Incorporation, as amended, incorporated by
reference to the like-numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under the Securities Act of
1933, as amended, File No. 33-70640-NY
3.2 Registrant's by-laws, incorporated by reference to the like-numbered
exhibit in the Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File No. 33-70640-NY
10.1 Stock Purchase Agreement dated November 19, 1998 , by and among
Gilman & Ciocia, Inc., Daniel Levy, and Joseph Clinard, incorporated
by reference to Exhibit No. 1 in the Registrations Curent Report on
Form 8-K dated December 7, 1998.
10.2 Stock and Asset Purchase Agreement Dated April 5, 1999, by and among
Gilman & Ciocia, iNc., a Delaware Corporation, Prime Financial
Services, Inc., a Delaware Corporation, Prime Financial Services,
Inc., a New York Corporation, Michael Ryan and Ralph Porpora,
incorporated by reference to Exhibit No. 1 in the Registrations
Current Report on Form 8-K dated April 20, 1999.
10.3 Revolving Credit Agreement Dated March 1, 1999 among Gilman &
Ciocia, Inc., and State Bank of Long Island, European American Bank,
North Shore Capital Management Corp. and Gilman & Ciocia Securities,
Inc.
27 Gilman & Ciocia, Inc. - Financial Data Schedule, Dated March 31,
1999
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated November 19,
1998, amended February 4, 1999 , in connection with the acquisition
of North Ridge Securities Corp. and North Shore Capital Management
Corp.
The Company filed a Current Report on Form 8-K dated April 5, 1999
in connection with the acquisition of Prime Capital Services, Inc.,
Asset & Financial Planning, Ltd., and Prime Financial Services, Inc.
7
<PAGE>
SIGNATURE
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: May 17, 1999
GILMAN & CIOCIA, INC.
By/s/Thomas Povinelli
- ---------------------
Thomas Povinelli
Chief Operating Officer
By/s/Stephen B. Sacher
- ----------------------
Stephen B. Sacher
Chief Financial Officer/
Chief Accounting Officer
8
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
MARCH 31,
1999
(UNAUDITED)
-----------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 2,785,041
MARKETABLE SECURITIES 370,361
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $87,500 8,603,269
RECEIVABLE FROM RELATED PARTIES, CURRENT PORTION 1,802,842
PREPAID EXPENSES AND OTHER CURRENT ASSETS 2,519,785
DEFERRED TAX ASSETS, CURRENT PORTION
54,000
-----------
TOTAL CURRENT ASSETS 16,135,298
-----------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 2,059,854
OF $2,356,350 -----------
OTHER ASSETS:
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION 7,813,377
OF $1,237,474
RECEIVABLES FROM RELATED PARTIES, NET OF CURRENT
PORTION
633,978
DEFERRED TAX ASSETS
191,000
OTHER ASSETS
490,266
-----------
TOTAL OTHER ASSETS 9,128,621
-----------
TOTAL ASSETS $27,323,773
===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31,
1999
(UNAUDITED)
-------------
CURRENT LIABILITIES:
SHORT-TERM BORROWINGS (NOTE 4) $ 7,000,000
DUE TO FORMER OWNERS OF ACQUIRED BUSINESSES 575,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,234,161
INCOME TAXES PAYABLE 2,087,619
------------
TOTAL CURRENT LIABILITIES 11,896,780
------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
LONG TERM DEBT (NOTE 4) --
------------
TOTAL LIABILITIES 11,896,780
------------
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 6,613,082 (MARCH 31, 1999) 66,131
PAID-IN-CAPITAL 9,437,532
RETAINED EARNINGS 6,849,022
------------
16,352,685
LESS- TREASURY STOCK, AT COST: 218,815 SHARES (840,176)
STOCK SUBSCRIPTIONS AND ACCRUED INTEREST RECEIVABLE (156,946)
ACCUMULATED COMPREHENSIVE INCOME:
UNREALIZED GAIN ON MARKETABLE SECURITIES, NET
OF INCOME TAXES 71,430
------------
TOTAL STOCKHOLDERS' EQUITY 15,426,993
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,323,773
============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31 March 31
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
TAX PREPARATION FEES $ 10,402,562 8,274,768 $ 10,829,435 $ 8,718,884
FINANCIAL PLANNING SERVICES 9,375,196 4,697,780 20,027,735 11,429,991
DIRECT MAIL SERVICES 359,568 125,179 1,137,508 1,561,538
------------ ------------ ------------ ------------
TOTAL REVENUES 20,137,326 13,097,727 31,994,678 21,710,413
------------ ------------ ------------ ------------
OPERATING EXPENSES:
SALARIES AND COMMISSIONS 8,942,537 5,386,414 17,091,021 10,667,524
GENERAL AND ADMINISTRATIVE EXPENSES 1,744,920 1,415,655 3,456,289 2,902,443
ADVERTISING 2,313,152 2,481,118 2,819,929 2,551,734
DIRECT MAIL COSTS 183,340 184,163 485,465 720,411
RENT 700,362 517,900 1,732,861 1,529,682
DEPRECIATION AND AMORTIZATION 343,616 135,076 844,515 609,008
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 14,227,927 10,120,326 26,430,080 18,980,802
------------ ------------ ------------ ------------
OPERATING INCOME 5,909,399 2,977,401 5,564,598 2,729,611
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
INTEREST AND INVESTMENT INCOME 11,627 49,633 61,952 67,437
INTEREST EXPENSE (96,301) (78,223) (145,722) (152,679)
OTHER INCOME 5,450 2,700 13,886 40,188
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (79,224) (25,890) (69,884) (45,054)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 5,830,175 2,951,511 5,494,714 2,684,557
PROVISION FOR INCOME TAXES 2,387,945 1,117,280 2,250,406 1,033,000
------------ ------------ ------------ ------------
NET INCOME $ 3,442,230 $ 1,834,231 $ 3,244,308 $ 1,651,557
============ ============ ============ ============
NET INCOME PER SHARE :
BASIC $ 0.54 $ 0.34 $ 0.55 $ 0.31
DILUTED $ 0.48 $ 0.28 $ 0.49 $ 0.28
WEIGHTED AVERAGE COMMON SHARES:
BASIC 6,391,077 5,384,808 5,939,851 5,377,010
DILUTED 7,139,860 6,456,176 6,677,458 5,975,024
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS ACCUMULATED TOTAL
AND ACCRUED OTHER STOCK-
FOR THE NINE MONTHS ENDED COMMON STOCK PAID-IN RETAINED INTEREST COMPREHENSIVE TREASURY STOCK HOLDERS'
March 31, 1999 SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE INCOME SHARES AMOUNT EQUITY
- ------------------------- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1998 5,606,913 $56,069 $6,377,334 $3,604,714 $(148,845) $(86,903) 211,315 $(784,782) $9,017,587
PURCHASE OF TREASURY STOCK 7,500 (55,394) (55,394)
ISSUANCE OF COMMON STOCK
UPON EXERCISE OF
STOCK OPTIONS 278,547 2,785 202,215 205,000
ISSUANCE OF COMMON STOCK
UPON EXERCISE OF
WARRANTS - NET 700,852 7,009 2,633,249 2,640,258
ISSUANCE OF COMMON
STOCK UPON
PURCHASE
ACQUISITION 26,770 268 224,734 225,002
ACCRUED INTEREST INCOME (8,101) (8,101)
COMPREHENSIVE INCOME:
UNREALIZED GAIN ON
MARKETABLE
SECURITIES 158,333 158,333
NET INCOME 3,244,308 3,244,308
---------- ---------- -----------
TOTAL COMPREHENSIVE INCOME 3,244,308 158,333 3,402,641
--------------------------------------------------------------------------------------------------------
BALANCE AT
MARCH 31, 1999 6,613,082 $66,131 $ 9,437,532 $6,849,022 $(156,946) $71,430 218,815 $(840,176)$15,426,993
========================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS
ENDED
MARCH 31,
-----------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $3,244,308 $ 1,651,557
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH AND CASH EQUIVALENTS
PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
COMPENSATION EXPENSE RECOGNIZED
IN CONNECTION WITH THE
ISSUANCE OF STOCK OPTIONS 86,874 47,550
BAD DEBT EXPENSE (100,000)
DEPRECIATION AND AMORTIZATION 844,514 550,068
LOSS FROM INVESTMENT -- (9,379)
LOSS ON SALE OF MARKETABLE SECURITIES -- 16,213
DEFERRED TAX BENEFIT (93,101) (140,000)
UNREALIZED LOSS ON MARKETABLE SECURITIES 2,331 6,692
DEFERRED COMPENSATION EXPENSE 105,001 119,004
INTEREST ON STOCK SUBSCRIPTIONS (8,100) (7,643)
PROCEEDS FROM SALE OF MARKETABLE SECURITIES -- 22,323
(INCREASE) DECREASE IN:
ACCOUNTS RECEIVABLE (5,914,708) (3,960,055)
ADVANCES TO FINANCIAL PLANNERS 5,764 (1,169)
SECURITY DEPOSITS (147,368) (26,397)
PREPAID EXPENSES AND OTHER CURRENT ASSETS (821,609) (795,456)
INCREASE(DECREASE)IN:
ACCOUNTS PAYABLE,ACCRUED EXPENSES, AND
OTHER CURRENT LIABILITIES 2,987,176 1,860,341
---------- ----------
NET CASH AND CASH EQUIVALENTS PROVIDED
BY (USED IN) OPERATING ACTIVITIES 191,082 (666,351)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (1,174,971) (692,696)
ACQUISITION OF INTANGIBLE ASSETS/BUSINESS (1,122,582) (144,176)
ACQUISITION OF NORTH SHORE CAPITAL
MANAGEMENT CORP. AND NORTH
RIDGE SECURITIES CORP.
- NET OF CASH ACQUIRED (5,353,546) --
INVESTMENTS (1,200) (13,858)
REPAYMENTS OF NOTES RECEIVABLE
FROM RELATED PARTIES 1,096 109,187
NOTES TO RELATED PARTIES (1,200,532) --
---------- ----------
NET CASH AND CASH EQUIVALENTS USED
IN INVESTING ACTIVITIES (8,851,735) (741,543)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
ACQUISITION OF TREASURY STOCK (55,395) (146,226)
PROCEEDS FROM BANK AND OTHER LOANS 7,000,000 3,000,000
PROCEEDS FROM EXERCISE OF STOCK
OPTIONS AND WARRANTS 2,845,258 35,508
PAYMENTS OF BANK AND OTHER LOANS (50,000) (2,318,154)
PROCEEDS FROM STOCK SUBSCRIPTIONS -- 75,847
---------- ----------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY FINANCING ACTIVITIES 9,739,863 646,975
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,079,210 (760,919)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,705,831 2,920,489
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,785,041 $2,159,570
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: 1999 1998
---- ----
CASH PAYMENTS FOR THE PERIOD:
INTEREST $ 125,881 $ 152,679
========== ==========
INCOME TAXES $ 411,110 $ 224,235
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING
ACTIVITIES:
DETAILS OF BUSINESS COMBINATIONS:
FAIR VALUE OF ASSETS ACQUIRED $7,845,441 --
LESS:
LIABILITIES ASSUMED (460,584) --
DUE TO FORMER OWNERS OF
ACQUIRED BUSINESSES (575,000) --
STOCK ISSUED (225,002)
---------- ----------
CASH PAID FOR ACQUISITIONS 6,584,855 --
CASH ACQUIRED IN ACQUISITIONS (108,727) --
---------- ----------
NET CASH PAID FOR ACQUISITIONS $6,476,128 --
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
GILMAN & CIOCIA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1999
(Unaudited)
NOTE 1 - BASIS OF FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Gilman & Ciocia,
Inc. and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
The consolidated financial statements and the related notes thereto as of March
31,1999 and for the three months and nine months ended March 31, 1999 and 1998
are presented as unaudited, but in the opinion of management include all
adjustments necessary to present fairly the information set forth therein. These
adjustments consist solely of normal recurring accruals. These interim financial
statements are not necessarily indicative of the results for any future periods.
This Form 10-QSB should be read in conjunction with the Company's Form 10-KSB
for June 30, 1998.
The Company's business is highly seasonal, with a majority of its revenue earned
in the first four months of the calendar year. In preparing financial statements
in conformity with generally accepted accounting principles, management is
required to make estimates and assumptions that effect the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SFAS No. 130 "Reporting Comprehensive Income" establishes rules for the
reporting of comprehensive income and its components. Comprehensive income
consists of net income and unrealized gain/loss on marketable securities and is
presented in the consolidated statement of stockholders' equity. The compliance
with SFAS No. 130 has no impact on total stockholders' equity.
NOTE 2 - BUSINESS COMBINATIONS
In November, 1998, the Company acquired all of the outstanding stock of
North Ridge Securities Corp., ("North Ridge"), a securities broker/dealer, and
North Shore Capital Management Corp., ("North Shore") a company that supplies
management services to North Ridge for $5,250,000 including $1,250,000 in
short-term notes. The notes have subsequently been paid. The acquired business
is a full-service financial organization, which provides its clients with a wide
range of financial investment services. The acquisition has been accounted for
by the purchase method. The results of operations of North Ridge and North Shore
have been included in the Company's results of operations from November, 1998.
F-7
<PAGE>
The schedule below shows the pro forma amounts assuming the business
combination was completed on July 1, 1998:
Pro Forma
Nine Months Ended
March 31, 1999
--------------
Revenues $34,265,221
Income before income taxes 5,399,216
Net Income 3,112,318
Income per share of common stock $ 0.47
===========
NOTE 3 - CONTINGENCIES
In April 1998, an investment banker and its assignee, instituted a suit in the
U.S. District Court in Austin Texas, demanding issuance, collectively, of
100,000 warrants to purchase the Company's common stock at $5.125 per share
(alleged to have been issuable under an investment banking agreement pursuant to
which the investment banker was to have provided investment banking services to
the Company), as well as attorney's fees and exemplary damages. The Company
entered into a settlement with the plaintiffs whereby the Company agreed to
issue warrants to purchase 85,000 shares of Common Stock in the aggregate at $5
1/8 and the Company's Chief Operating Officer, agreed to transfer 12,500 shares
of the Company's Common Stock in the aggregate. The Company is to reimburse its
officer for such shares at the market value of the shares transferred. Should
the shares underlying the 85,000 warrants not be registered by June 4, 1999, the
defendants have 60 days from that date to exchange these warrants for an
additional 31,000 shares of the Company's Common stock. The Company valued this
settlement at $348,000, and included this amount in general and administrative
expenses, net of previous reserves, for the nine months ended March 31, 1999.
In addition, the Company has received a demand letter from a consultant
demanding the issuance of 150,000 warrants to purchase the Company's Common
stock at $5.13 per share, alleged to have been issuable under a consulting
agreement pursuant to which the investment banker was to have provided
consulting services to the Company. The Company believes that the consultant
defaulted under such agreement and provided no material services to the Company.
The Company has denied such demand.
In August 1998, a legal action was instituted against the Company pertaining to
a wrongful death matter allegedly sustained in a Company automobile more than
ten years ago. The complaint seeks indemnification in the amount of up to $3.5
million. The allegations in the complaint are based upon a $1.7 million payment
made by the plaintiffs plus an additional $1.8 million payment for which
plaintiffs ultimately may be held liable. An additional action is currently
pending to determine the liability allocation. The Company answered the
complaint by asserting numerous defenses which it believes are meritorious. The
Company is unable to determine at this time the ultimate likelihood of success
of any asserted allegation or defense.
F-8
<PAGE>
NOTE 4 - CREDIT AGREEMENTS
During the third quarter of fiscal 1999, the Company borrowed $4,500,000 under a
new line of credit. With two banks. The interest rate is at 1 1/2% over prime.
The Company also entered into a revolving credit agreement with two the banks
with interest at prime plus 1 1/2%. At March 31, 1999, the Company had borrows
$2,500,000 of $3,500,000 available under the agreement. The revolving credit
agreement requires that the Company maintain certain minimum net worth ratios
and places certain limitations on dividend payments. Both loan facilities are
guaranteed by three principal shareholders of the Company and collateralized by
significantly all of the Company's assets.
NOTE 5: SUBSEQUENT EVENT
On April 5, 1999 the Company consummated the acquisition of all of the
issued and outstanding capital stock of Prime Capital Services, Inc., a New York
corporation ("PCS"), Asset & Financial Planning, Ltd., a New York corporation
("AFP"), and simultaneously Prime Financial Services, Inc., a Delaware
corporation and a newly-formed and wholly-owned subsidiary of the Company
("PFS"), consummated the acquisition of certain assets of Prime Financial
Services, Inc., a New York corporation ("Oldco"), (collectively, the
"Acquisition"), pursuant to a Stock and Asset Purchase Agreement.
PCS is a registered securities broker/dealer and a member of the National
Association of Securities Dealers, Inc. AFP provides investment management
services. PFS was organized February 17, 1999. PFSI performs management services
for PCS and AFP and operates an insurance brokerage business. The principal
assets acquired by PFS are equipment, furniture and advances to registered
representatives of PCS (the "Representative Advances").
For all the outstanding shares of the common stock of PCS and PFS and for
the assets acquired by PFS (except the Representative Advances), the Company
delivered at the closing of the Acquisition 603,878 shares of the Common stock
of the Company, par value $.01 per share , and placed an additional 147,126
shares of the Common stock in escrow, or total consideration of 751,004 shares
of Common Stock. The amount of Purchase Shares may be adjusted downward, if the
1999 adjusted pre-tax profits of PCS, PFS, and AFP fail to meet certain targets
set forth in the Purchase Agreement. The Common Stock placed in escrow at
Closing shall be released, except to the extent of such adjustment, thirty (30)
days after the final determination of such adjustment. The consideration for the
purchase of the Representative Advances may be reduced to the extent that the
representative Advances are found not to be collectible.
At the Closing, the Company entered into Limited Liability Company
Interest Option Agreement with Oldco granting to the Company an option to
purchase Oldco's 50% limited liability company interest in Healthvest LLC, a
Delaware limited liability company ("Healthvest"), at an exercise price of $1.00
and exercisable any time during a period extending from the Closing to the fifth
anniversary of the Closing. Healthvest markets and sells, pursuant to a joint
marketing agreement, financial services to certain customers of Oldco, PCS,
Henry Schein, Inc. ("Schein") and Henry Schein Financial Services, Inc. who are
in-office healthcare practitioners. Oldco's participation in such joint
marketing agreement was assigned to and assumed by PFS as part of the
Acquisition. Schein is a direct marketer of healthcare products and services to
office-based healthcare practitioners. Schein is the owner of the 50% limited
liability company interest in Healthvest not subject to the Option.
F-9
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