U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
[ ] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the
fiscal year ended June 30, 1999.
{ } Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for
the transition period from ______________ to ______________.
Commission file number 000-22996
GILMAN + CIOCIA, INC.
(Name of small business issuer in its charter)
Delaware 11-2587324
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
1311 Mamaroneck Ave. Suite 130, White Plains, NY 10605
(Address of principal executive offices) (Zip Code)
(914) 397-4829
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: Name of Exchange
Title of each class on which registered
Securities registered under Section 12(g) of the Act:
Common Stock, par value $.01 Per share
(Title of class)
Check whether the issuer: (1) filed reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days. Yes X No__
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. :
State issuer's revenues for its most recent fiscal year. $50,443,406
The aggregate market value of the voting stock held by non-affiliates as of
[September 30, 1999] was $48,666,555 based on a sale price of $11.25.
State the number of shares outstanding of each class of the issuer's classes of
common equity, as of the latest practicable date. As of September 30, 1999,
7,511,059 shares of the issuer's common equity were outstanding.
Transitional Small Business Disclosure Format (check one): Yes__ No X
Page 1 of 39
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Part I
Item 1. DESCRIPTION OF BUSINESS
General
Gilman + Ciocia, Inc. is a corporation that was organized in 1981 under
the laws of the State of New York (together with its wholly owned subsidiaries,
the "Company" or "Gilman + Ciocia(R)" or "GTAX"). The Company was reorganized
under the laws of the State of Delaware in 1993. The Company provides federal,
state and local tax preparation and financial planning services to individuals
predominantly in the middle and upper income brackets. The Company currently has
135 offices operating in 15 states. To complement its tax preparation services,
the Company also provides financial planning services to its tax preparation
customers. These financial planning services include securities brokerage
services and insurance and mortgage agency and finder services. The Company also
operates a direct mail service, which provides advertising and other mail
services for the Company as well as third party customers.
During the Company's fiscal year ended June 30, 1999 ("Fiscal 1999"),
Gilman + Ciocia prepared approximately 120,000 tax returns, which represents an
increase of 26% from the approximately 95,000 tax returns it prepared during its
fiscal year ended June 30, 1998 ("Fiscal 1998"). Also in Fiscal 1999, Gilman +
Ciocia earned $36,137,861 in commissions from financial planning services
provided to its customers, an increase of 118% over the $16,578,032 received
from financial planning services in Fiscal 1998. In Fiscal 1999, approximately
25% of the Company's revenues were from tax preparation services, and
approximately 72% of the Company's revenues were from commissions on financial
planning services. Approximately 3% of the Company's revenues were attributable
to the Company's direct mail service operations.
While preparing tax returns, clients often consider other aspects of
their financial needs, such as insurance, investments, pension and estate
planning. The Company capitalizes on this situation by introducing its tax
clients, if appropriate, to financial planners. The Company provides tax clients
with questionnaires about their financial goals, and the tax clients then have
the opportunity to request the Company's assistance with their financial
planning needs. When the Company is notified, it introduces the client to a
financial planner. In approximately 20% of such cases, the financial planner is
also the tax preparer.
In February 1999, the Company began preparing individual income taxes
online when its newly formed subsidiary e1040.com, Inc. completed the
acquisition of all the assets of an existing online tax preparation business.
Since its purchase, e1040.com has generated 5.6 million web page hits,
representing 373,000 visitors to the e1040.com web site, and has prepared 1,525
tax returns and 4,400 tax extensions.
In July 1999, the Company formed a joint venture corporation,
GTAX/Career Brokerage, Inc. ("GTAX/CB"), with Fiengold & Scott, Inc., a company
engaged in the wholesaling of insurance and annuity products. The Company is the
owner of 50% of the stock of GTAX/CB; Fiengold & Scott, Inc. is the owner of the
remaining 50%. GTAX/CB was formed to become a licensed insurance agent in all
states in which the Company markets insurance and annuity products and to act as
the licensed entity for the sale by the Company of life insurance, long-term
health care insurance, and fixed-annuity products.
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In Fiscal 1999, the Company purchased all of the issued and outstanding
capital stock of Prime Capital Services, Inc. ("Prime") and of North Ridge
Securities Corp. ("North Ridge"), each a registered securities broker/dealer.
The Company terminated its relationship with Royal Alliance Associates, Inc.
("Royal Alliance"), an independent registered broker/dealer, to which previously
the Company had referred its clients for financial planning services. Royal
Alliance had retained approximately six percent (6%) of the total securities
commissions generated by its financial planners to whom the Company had referred
clients. Each of the financial planners to whom a client might be introduced is
now a registered representative ("Registered Representative") of Prime. Each
Registered Representative is also either an employee of the Company, with an
employment agreement calling for a specified payout on commissions to be made by
Prime or an independent contractor with a contractual agreement to share
commissions with Prime in return for the Company's referral of new clients. The
Company and its subsidiaries therefore retain six percent (6%) more of the
securities commissions generated through its referrals than it had in previous
years. The amount of commission earned by the Company depends on the financial
planning services that are sold. Almost all of the financial planners are also
authorized agents of insurance underwriters and mortgage agencies, and the
Company earns revenues from these insurance and mortgage services as well. Each
of North Ridge and Prime has its own clients independent of referrals from
Gilman + Ciocia.
The Company's direct mail service division assembles, packages and
sends direct mail materials of third-party customers as well as the Company's
own marketing materials. This division also provides limited consulting services
in connection with the design, creation and testing of direct mail materials.
Industry Overview
The United States Internal Revenue Service (the "IRS") reported that
approximately 120 million individual 1998 federal income tax returns were filed
in the United States through June 30, 1999. According to the IRS, approximately
one-half of the tax returns filed in the United States each year are completed
by a paid preparer. Among paid preparers, H&R Block, Inc. ("H&R Block")
dominates the low-cost tax preparation business with approximately 8,000 offices
located throughout the United States. According to information released by H&R
Block, H&R Block prepared an aggregate of approximately 16 million United States
tax returns during the 1999 tax season, which represented approximately 13% of
all tax returns filed in the United States. Other than H&R Block, the tax
preparation industry is highly fragmented and includes regional tax preparation
services, accountants, attorneys, small independently owned companies, and
financial service institutions that prepare tax returns as ancillary parts of
their businesses. The ability to compete in this market depends in large part on
the geographical area, specific location of the tax preparation office, local
economic conditions, quality of on-site office management and the ability to
file tax returns electronically with the IRS.
According to data from the National Association of Securities Dealers,
Inc. (the "NASD"), approximately 600,000 registered securities broker/dealers
are registered in the United States, some of which provide financial planning
services similar to those offered by the Company. A large number of these
professionals are affiliated with larger financial industry firms. The remaining
portion of the financial planning industry is highly fragmented with services
provided by certified financial planners, stockbrokers and accountants. The
Company believes that no other large, national tax preparation firm has combined
tax preparation and financial planning services to the same extent as the
Company.
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Tax Return Preparation
Customers. The Company prepares federal, state and local income tax
returns for individuals, predominantly in the middle and upper income brackets.
The Company believes that customers are attracted to the Company's tax
preparation services because they prefer not to file their own tax returns and
are unwilling to pay the fees charged by most accountants and tax attorneys.
Tax Preparation Services. The preparation of a tax return by the
Company generally begins with a personal meeting at a Company office between a
client and an employee of the Company. At the meeting, the Company's employee
solicits from the client the information concerning income, deductions and
family status necessary to prepare the client's tax return. After the meeting,
the employee prepares drafts of the client's tax returns. After review and final
correction by the tax preparer, the returns are delivered to the client for
filing.
E1040.com is an online tax preparation service whereby clients submit
information concerning their income, deductions, family status, etc. over the
Internet to e1040.com's staff who are employees of the Company. These tax
preparers then prepare the client's federal, state and local returns, and then
either file it electronically, or return it to the client for filing.
The Company believes that it offers clients a cost effective tax
preparation service compared to services provided by accountants, attorneys and
independent tax preparers. The Company's volume allows it to provide uniform
service at competitive prices. In addition, as compared to certain of its
competitors that are open only during tax season, most of the Company's offices
are open year round due to the demand for financial planning services, and as a
result, has avoided opening offices especially for tax season and closing them
after the peak period.
Since 1990, the IRS has made electronic filing available throughout the
United States. The IRS has announced its intention to increase the number of tax
returns filed electronically and is currently reviewing various proposals to
encourage the growth of its electronic filing program. The Company has qualified
to participate in the electronic filing program with the IRS and offers clients
the option of filing their federal income tax returns electronically. Under this
system, the final federal income tax return is transmitted to the IRS through a
publicly available software package. As part of its electronic filing program,
Refund Anticipation Loans ("RALs") are also available to 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
(less fees charges by the Company and banking institutions) drawn on an approved
bank, at the office where he or she had his or her return prepared. RALs are
recourse loans secured by the taxpayer's refund. The Company acts only as a
facilitator between the client and the bank in preparing and submitting the loan
documentation and receives a fee for these services payable upon consummation of
the loan. None of the Company's funds are used to finance these loans, and the
Company has no liability for repayment of these loans.
Tax Preparers. The Company's tax preparation business is conducted
predominantly in the months of February, March and April when most individuals
prepare their federal, state and local income tax returns. The Company hires
approximately 500 seasonal employees in conjunction with the utilization of its
existing employees to meet the demand imposed during those months. Almost all of
the Company's professional tax preparers have a college degree or its equivalent
and two years of tax
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preparation experience, and each one is specifically tested and trained by the
Company to meet the required level of expertise to properly prepare tax returns.
A majority of the Company's seasonal employees return in the next year. The
Company generally utilizes advertisements in local newspapers to recruit the
remainder of its seasonal work force.
The Company's tax preparers are generally not certified public
accountants. Therefore, they are limited in the representation that they can
provide to clients of the Company on an audit by the IRS. The Company's tax
preparation business subjects it to potential civil liabilities under the
Internal Revenue Code. Although the Company believes that it complies with all
applicable laws and regulations, no assurance can be given that the Company will
never incur any material fines or penalties. In addition, the Company does not
maintain professional liability or malpractice insurance policies. 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.
Financial Planning
Financial Planning Services. While preparing tax returns, clients often
consider other aspects of their financial needs, such as insurance, investments
and pension and estate planning. To capitalize on this situation, the Company
offers every client the opportunity to complete a questionnaire that requests
information on his/her financial situation. These questionnaires are
subsequently reviewed by financial planners to evaluate whether the client may
need financial planning services. Upon request, the clients are then introduced
to the financial planner. Of all of the financial planners affiliated with the
Company, approximately 17% also perform tax preparation services as employees of
the Company. Approximately 20% of the Company's tax clients also use the
Company's financial planning services.
Most middle and upper income individuals require a variety of financial
planning services. If clients seek insurance products in connection with the
creation of a financial plan, they are referred to a financial planner (who may
also be the tax preparer) who is an authorized agent of an insurance
underwriter. If clients seek mutual fund products or other securities for
investment, they are referred to a financial planner of the Company (who may
also be the tax preparer) who is a Registered Representative of Prime or North
Ridge, Broker Dealer subsidiaries of the Company. See "--Relationship with
Registered Representatives of Broker/Dealer" and "--Relationship with Authorized
Agents of Insurance Underwriters."
The Company does not have financial planners at all of its offices.
Approximately 75% of the Company's offices provide both tax preparation and
regular financial planning services. The remaining Company offices provide
predominantly tax preparation services and have no regular financial planner
associated with them, although financial planners from other offices work with
clients from all of these offices. In the offices that provide both tax
preparation and financial planning services, approximately one-third of these
offices have only one person who provides both tax preparation and financial
planning services. No office has more than a total of ten tax preparers and
financial planners.
Relationship with Registered Representatives of Securities
Broker/Dealer. The financial planners that provide financial planning services
to the Company's clients are Registered Representatives of Prime, which is a
registered securities broker/dealer and member of the NASD. 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.
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Prime supervise the Registered Representatives with regard to all
regulatory matters. In addition to certain mandatory background checks required
by the NASD, the Company also requires that each Registered Representative
respond in writing to a background questionnaire.
If clients of the Company inquire about the acquisition or sale of
investment securities, they are directed to a Registered Representative of
Prime. The Registered Representatives are able to effect transactions in such
securities at the request of clients and retain a certain percentage of the
commissions earned on such transactions. Prime licensed principals in all areas
of the securities business. All security transactions are introduced and cleared
on a fully disclosed basis through a correspondent broker that is a member of
the New York Stock Exchange.
About ninety percent of the securities transactions effected by
Registered Representatives of Prime or North Ridge 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 particular securities, except in very
limited cases on the specific initiative and request of a client.
Each of the Registered Representatives licensed with the Company,
except the officers of the Company, has entered into a commission sharing
agreement with the Company, which generally provides that a specified percentage
of the commissions earned by the Registered Representative (generally fifty
percent (50%) of the total commission) is paid to the Company. All Registered
Representatives have agreements that contain covenants requiring them to
maintain strict confidentiality and to refrain from certain competition with the
Company. Agreements with Registered Representatives generally have a term of no
more than one year.
Approximately 80% of the Company's full-year tax-preparer employees are
also Registered Representatives. Such individuals, who have two separate roles,
divide their time based upon the needs of clients who come to the offices of the
Company in which they work. 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 based on the overall commissions earned on transactions
completed for clients of the Company.
Relationship with Authorized Agents of Insurance Underwriters. Certain
of the Company's full-time employees and financial planners are authorized
agents of insurance underwriters. If clients of the Company inquire about
insurance products, they are directed to one of these authorized agents. These
agents are able, through several insurance underwriters, to sell insurance
products to clients and retain a certain percentage of the commissions earned on
such sales. The Company is an authorized insurance agent under both New York and
Florida law. The Company's 50% owned subsidiary, GTAX/CB Brokerage is an
authorized agent under New York law. In approximately 20% 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.
Each of the insurance agents (except the Company's officers) has
entered into a commission sharing agreement with the Company. Each such
agreement generally provides that a specified percentage of the commissions
earned by the agent are paid to the Company. In the commission sharing
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agreements, the agents also agree to maintain certain Company information as
confidential and not to compete with the Company. Most of the Company's
agreements with insurance agents have terms of no greater than one year.
Credit Cards. The Company entered into a Bankcard Agreement with First
USA Bank (the "Credit Card Bank") for the Credit Card Bank to issue MasterCard
and/or Visa credit cards denominated as "Gilman + Ciocia" credit cards. The
Company supplies a list of the names and addresses of its customers to the
Credit Card Banks that is utilized in direct mail solicitations for credit card
applications. The Company receives, among other consideration, $15.00 for each
"Gilman + Ciocia" credit card issued under a Credit Card Bank marketing plan,
$30.00 for each "Gilman + Ciocia" credit card issued under a Company marketing
plan, plus 5% of all finance charges collected by the Credit Card Bank from
holders of a "Gilman + Ciocia" credit card. The Company bears no risk of loss
from default on any of the credit cards issued under this arrangement.
Broker/Dealer Subsidiaries
North Ridge and Prime (the "B/D Subsidiaries") are each a wholly owned
subsidiary of the Company. Each conducts a securities brokerage business
providing expertise, products, and sales support to its brokers and investment
products and services to its customers.
The B/D Subsidiaries have been able to recruit and retain experienced
and productive brokers who seek to establish and maintain personal relationships
with high net worth individuals. The B/D Subsidiaries generally do not hire
inexperienced brokers or trainees to work as retail brokers. The Company
believes that its performance-based equity incentive compensation has been a key
component in its ability to recruit new brokers. The Company believes that
continuing to add experienced, highly productive brokers is an integral part of
its growth strategy.
In addition to executing transactions, the B/D Subsidiaries provide
services to individual investors, including portfolio strategy, research
services and investment advice, as well as other services such as sales of
restricted securities. Certain of the B/D Subsidiaries' retail brokers exercise
discretionary authority over investment decisions in certain customer accounts.
The B/D Subsidiaries business and the securities industry in general
are subject to extensive regulation in the United States at both the federal and
state levels, as well as by self-regulatory organizations ("SROs").
In the United States, the SEC is the federal agency primarily
responsible for the regulation of broker-dealers and investment advisers doing
business in the United States, and the Board of Governors of the Federal Reserve
System promulgates regulations applicable to securities credit transactions
involving broker-dealers and certain other United States institutions. Each of
the B/D Subsidiaries is registered as a broker-dealer with the SEC. Certain
aspects of broker-dealer regulation have been delegated to securities-industry
SROs, principally the NASD and also the NYSE. These SROs adopt rules (subject to
SEC approval) that govern the industry, and, along with the SEC, conduct
periodic examinations of the B/D Subsidiaries' operations. Securities firms are
also subject to regulation by state securities administrators in those states in
which they conduct business.
Broker-dealers are subject to regulations covering all aspects of the
securities industry, including
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sales practices, trade practices among broker-dealers, capital requirements, the
use and safekeeping of customers funds and securities, record-keeping and
reporting requirements, supervisory and organizational procedures intended to
ensure compliance with securities laws and to prevent unlawful trading on
material nonpublic information, employee-related matters, including
qualification, and licensing of supervisory and sales personnel, limitations on
extensions of credit in securities transactions, clearance and settlement
procedures, requirements for the registration, underwriting, sale and
distribution of securities and rules of the SROs designed to promote high
standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations concerns the relationship between
broker-dealers and their customers. As a result, many aspects of the
relationship between broker-dealers and customers are subject to regulation,
including, in some instances, requirements that brokers make "suitability"
determinations as to certain customer transactions, limitations on the amounts
that may be charged to customers, timing of proprietary trading in relation to
customers trades, and disclosures to customers.
Prime and North Ridge also are subject to "Risk Assessment Rules"
imposed by the SEC. These rules require, among other things, that certain
broker-dealers maintain and preserve certain information, describe risk
management policies, procedures and systems and report on the financial
condition of certain affiliates whose financial and securities activities are
reasonably likely to have a material impact on the broker-dealers' financial and
operational condition.
Additional legislation, changes in rules promulgated by the SEC, state
regulatory authorities or SROs, or changes in the interpretation or enforcement
of existing laws and rules may directly affect the mode of operation and
profitability of broker-dealers. The SEC, SROs and state securities commissions
may conduct administrative proceedings, which can result in censure, fines, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulating
and disciplining broker-dealers is the protection of customers and the
securities markets, rather than the protection of creditors and shareholders of
broker-dealers.
As registered broker-dealers, the B/D Subsidiaries are required to
establish and maintain a system to supervise the activities of their retail
brokers, including their independent contractor offices, and other securities
professionals. The supervisory system must be reasonably designed to achieve
compliance with applicable securities laws and regulations, as well as SRO
rules. The SROs have established minimum requirements for such supervisory
systems; however, each broker-dealer must establish procedures that are
appropriate for the nature of its business operations. Failure to establish and
maintain an adequate supervisory system may result in sanctions imposed by the
SEC or a SRO that could limit the B/D Subsidiaries abilities to conduct their
securities business. Moreover, under federal law, and certain state securities
laws, the B/D Subsidiaries may be held liable for damages resulting from the
unauthorized conduct of their account executives to the extent that the B/D
Subsidiaries have failed to establish and maintain an appropriate supervisory
system.
North Ridge. Approximately ninety percent of the securities
transactions effected by North Ridge's Registered Representatives involve
packaged products, including interests in mutual funds and variable annuities.
The remainder of the securities transactions effected by North Ridge's
Registered Representatives involve corporate equities and bonds and other
securities of operating issuers. Individual stock and bond transactions are
processed through Pershing & Co., the clearing division of Donaldson, Lufkin &
Jenrette, where all accounts are insured for up to $10 million.
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North Ridge receives commissions generated by its financial planners.
As of June 30, 1999 North Ridge employed approximately 80 Registered
Representatives (for an explanation of the role of licensed Representatives,
see"-Relationship with Registered Representatives of Broker/Dealer" above).
North Ridge 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 1990. In
addition, North Ridge has effected all filings under state law to register as a
broker/dealer in Arizona, California, Connecticut, Florida, Georgia, Hawaii,
Idaho, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina,
Ohio, Pennsylvania, Rhode Island, Texas, and Virginia.
Approximately ninety percent of the securities transactions effected by
Prime's Registered Representatives involve packaged products, including
interests in mutual funds and variable annuities. The remainder of the
securities transactions effected by Prime's Registered Representatives involves
corporate equities and bonds and other securities of operating issuers.
Individual stock and bond transactions are processed through National Fidelity
where all accounts are insured for up to $10 million.
Prime receives commissions generated by financial planners who are
Registered Representatives of Prime. As of June 30, 1999, Prime employed
approximately 400 Registered Representatives (for an explanation of the role of
licensed Representatives, see"-RELATIONSHIP WITH REGISTERED REPRESENTATIVES OF
BROKER/DEALER" above).
Prime 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 1986. In addition, Prime
has effected all filings under state law to register as a broker/dealer in every
state.
Insurance Brokerage Joint Venture
GTAX/CB is a joint venture of the Company and Fiengold & Scott, Inc., a
company engaged in the wholesaling of insurance and annuity products in every
state. The Company is the owner of 50% of the stock of GTAX/CB; Fiengold &
Scott, Inc. is the owner of the remaining 50%. GTAX/CB was formed to become a
licensed insurance agent in all states in which the Company markets insurance
and annuity products.
GTAX/CB acts as the Company's licensed entity for the sale of life
insurance and long-term health care insurance in all the states in which GTAX/CB
is licensed and for the sale of fixed annuity products in the state of New York.
GTAX/CB is jointly managed by the Company and Feingold & Scott, Inc. The Company
and its licensed insurance agents receive commissions on the sale of such
insurance products comparable to sales that the Company could place through
third-party insurance brokers. In addition, the Company as 50% owner of GTAX/CB
will receive 50% of dividends paid by GTAX/CB from its net revenues. Such
dividends represent additional income to the Company that it would not receive
if it utilized third-party insurance brokers.
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GTAX/CB's business and the insurance industry in general are subject to
extensive regulation at the state level in the United States. Insurance agents
are subject to regulations covering all aspects of the insurance industry,
including sales practices, record-keeping requirements, qualification and
licensing.
Direct Mail Division
The Company commenced operations of a direct mail service division in
July 1995 under the name "Progressive Mailing." Progressive Mailing does not
design, create or draft the text for direct mail materials, but does provide
limited consulting services in these areas.
The Company's principal marketing medium is direct mail solicitation,
and the Company's solicitations constitute the majority of Progressive Mailing's
services. Currently, Progressive Mailing is also soliciting business through
referrals and an employee.
The direct mail business is highly competitive with many large and
small entities competing for business. The principal competitive factors are
timeliness, accurate service and price.
At September 30, 1999, the Company employed 19 people on a full-time
basis in its Progressive Mailing division.
Marketing
The Company markets its services principally through direct mail,
promotions, and seminars. The majority of clients in each office return to the
Company for tax preparation services during the following years. The Company
estimates that in Fiscal 1999, the client retention rate was approximately 75%.
Older offices tend to have higher retention rates than new offices.
Direct Mail. Each year prior to and during the "tax season" when
individuals file federal, state and local income tax returns, the Company sends
direct mail advertisements to each residence in the area surrounding the
Company's offices. The direct mail advertising solicits business principally for
the Company's tax preparation services. A large majority of the Company's new
clients each year are first introduced to the Company through its direct mail
advertising.
Promotions. The Company offers a $50 U.S. Savings Bond to any client
that refers another two clients to the Company. In Fiscal 1998 and Fiscal 1999,
the program resulted in approximately 500 new clients per year.
Seminars. The Company supports its Registered Representatives by
advertising their local financial planning seminars. At these seminars,
prospective new clients can learn about a wide variety of investment products
and tax planning opportunities.
Online. The Company currently has a web site on the Internet at
http://www.e1040.com for income tax and financial planning advice and Company
information, including financial information and the latest news releases. For
the 1999 tax season, the Company advertised e1040.com with paid links and banner
advertisements on the following web sites: www.irs.com; www.sidewalk.com;
www.lycos.com; www.yahoo.com; www.snap.com; and www.planetdirect.com.
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Other Marketing. The Company also prints and distributes brochures,
flyers and newsletters about its services.
The Company believes that its most promising market for in-office tax
preparation expansion may lie in areas of high/above average population growth.
Individuals usually retain a local tax preparer in connection with their
individual tax returns. When people move, therefore, they usually seek to find a
new income tax preparer. At or shortly after the time that they move, therefore,
individuals are most susceptible to the direct mail advertising of the Company's
tax preparation services. The Company has not conducted any analysis of
demographic data or any formal market surveys.
Competition
The income tax preparation and financial planning services industry is
highly competitive. The Company's competitors include companies specializing in
income tax preparation as well as companies that provide general financial
services. Many of these competitors, including H&R Block in the tax preparation
field and many well-known brokerage firms in the financial services field have
significantly greater financial and other resources than the Company. The
Company's on-line tax preparation competitors during the 1999-tax season were
Intuit and Secure Tax which have since combined their operations. The Company
believes that the primary elements of competition are convenience, location,
local economic conditions, quality of on-site management, quality of service,
price, and with respect to on-line operations, effective advertising campaigns
and ease of service. There is no assurance that the Company will be able to
compete successfully with larger and more established companies.
In addition, the Company may suffer from competition from departing
employees and financial planners. Although the Company attempts to restrict such
competition contractually, as a practical matter, enforcement of contractual
provisions prohibiting small-scale competition by individuals is difficult. In
addition, the Company depends on the availability of employees willing to work
for a period of approximately three months for relatively low hourly wages, and
minimal benefits. The Company's success in managing the expansion of its
business depends in large part upon its ability to hire, train, and supervise
seasonal personnel. If this labor pool is reduced or if the Company is required
to provide its employees higher wages or more extensive and costly benefits, due
to competitive reasons, the expenses associated with the Company's operations
could be substantially increased without the Company's receiving offsetting
increases in revenues.
Trademarks
The Company has registered its "Gilman + Ciocia" trademark and has
applied for registration of its "e1040.com" trademark with the U.S. Patent and
Trademark Office. There is no assurance that the Company would be able
successfully to defend its trademarks if forced to litigate their
enforceability. The Company believes that its trademarks "Gilman + Ciocia" and
"e1040.com" constitute valuable marketing factors. If the Company were to lose
the use of such trademarks, its sales could be adversely affected.
<PAGE>
Regulation
The Company, as a preparer of federal income tax returns, is subject to
civil liabilities for violations of the Internal Revenue Code or other
regulations of the IRS. The Internal Revenue Code requires, for example, that
tax preparers comply with certain ministerial requirements with respect to the
preparation and filing of tax returns and rules on the maintenance of taxpayer
records. The Internal Revenue Code also imposes regulations relating to the
truthfulness of the contents of tax returns, the confidentiality of taxpayer
information, and the proper methods of negotiating taxpayer refund checks.
To represent a taxpayer before the IRS after the initial audit, an
individual must meet certain requirements. Only an attorney, a certified public
accountant or a person specifically enrolled to practice before the IRS can
represent a taxpayer in such circumstances. None of the full-year employees and
only several of the seasonal employees of the Company meet such requirements.
Most of the Company employees are limited to representing a taxpayer only
through the stage of an audit examination at the office of a District Director,
and then only upon complying with applicable regulations.
The IRS prohibits tax preparers 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.
The Registered Representatives themselves are strictly regulated in
their activities as Registered Representatives of a broker/dealer under the
Exchange Act, state regulation, the rules of the NASD and by the rules and
regulations of the broker/dealer.
Prime and North Ridge are registered broker/dealers: Prime is
registered in every state and North Ridge is registered in every state it does
business. Gilman + Ciocia has not registered as a broker/dealer in any states
and does not believe that it is currently required to so register. However, The
State of Washington made written inquiries in 1996 regarding possible
requirements for it to register as a securities broker/dealer in the State of
Washington. The Company responded to such inquiries and has not received any
further communication from the State of Washington in this regard.
The Company is the Respondent of a Summary Order to Cease and Desist
from the Securities Commissioner of the State of Maryland ordering the Company
to cease and desist from holding itself out as offering "financial planning"
services and from advertising that "financial planning" services are available
at its offices until the Company registers as an investment advisor. This order
arose not because the company was itself acting as a financial planner --
because all financial planning in the Company's offices is performed by
registered representatives of Prime or North Ridge, which have made all
appropriate registrations -- but because under Maryland law, no entity can use
the words "financial planner" to promote its business without registering as an
investment advisor. The Company does advertise that financial planning services
are available at its offices. The Company has agreed with the Maryland
Securities Commissioner to register as an investment advisor and to reimburse
the State of Maryland for the costs of its proceeding in the amount of $5,000.
<PAGE>
Gilman + Ciocia registered with the Securities and Exchange Commission
as an investment advisor in October 1999.
Employees
As of October 1, 1999, the Company employed 398 persons on a full-time
full-year basis, including the Company's four officers. The Company's full-time
employees include 50 professional tax preparers, 180 financial planners, 81
clerical and support staff persons (which include persons performing clerical
work while in training for other positions), 23 administrative personnel (who
include the Company's executive officers), 19 employees who are part of the
Company's direct mail services division and 45 individuals who are employed by
the Company's broker/dealer subsidiaries. During peak season the Company employs
approximately 700 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
a passing grade on an examination given by the Company.
The Company also is affiliated with approximately 400 independent
financial planners who have entered into commission sharing agreements with one
of the Company's two broker dealer subsidiaries.
Risk Factors
This Form 10-KSB contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this Form 10-KSB, the
words "anticipate," "believe," "estimate," "expect" and similar expressions, as
they relate to the Company or its management, are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed below.
Risk of Acquiring Broker/Dealers and Expanding into Financial Planning.
The Company plans to continue to expand into the area of financial planning,
both through the acquisition of independent securities broker/dealers and by
recruiting financial planners. The Company's continued revenue growth will in
large part depend upon successful integration and continued profitability of the
broker/dealers acquired. The Company's growth will also depend on the successful
operation of independent financial planners who are recruited to join the
Company. The financial planning segment of the Company's business has generated
an increasing portion of the Company's revenues during the past few years, and
if such segment does not continue to be successful, the Company's rate of growth
may decrease.
Risk of Acquisition of Small Tax Preparation Practices. As part of its
strategy, the Company intends to pursue the acquisition of tax preparation
practices. The success of the Company will in part depend upon the successful
operation of the practices acquired and the integration of the acquired
businesses into the Company. A rapid expansion of offices that do not become
profitable would reduce the Company's net income and could depress future
operating results. If the acquired companies do not perform as expected or the
Company can not effectively integrate the acquired companies, the Company's
operating results could be materially adversely affected.
<PAGE>
Risk of Opening New Offices. In order to open new offices, the Company
incurs significant expenses to purchase furniture, equipment and supplies. The
Company has found that a new office usually suffers a loss in its first year of
operation, shows no material profit or loss in its second year of operation and
does not attain profitability, if ever, until its third year of operation.
Therefore, the Company's operating results could be materially adversely
affected in any year that the Company opens a significant number of new offices.
Seasonality. The third fiscal quarter during tax season is the
Company's strongest. The Company has significantly reduced earnings during the
remainder of the year. From July 1st to December 31st each year, the Company
generally requires substantial financing to fund operations until cash flows
from the upcoming tax season materialize. If the Company was not able to secure
such financing or if such financing was not available on terms favorable to the
Company, the Company's operating results could be materially adversely affected,
and the Company would have to curtail its operations.
Highly Competitive Nature of the Tax Preparation and Financial Planning
Services Industry. The income tax preparation and financial planning services
industries are highly competitive. The Company's competitors include companies
specializing in income tax preparation as well as companies that provide general
financial services. The Company's principal competitor is H+R Block, Inc. in the
tax preparation field and many well-known national brokerage and insurance firms
in the financial services field. Many of these competitors have larger market
shares and significantly greater financial and other resources than the Company.
The Company may not be able to compete successfully with such competitors.
Competition could cause the Company to lose existing clients, slow the growth
rate of new clients and increase advertising expenditures, all of which could
have a material adverse effect on the Company's business or operating results.
Potential Competition from Departing Employees and Financial Planners.
Departing employees and financial planners may compete with the Company.
Although the Company attempts to restrict such competition contractually, as a
practical matter, enforcement of contractual provisions prohibiting small-scale
competition by individuals is difficult. In the past, departing employees and
financial planners have competed with the Company. They have the advantage of
knowing the Company's methods and, in some cases, having access to the Company's
clients. No assurance can be given that the Company will be able to retain its
most important employees and financial planners or that the Company will be able
to prevent competition from them or successfully compete against them. If a
substantial amount of such competition occurs, the corresponding reduction of
revenue may materially adversely affect the Company's operating results.
Dependence on Key Personnel. The Company believes that its ability to
successfully implement its business strategy and operate profitably depends on
the continued employment of James Ciocia, its President, Thomas Povinelli, its
Chief Operating Officer, Stephen B. Sacher, its Chief Financial Officer, Kathryn
Travis, its Secretary, Michael Ryan, the President of its Prime subsidiary, and
Daniel Levy, the President of its North Ridge subsidiary. If any of these
individuals become unable or unwilling to continue in his or her present
position, the Company's business and financial results could be materially
adversely affected.
Potential Liability under the Internal Revenue Code. The Company's
business of preparing tax returns subjects it to potential civil liabilities for
violations of the Internal Revenue Code or other regulations of the IRS.
Penalties could range from $25 to $25,000 per violation. The Company has never
<PAGE>
been assessed with material civil penalties or fines. However, if a Company
violation resulted in a material fine or penalty, the Company's operating
results could be materially adversely affected. In addition, the Company does
not maintain any professional liability or malpractice insurance policies. The
Company has never been the subject of a malpractice claim. However, the
significant uninsured liability and legal and other costs relating to such
claims could materially adversely affect the Company's business and operating
results.
In addition, making fraudulent statements on a tax return, willfully
delivering fraudulent documents to the IRS and unauthorized disclosure of
taxpayer information can constitute criminal offenses. Criminal penalties for
such offenses range from $1,000 and/or one year of imprisonment to $500,000
and/or three years of imprisonment per violation. The Company has never been
charged with a criminal offense. If the Company were to be charged with a
criminal offense and found guilty or if any of its employees or executives were
convicted of a criminal offense, in addition to the costs of defense and
possible fines, the Company would likely experience an adverse affect to its
reputation, which could directly lead to a decrease in revenues from the loss of
clients.
Inability of the Company to Provide Services of a Certified Public
Accountant. The Company generally utilizes seasonal employees who are not
certified public accountants or tax attorneys to provide tax preparation
services. The Company employs fewer than 10 full-time certified public
accountants, two of whom do not work as tax preparers. Under state law, the
Company is not allowed to provide legal tax advice, and the Company does not
employ nor does it retain any tax attorneys on a full-time basis. Because most
of the Company's employees who prepare tax returns are not certified public
accountants, tax attorneys or otherwise enrolled to practice before the IRS,
such employees of the Company are strictly limited as to the roles they may take
in assisting a client in an audit with the IRS. These limitations on services
that the Company may provide could hinder the Company's ability to market its
services.
Furthermore, the small percentage of certified public accountants or
tax attorneys available to provide assistance and guidance to the Company's tax
preparers may increase the risk of the improper preparation of tax returns by
the Company. The improper preparation of tax returns could result in significant
defense expenses and civil liability.
Infringement and Loss of Trademark and Other Proprietary Rights. The
Company believes that its trademarks and other proprietary rights are important
to its success and its competitive position. The Company has registered its
"Gilman + Ciocia" trademark and has applied for registration of its "e1040.com"
trademark with the U.S. Patent and Trademark Office and devotes substantial
resources to the establishment and protection of its trademarks and proprietary
rights. However, the actions taken by the Company to establish and protect its
trademarks and other proprietary rights may be inadequate to prevent imitation
of its services and products by others or to prevent others from claiming
violations of their trademarks and proprietary rights by the Company. In
addition, others may assert rights in the Company's trademarks and other
proprietary rights.
Control of the Company by Current Management. The Company's Chief
Executive Officer, Chief Operating Officer and Secretary own approximately 32%
of the outstanding Company common stock, par value $.01 per share (the "Common
Stock"). Accordingly, these officers control the Company and have the power to
elect a majority of the directors, appoint management and approve certain
actions requiring the approval of a majority of the Company's stockholders. The
interests of these officers could conflict with the interests of the other
stockholders of the Company. In addition, their ownership could
<PAGE>
pose an obstacle to a purchase of the Company that might be desirable to other
stockholders and/or to a change in management if the Company is not operating
profitably in the future.
Lack of Dividends. Since its initial public offering of securities in
1994, the Company has not paid dividends, and it does not plan to pay dividends
in the foreseeable future. The Company currently intends to retain any earnings
to finance the growth of the Company. It is very likely that dividends will not
be distributed in the near future, which may reduce the marketability of the
Company's Common Stock.
Certain Anti-takeover Provisions; Preferred Stock. Certain provisions
of the Certificate of Incorporation could make it more difficult for a third
party to acquire control of the Company, even if such change in control would be
beneficial to stockholders. The Certificate of Incorporation allows the Company
to issue preferred stock without stockholder approval. Such issuances could make
it more difficult for a third party to acquire the Company. The Certificate of
Incorporation also provides for a classified board of directors, which would
prevent a third party acquiring a majority of the Common Stock from immediately
electing a new board of directors.
Possible Volatility of Stock Price. Since December 1997, the market
price of the Common Stock has almost tripled and fallen to approximately its
December 1997 range. During that period, the average daily trading volume of the
Common Stock has varied significantly. In addition, prior to August 28, 1998,
the Common Stock traded on the Nasdaq SmallCap Market. As a result, historical
market prices may not be indicative of market prices in the future. There is no
assurance that an active trading market for the Common Stock will develop or be
sustained in the future. In addition, the stock market has recently experienced
extreme stock price and volume fluctuation. These fluctuations have often been
unrelated to the operation performance of particular companies. The Company's
market price may be impacted by changes in earnings estimates by analysts,
economic and other external factors and the seasonality of the Company's
business. Fluctuations or decreases in the trading price of the Common Stock may
adversely affect the ability to buy and sell the Common Stock and the ability to
raise money in a future offering of Common Stock. See "Market for Common Equity
and Related Stockholder Matters".
Restrictions on Possible Future Sales. Various restrictions on the
possible future sale of Common Stock may have an adverse affect on the market
price of the Common Stock. Approximately 3,500,000 shares of Common Stock
outstanding are "restricted securities" under Rule 144 of the Securities Act of
1933, as amended (the "Act"). In general, under Rule 144, a person who has
satisfied a one-year holding period may, under certain circumstances, sell,
within any three-month period, a number of shares of "restricted securities"
that do not exceed the greater of one percent of the then outstanding shares of
Common Stock or the average weekly trading volume of such shares during the four
calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares of Common Stock by a person who is not an
"affiliate" of the Company (as defined in Rule 144) and who has satisfied a
one-year holding period, without any volume or other limitation.
The Company has granted 2,713,000 options to purchase shares of Common
Stock to 37 individuals. The shares issuable upon exercise of such options would
be eligible for resale under Rule 144 after one year following the exercise of
such options or earlier if the underlying Common Stock were registered by the
Company. Certain shares are registered in the Company's registration statements
on Form S-8 filed on October 28, 1996 and April 13, 1998.
<PAGE>
The sale of restricted Common Stock in the future, or even the
possibility that it may be sold, may have an adverse affect on the market price
for the Common Stock and reduce the marketability of the Common Stock.
New Rules Limiting Broker/Dealer Sales. New rules limiting
Broker/Dealer sales of Common Stock could affect the Company's ability to sell
its securities and discourage Broker/Dealers from dealing in the Company's
Common Stock. For example, the Company's Common Stock is not currently covered
by a Commission rule that imposes additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 individually, or $300,000 jointly with their spouse).
However, if the market price of the Common Stock were to fall substantially, the
Common Stock may be governed by such a rule in the future. For transactions
covered by such a rule, the broker/dealer must determine whether certain
potential purchasers are suitable and then receive the purchaser's written
agreement to the transaction prior to sale.
Moreover, there is another Commission rule that imposes additional
disclosure requirements on broker/dealers in "penny stock" transactions. An
underwriter's participation in the trading market of the Common Stock could be
governed by this rule if the price of the Common Stock were to fall. The Common
Stock is currently outside the definition of a "penny stock" under the
applicable rules, however, in the event the Common Stock were subsequently to
become characterized as a "penny stock" as a result of being delisted from The
Nasdaq National Stock Market or otherwise, broker/dealers will be required to
make extensive disclosures to such clients in certain circumstances regarding
the Common Stock. Such additional burdens imposed upon broker/dealers may
discourage broker/dealers from transacting in the Common Stock. Consequently,
these rules may affect the ability of broker/dealers to sell the Company's
securities and also may affect the ability of purchasers of Common Stock to sell
their securities in the secondary market.
Limitations on Director Liability. With limited exceptions, under
Delaware law directors of the Company are not liable individually to the Company
or to its stockholders for corporate decisions. Specifically, directors of the
Company are not liable to the Company or its stockholders for monetary damages
for breach of their fiduciary duty unless such actions were a breach of the duty
of loyalty, acts or omissions not in good faith or which involved intentional
misconduct or a knowing violation of law, for dividend payments or stock
repurchases illegal under Delaware law or in any transaction in which a director
derived an improper personal benefit. Therefore, the Directors have broad
discretion over actions made on behalf of the Company.
General Risks of the Securities Industry. The securities industry, by
its very nature, is subject to numerous and substantial risks, including the
risk of declines in price level and volume of transactions, losses resulting
from the ownership, trading or underwriting of securities, risks associated with
principal activities, the failure of counterparties to meet commitments,
customer, employee or issuer fraud risk, litigation, customer claims alleging
improper sales practices, errors and misconduct by brokers, traders and other
employees and agents (including unauthorized transactions by brokers), and
errors and failure in connection with the processing of securities transactions.
Many of these risks may increase in periods of market volatility or reduced
liquidity. In addition, the amount and profitability of activities in the
securities industry are affected by many national and international factors,
including economic and political conditions; broad trends in industry and
finance; level and volatility of interest rates; legislative
<PAGE>
and regulatory changes; currency values; inflation; and availability of
short-term and long-term funding and capital, all of which are beyond the
control of the Company.
Several current trends are also affecting the securities industry,
including increasing consolidation, increasing use of technology, increasing use
of discount and online brokerage services, greater self-reliance of individual
investors and greater investment in mutual funds. These trends could result in
the Company's facing increased competition from larger broker-dealers, a need
for increased investment in technology, or potential loss of customers or
reduction in commission income. There can be no assurance that these trends or
future changes will not have a material adverse effect on the Company's
business, financial condition, results of operations or cash flows.
Risk of Reduced Revenue During Periods of Lower Stock Prices or Reduced
Trading Volume. The Company's revenue and profitability may be adversely
affected by declines in the volume of securities transactions and in market
liquidity, which generally result in lower revenues from trading activities and
commissions. Lower securities price levels may also result in a reduced volume
of transactions, as well as losses from declines in the market value of
securities held in trading, investment and underwriting positions. In periods of
low volume, the fixed nature of certain expenses, including salaries and
benefits, computer hardware and software costs, communications expenses and
office leases, will adversely affect profitability. Sudden sharp declines in
market values of securities and the failure of issuers and counterparties to
perform their obligations can result in illiquid markets in which the Company
may incur losses in its principal trading and market-making activities.
Regulation. The SEC, the NYSE and various other regulatory agencies
have stringent rules with respect to the protection of customers and maintenance
of specified levels of net capital by broker-dealers. The regulatory environment
in which the Company operates is subject to change. The Company may be adversely
affected as a result of new or revised legislation or regulations imposed by the
SEC, other U.S. governmental regulators or Self Regulating Organizations
("SROs"). The Company also may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by the SEC, other
federal and state governmental authorities and SROs.
The B/D Subsidiaries are subject to periodic examination by the SEC,
SROs and various state authorities. The B/D Subsidiaries' sales practice
operations, record-keeping, supervisory procedures and financial position may be
reviewed during such examinations to determine if they comply with the rules and
regulations designed to protect customers and protect the solvency of
broker-dealers. Examinations may result in the issuance of letters to the B/D
Subsidiaries noting perceived deficiencies and requesting the B/D Subsidiaries
to take corrective action. Deficiencies could lead to further investigation and
the possible institution of administrative proceedings, which may result in the
issuance of an order imposing sanctions upon the B/D Subsidiaries and/or their
personnel.
The Company's business may be materially affected not only by
regulations applicable to it as a financial market intermediary, but also by
regulations of general application. For example, the volume and profitability of
the Company's or its customers trading activities in a specific period could be
affected by, among other things, existing and proposed tax legislation,
antitrust policy and other governmental regulations and policies (including the
interest rate policies of the Federal Reserve Board) and changes in
interpretation or enforcement of existing laws and rules that affect the
business and financial communities.
<PAGE>
Litigation and Potential Securities Law Liability. Many aspects of the
Company's business involve substantial risks of liability. There has been an
increase in litigation and arbitration within the securities industry in recent
years, including class action suits seeking substantial damages. Broker-dealers
such as the B/D Subsidiaries are subject to claims by dissatisfied customers,
including claims alleging they were damaged by improper sales practices such as
unauthorized trading, churning, sale of unsuitable securities, use of false or
misleading statements in the sale of securities, mismanagement and breach of
fiduciary duty. The B/D Subsidiaries may be liable for the unauthorized acts of
their retail brokers and independent contractors if they fail to adequately
supervise their conduct. From time to time, in connection with hiring retail
brokers, the Company is subject to litigation by a broker's former employer. The
adverse resolution of any legal proceedings involving the Company could have a
material adverse effect on its business, financial condition, and results of
operations or cash flows.
Item 2. DESCRIPTION OF PROPERTY
The Company provides services to its clients at 135 local offices in
fifteen states: forty-eight in New York, fifteen in New Jersey, ten in Arizona,
twenty in Florida, six in Ohio, seven in Maryland, six in Connecticut, seven in
Washington, five in Massachusetts, five in Nevada, two in Pennsylvania, one in
Virginia, one in Illinois, one in Texas and one in Kentucky. 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 terms remaining from
one to seven years. The Company's rental expense during its Fiscal 1999 was
$2,480,067. 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 an
office that is not replaced with a nearby office could adversely affect the
Company's business at that office. The Company needs less than 1,000 square feet
of usable floor space to operate an office, and its needs can be flexibly met in
a variety of real estate environments. Therefore, the Company believes that its
facilities are adequate for its current needs.
Subsequent to year-end, the Company entered into a ten-year lease for
corporate office space. The lease commences on December 1, 1999 and calls for
annual minimum rental payments of approximately $265,000 per fiscal year.
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. This action was settled in December 1998
in a settlement agreement under which the Company issued warrants to purchase an
aggregate of 85,000 shares of the Company's common stock and agreed to reimburse
Thomas Povinelli for the transfer of an aggregate of 12,500 shares to the
plaintiffs. The Company subsequently exchanged the warrants for an aggregate of
34,500 shares of newly issued common stock.
<PAGE>
On August 21, 1998, Mercedes-Benz Credit Corporation, Allianz Insurance
Company, and Allianz Underwriters, Inc. filed a complaint against the Company in
New York Supreme Court, Nassau County. The complaint seeks indemnification in
the amount of up to approximately $3.5 million from Gilman + Ciocia, Inc. The
allegations in the complaint are based upon a $1.7 million payment made by the
plaintiffs in a settlement reached on October 3, 1996 with the estate of Thomas
Gilman in a wrongful death action, upon an additional approximately $1.8 million
payment made to the estate in the settlement for which plaintiffs ultimately may
be held liable. (An action is currently pending in New York Supreme Court Nassau
County to determine the liability allocation between the settlors with the
estate). Gilman + Ciocia, Inc. served its answer on September 18, 1998. Gilman +
Ciocia, Inc. asserted numerous defenses, which it believes, are meritorious.
However, it is not possible to determine at this time the ultimate success of
any asserted allegation or defense.
In July 1999, Euromarket Advisory, Inc. instituted a suit in the
Circuit Court in and for Fasco and Pinellas Counties, Florida demanding
issuance, collectively, of 150,000 warrants to purchase the Company's common
stock at $5.13 per share (alleged to have been issuable under an investment
banking agreement pursuant to which Euromarket Advisory, Inc. was to have
provided investment banking services to the Company), plus $16,000 in monthly
investment banking fees, as well as attorney's fees and exemplary damages. The
Company believes that Euromarket Advisory, 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held an annual meeting of shareholders on June 22, 1999. At
the meeting all of the directors of the Company were reelected to the board of
directors of the Company. A proposal to amend the Company's Certificate of
Incorporation in order to change the Company's name from "Gilman & Ciocia, Inc."
to Gilman + Ciocia, Inc.; increase the number of shares of authorized common
stock from 9,000,000 to 20,000,000 shares and to establish a classified board of
directors consisting of three classes, was approved by a vote of 3,889,192 for
and 883,771 against, with 9,300 abstaining. A proposal to approve the Company's
1999 Common Stock and Incentive and Non-Qualified Stock Option Plan was approved
by a vote of 4,176,261 for and 597,552 against, with 8,450 abstaining. A
proposal to ratify the reappointment of Arthur Andersen LLP as the Company's
auditors was approved by a vote of 6,936,478 for and 45,565 against, with 3,700
abstaining. The voting for the election of directors was as follows:
Director For Against
- -------- --- -------
James Ciocia 6,856,397 129,346
Thomas Povinelli 6,855,997 129,746
Kathryn Travis 6,856,397 129,346
Louis Karol 6,856,397 129,346
Seth Akabas 6,856,397 129,346
<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market on which the Company's Common Stock trades is The
Nasdaq National Stock Market under the symbol "GTAX." Prior to August 28, 1998,
the principal market on which the Company's Common Stock traded was The Nasdaq
SmallCap Stock Market. Prior to December 1994, no public market existed for the
Company's securities.
The following table sets forth the high and low sales prices for the
Common Stock during the period indicated:
Sales Prices
------------
Quarter Ended High Low
- ------------- ---- ---
September 30, 1997 $ 5 1/8 $ 4 1/8
December 31, 1997 $ 8 3/8 $ 4 3/8
March 31, 1998 $ 14 7/8 $ 7
June 30, 1998 $ 26 3/8 $ 13 3/4
September 30, 1998 $ 18 1/4 $ 7 1/2
December 31, 1998 $ 10 1/8 $ 5 1/4
March 31, 1999 $ 19 1/8 $ 9 1/2
June 30, 1999 $ 15 7/16 $ 7 3/4
The Company has no basis for knowing the cause of the volatility of
its stock 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 30, 1999, there were approximately 225 registered
holders of Common Stock. On September 30, 1999, the closing price of the Common
Stock was $11 1/4 per share.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Company's financial statements and related notes thereto set forth in Item 7 of
this Annual Report. Except for the historical information contained herein, this
and other sections of this Annual Report contain certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
Annual Report, the words "anticipate," "believe," "estimate," "expect", and
similar expressions, as they relate to the Company or its management, are
intended to identify such forward-looking statements. The Company's actual
results, performance, or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements.
Overview
Gilman + Ciocia, Inc. 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
<PAGE>
planning. The Company capitalizes on this situation by making available
financial planning services. The financial planners who provide such service are
employees or independent contractors of the Company and are registered
representatives of the Company's broker/dealer subsidiaries. The Company or its
broker/dealer subsidiaries earn 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.
Almost all of the financial planners are also authorized agents of
insurance underwriters, and approximately 2% of the financial planners are
authorized to act as mortgage brokers. As a result, the Company also earns
revenues from commissions for acting as an insurance agent and a mortgage
broker. In addition, the Company owns a 50% stake in GTAX/CB, an insurance
broker.
The Company also has a division operating as a direct mail service.
This division assembles, packages and mails direct mail materials, including the
Company's own marketing materials as well as materials of third parties. This
division also provides limited consulting services in connection with the
design, creation and testing of direct mail materials.
During Fiscal 1999, approximately 25% of the Company's revenues were
earned from tax preparation services, 72% were earned from all financial
planning and related services (with 26% from securities transactions and 46%
from mortgage brokerage, insurance and other related services), and 3% were
earned from direct mail and related services.
Direct mail services historically have not materially contributed to
the Company's net income. The Company's tax return preparation business and its
financial planning business are closely linked together. These lines of business
generally use the same individuals, assets, marketing and facilities. In
addition, the Company's financial planning customers generally are introduced to
the Company through the Company's tax preparation services. The Company believes
that its tax return preparation business is inextricably intertwined with, and a
necessary adjunct to, 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, seven new offices in 1998, and
seven new offices in Fiscal 1999.
Plan of Operation
Tax Preparation and Financial Planning
The Company opens new tax offices and acquires existing tax
preparation businesses. New offices have historically attracted more potential
tax preparation clients, which have resulted in increased revenues and have
contributed to the Company's growth. In addition, the new tax preparation
clients are potential new financial planning clients. The Company plans to
continue to expand and open new offices during the next year (although no
specific target has been set), recruit successful financial planners and acquire
existing securities broker/dealers and tax preparation practices. The Company
anticipates funding this growth through the proceeds of future offerings, if
any, operating profits and use of its credit facility.
<PAGE>
During Fiscal 1996 and Fiscal 1997, in connection with the
acquisitions of two tax preparation practices, the Company bought a building in
which the tax preparation practices 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 Fiscal 1999, 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.
Results of Operations
The following table sets forth for the periods indicated certain
items from the Company's statements of income expressed as a percentage of
revenue and the percentage change in such items for Fiscal 1998 and Fiscal 1999.
The trends illustrated in the following table are not necessarily indicative of
future results.
Percentage of Revenue
Percentage
Year Ended Increase (Decrease)
June 30, As a Percentage of Revenue
1998 1999 1998 to 1999
---- ---- ------------
Tax preparation fees 36% 25% (11%)
Financial planning 58% 72% 14%
Commissions
Direct mail services 3%
6% (3%)
Total revenue 100% 100% --
General and administrative
Expense
15% 13% (2%)
Advertising 11% 8% (3%)
<PAGE>
Percentage of Revenue
Percentage
Year Ended Increase (Decrease)
June 30, As a Percentage of Revenue
1998 1999 1998 to 1999
---- ---- ------------
Depreciation and 3% 3% 0%
Amortization
Other operating expenses 59% 69%
10%
Operating expenses 88% 93% 5%
Other income (expense), net 0% 0% 0%
Income before taxes 12% 7% (5)%
Provision for income taxes 5% 3%
(2)%
Net income 7% 4% (3)%
- --------------------------------
Fiscal 1999 Compared to Fiscal 1998
The Company's revenues for Fiscal 1999 were $50,443,406 as compared to
$28,533,083 for Fiscal 1998, an increase of $21,910,323 or 77%. This increase
was attributable to an increase in Financial Planning services as well as the
acquisitions of Prime and North Ridge.
The Company's total revenues for Fiscal 1999 consist of $12,813,113 for
tax preparation services, $36,137,862 for financial planning services and
$1,492,431 for direct mailing services. Tax preparation services represented
25%, financial planning services represented 72% and direct mailing services
consisted of 3% of the Company's total revenues for Fiscal 1999. The Company's
total revenues for Fiscal 1998 consist of $10,164,550 for tax preparation
services; $16,578,032 for financial planning services; and $1,790,501 for direct
mailing services. Tax preparation services represented 36%, financial planning
services represented 58% and direct mailing services represented 6% of the
Company's total revenues for Fiscal 1998.
The growth in the tax preparation segment is primarily attributable to
the acquisition of seven new tax practices during fiscal 1999 and additional tax
revenues generated from the remaining one hundred twenty-eight offices. The
growth in the financial planning segment is attributable to the hiring of
additional financial planners who generated additional commissions from securing
transaction activities. The remaining growth in financial planning revenues is a
result of additional financial planning revenues generated from the North Ridge,
Prime and related acquisitions.
Any reduction in the rate of increase of equity securities' prices in
the marketplace could reduce the increase in investments that the Company's
clients make through the Company, and falling market prices of securities could
result in a reduction that would offset other sources of growth in the Company's
financial planning revenues. The Company has previously experienced a 6 to 12
month delay after the opening of a new office before such office generated
significant financial planning revenues.
The Company's operating expenses for Fiscal 1999 were $46,646,555 or
92% of revenues, an increase of $21,516,142 or 86% as compared to $25,130,413 or
88% of revenues for Fiscal 1998. The
<PAGE>
increase in operating expenses was attributable to an increase of $17,378,147 in
salaries and commissions; $2,150,154 in general and administrative expenses;
$442,950 in rent; $582,997 in depreciation and amortization; $1,140,713 in
advertising, offset by a decrease of $178,819 in direct mail costs.
Salaries and commissions increased $17,378,147 or 120% in Fiscal 1999
to $31,915,652 compared to $14,537,505 in Fiscal 1998. The increase in salaries
and commission expense is primarily attributable 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 form North Ridge and
Prime.
General and administrative expense increased $2,150,154 or 51% in
Fiscal 1999 to $6,344,215 as compared to $4,194,061 in Fiscal 1998. The increase
in general and administrative expense is primarily attributable to the opening
of seven new offices in Fiscal 1999 relating to an increase in office expenses
at the new offices. The additional increase in general and administrative
expense is attributable to North Ridge and Prime.
Rent expense increased $442,950 or 22% in Fiscal 1999 to $2,480,067, as
compared to $2,037,117 in Fiscal 1998. The increase in rent expense is primarily
attributable to the opening of the Company's seven new offices during Fiscal
1999 and the offices opened in Fiscal 1998.
Depreciation and amortization expense increased $582,997 or 68% in
Fiscal 1999 to $1,441,388 as compared to $858,391 in Fiscal 1998. The increase
in depreciation and amortization is primarily attributable to additional
purchases of computer equipment during Fiscal 1999 and also additional
amortization incurred on financial planning and tax practice acquisitions.
The increase in other expense of $111,193 is predominantly due to an
increase in interest expense on debt.
The Company's income after provision for income taxes for Fiscal 1999
is $2,181,143 as compared to $2,011,345 for Fiscal 1998. The increase of 8% is
primarily attributable to higher net operating income generated from financial
planning services and tax preparation.
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
The Company's revenues have been, and are expected to be, highly
seasonal. As a result, the Company must generate sufficient cash during the tax
season, in addition to its available bank credit facility, to fund its operation
in the first half of the following fiscal year. Operations during the non-tax
season are primarily focused on financial planning services. Since its
inception, the Company has utilized funds from operations, proceeds from its
initial public offering and bank borrowings to support operations, finance
working capital requirements and complete acquisitions. In addition, the Company
received gross proceeds of approximately $3,000,000 million from the exercise of
warrants and options during Fiscal 1999.
<PAGE>
The Company's cash flows provided by operating activities were
$3,602,400 and $1,759,773 for the Fiscal 1999 and Fiscal 1998, respectively. The
increase of $1,842,627 is due primarily to additional depreciation and
amortization of $582,997, an increase from an income tax benefit on exercise of
stock options of $894,000, an increase in compensation expense recognizable in
connection with the reissuance of treasury stock and the issuance of stock
options of $123,096 and an increase in net income of $169,798.
Net cash used in investing activities was $8,406,635 and $1,220,996 for
Fiscal 1999 and Fiscal 1998, respectively. The increase of $7,185,639 is
primarily due to an increase in acquisitions of $6,566,432, an increase in loans
to officers and stockholders of $488,946 and a decrease from sale of investments
of $214,652.
Net cash provided by financing activities was $6,551,758 in fiscal
1999, compared with net cash used in financing activities of $1,753,435 in
fiscal 1998. The increase of approximately $8,305,193 is primarily due to an
increase in bank borrowings of $5,500,000, an increase in proceeds from sale of
common stock and exercise of stock options and warrants of $2,920,120, and a
decrease in deferred registration costs of $314,819. These amounts were offset
by an increase in payments of bank and other loans of $384,884 and a decrease in
proceeds from stock subscriptions of $87,869.
The Company had two joint credit facilities with State Bank of Long
Island and EAB Bank. The first facility was a line of credit for up to
$4,500,000. Borrowings under this line were in the form of short-term notes with
interest charged monthly at the bank's prime lending rate plus 1 1/2%. At June
30, 1999, the Company had an outstanding principal balance of $2,500,000. The
second credit facility was a revolver for up to $3,500,000. Borrowings on this
revolver are in the form of short-term notes with interest charged monthly at
the bank's prime lending rate plus 1 1/2 %. At June 30, 1999, the Company had an
outstanding principal balance of $1,500,000. Subsequent to year-end, the two
credit facilities were refinanced with Merrill Lynch. The new facility consists
of three separate loans as follows: $10,000,000 comprises a line of credit of
$4,000,000 and two revolver loans for a total of $6,000,000. The interest rate
on the line of credit is 2.9% plus the 30-day commercial paper rate. The line of
credit facility expires on June 30, 2000. The interest rate on the two revolver
loans is 3.15% plus the 30-day commercial paper rate. The terms of the two
revolving loan facilities are sixty months. Both facilities are secured by a
pledge of all of the business assets of the Company and guaranteed by each of
the three principal officers of the Company up to $1,250,000.
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 any dividends on its Common
Stock in the foreseeable future, but will apply any profits to fund the
Company's expansion.
New Accounting Pronouncements
In April 1998, the AICPA issued Statement of Position (SOP) 98-5
"Reporting Costs of Start-Up Activities," which establishes standards for the
accounting of start-up costs. Costs of start-up activities, including
organization costs, should be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998,
although earlier application is encouraged. The Company has adopted SOP 98-5
during fiscal year 1998; however, the effects of this standard have no material
impact on the Company's results of operations, earnings per share or financial
position.
<PAGE>
Year 2000 Compliance
The Company has completed the installation of the Great Plains
accounting system, which is year 2000 compliant. The Company does not anticipate
any material additional costs with regard to its year 2000 compliance. The year
2000 issue is not expected to affect the systems of various entities with which
the Company interacts. However, there can be no assurance that the systems of
other companies on which the Company relies will be timely converted, or that a
failure by another Company's systems to be year 2000 compliant would not have a
material adverse effect on the Company.
Item 7. FINANCIAL STATEMENTS
INDEX
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS:
Consolidated Balance Sheet
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information regarding the executive
officers and directors of the Company:
Name Age Position
James Ciocia 42 Chief Executive Officer, President and Director
Thomas Povinelli 39 Chief Operating Officer, Executive Vice President
and Director
Kathryn Travis 50 Secretary, Vice President and Director
Stephen B. Sacher 40 Chief Financial Officer and Treasurer
<PAGE>
Michael P. Ryan 41 Director and President of Prime Capital Services, Inc.
Seth A. Akabas 43 Director
Louis P. Karol 40 Director
Executive Officers and Directors
James Ciocia, Chief Executive Officer, President and Director
Mr. Ciocia is a principal founder of the Company having opened the
Company's first tax preparation office in 1981. In addition to serving the
Company as its Chief Executive Officer since its founding, Mr. Ciocia is a
registered representative of Prime. Mr. Ciocia holds a B.S. in Accounting from
St. John's University and is a member of the International Association for
Financial Planners.
Thomas Povinelli, Chief Operating Officer, Executive Vice President and Director
Mr. Povinelli began his tenure with the Company as an accountant in
1983 and has served as an executive officer since November 1984. In addition to
supervising the opening of all new Gilman + Ciocia offices, Mr. Povinelli is a
registered representative of Prime. Mr. Povinelli holds a B.S. in Accounting
from Iona College.
Kathryn Travis, Secretary, Vice President and Director
Ms. Travis began her career with the Company in 1986 as an accountant
and has served as Secreatary, Vice President and a Director since November 1989.
Ms. Travis currently manages the Company's Great Neck office, supervises all
e1040.com tax preparation personnel, and is a registered representative of
Prime. Ms. Travis holds a B.A. in Mathematics from the College of New Rochelle.
Stephen B. Sacher, Chief Financial Officer and Treasurer
Mr. Sacher joined the Company as its Chief Financial Officer in January
1998. Mr. Sacher is a Certified Public Accountant, holds a B.A in Accounting
from Queens College of the City of New York and has been practicing in the
public accounting profession since 1981. Mr. Sacher is currently 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
Mr. Akabas has served as a partner at the law firm of Akabas & Cohen
since June 1991. Mr. Akabas holds a B.A. in Economics from Princeton University
and a J.D. form Columbia University's School of Law and Journalism.
Louis P. Karol, Director
Mr. Karol is a partner of the law firm of Karol, Hausman & Sosnick. Mr.
Karol holds a B.S. from George Washington University, a J.D from Cardozo Law
School and an L.L.M in Taxation from New York University's School of Law. Mr.
Karol currently serves on the Board of Directors of the Long Island Chapter of
the International Association of Financial Planning and is a Certified Public
Accountant.
<PAGE>
Michael P. Ryan, Director and President of Prime Capital Services, Inc.
Mr. Ryan is President of Prime Capital Services, Inc., Gilman +
Ciocia's wholly owned broker/ dealer subsidiary. Mr. Ryan co-founded this
company and has served as its President since 1987. Mr. Ryan is a Certified
Financial Planner and a founding member and past President of the Mid-Hudson
Chapter of the International Association for Financial Planning. Mr. Ryan is a
Registered Principal with the National Association of Securities Dealers and
serves on the Independent Firms Committee of the Securities Industry Association
(SIA). Mr. Ryan holds a B.S. in Finance from Syracuse University.
Item 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, as to the Chief Executive Officer and
the three other executive officers whose annual salary and bonus exceeded
$100,000 in Fiscal 1999 (collectively, the "Named Executive Officers"),
information with respect to annual and long-term compensation earned during the
last three fiscal years:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
Name and Other Annual Number of Shares Underlying
Principal Position Year Salary Bonus* Compensation Options
<S> <C> <C> <C> <C> <C>
James Ciocia
Chief Executive Officer, 1997 $151,200 $240,000 $ 9,580(1) 10,000
President and Director 1998 $190,000 $12,393(1)
1999 $190,000 $15,266(1) 60,000
Thomas Povinelli
Chief Operating Officer, 1997 $ 99,951 $210,000 $78,600(3) 10,000
Executive Vice President and 1998 $190,000
Director 1999 $190,000 60,000
Kathryn Travis
Secretary, Vice President 1997 $ 92,149 $ 3,000 $ 7,149(1) 10,000
and Director 1998 $135,000 $10,758(1)
1999 $135,000 $10,758(1) 30,000
Michael P. Ryan
Director and President
Prime Capital Services, Inc. 1999 $ 60,000 $ 2,400(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
Name and Other Annual Number of Shares Underlying
Principal Position Year Salary Bonus* Compensation Options
<S> <C> <C> <C> <C> <C>
Stephen B. Sacher 1998 $ 36,667 $125,717(2) 220,000
Chief Financial Officer and 1999 $ 80,000 $120,000(4) 15,000
Treasurer
</TABLE>
- ------------------------------
*Represents commission earned from non-affiliated entities that received
referrals from the Company.
(1) Auto expense.
(2) Includes professional fees paid to Sacher & Company, PC, a company of which
Mr. Sacher is President.
(3) Includes $18,600 for auto expense and $60,000 for forgiveness of loan.
(4) Includes professional fees paid to Sacher & Co., a company of which Mr.
Sacher is President.
Key Man Insurance
The Company maintains $2.0 million key-man life insurance policies on
both Thomas Povinelli and James Ciocia.
Directors
Directors of the Company receive no compensation for serving as a
director of the Company.
Option Grants
The following table sets forth information regarding options to
purchase shares of Common Stock granted to the Named Executive Officers during
Fiscal 1999.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
Individual Grants
Name Number of Securities Percent of Total
Underlying Options/SARs Granted
Options/SARs Granted to Employees in Exercise of Base Price
(#) Fiscal Year ($/Sh) Expiration
Date
<S> <C> <C> <C> <C>
James Ciocia 60,000 11.4% $9.50 1/05/04
Thomas Povinelli 60,000 11.4% $9.50 1/05/04
Kathyrn Travis 30,000 5.7% $9.50 1/05/04
Stephen Sacher 15,000 2.8% $9.50 1/05/04
</TABLE>
Option Exercises and Holdings
The following table sets forth information concerning the number and
value of unexercised options to purchase shares of Common Stock held by the
Named Executive Officers as of June 30, 1999.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Name Shares Underlying Unexercised In-the-Money
Acquired Options at Options
upon Value Fiscal Year-End (#) Fiscal Year-End ($)
Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable(1)
<S> <C> <C> <C> <C>
James Ciocia 83,105 $ 485,537 10,000/60,000 $64,375/--
Chief Executive Officer
Thomas Povinelli 83,105 $ 485,537 10,000/60,000 $64,375/--
Chief Operating Officer
Kathryn Travis 62,337 $ 364,196 10,000/30,000 $64,375/--
Secretary
Stephen B. Sacher 12,680 $ 106,195 20,000/195,000 $33,750/$27,500
Chief Financial Officer
</TABLE>
(1) Based on a year-end fair market value of the underlying securities
equal to $9.1875.
Stock Option Plans
On September 14, 1993, the Company adopted the 1993 Plan pursuant to
which the Company may grant options to purchase up to an aggregate of 816,000
shares. Such options may be intended to qualify as "incentive stock options"
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or they may be intended not to qualify under
such Section ("Non-Qualified Options").
The 1993 Plan is administered by the committee of two independent
directors of the Board of Directors of the Company, which has authority to
determine the persons to whom the options may be granted, the number of shares
of Common Stock to be covered by each option, the time or times at which the
options may be granted or exercised, whether the options will be Incentive Stock
Options or Non-Qualified Options, and other terms and provisions of the options.
The exercise price of the Incentive Stock Options granted under the 1993 Plan
may not be less than the fair market value of a share of Common Stock on the
date of grant (110% of such value if granted to a person owning in excess of ten
percent of the Company's securities). Options granted under the 1993 Plan may
not have a term longer than 10 years from the date of grant (five years if
granted to a person owning in excess of ten percent of the Company's securities)
and may not be granted more than ten years from the date of adoption of the 1993
Plan.
The Company has granted under the 1993 Plan Incentive Stock Options to
purchase 20,000 shares at $7.00, 20,000 shares at $7.50, 20,000 shares at $8.00,
20,000 shares at $8.50, 20,000 shares at $9.00, 20,000 shares at 9.50 and
100,000 shares at $20.00 to Stephen Sacher that remain outstanding. In total,
the Company has granted options of which 200,000 are still outstanding. Shares
and options to purchase 110,998 shares remain to be granted under the 1993 Plan.
On April 20, 1999, the Board of Directors of the Company adopted the
Company's 1999 Common Stock and Incentive and Non-Qualified Stock Option Plan
(the "Plan"). The Plan was approved by the Company's stockholders on June 22,
1999.
Under the Plan, the Company may grant options to purchase up to 300,000
shares of Common Stock to key employees of the Company and its subsidiaries, and
directors, consultants and other
<PAGE>
`individuals providing services to the Company. Such options may either qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or they may not qualify under such Section
("non-qualified stock options").
The Board of Directors will administer the Plan. The Plan allows the
Board of Directors of the Company to designate a committee of at least two
non-employee directors to administer the Plan for the purpose of complying with
Rule 16(b)(3) under the Securities Exchange Act of 1934, as amended, with
respect to future grants under the Plan. Until such delegation, the Board will
select the persons who are to receive options and the number of shares to be
subject to each option (the administrator of the Plan, whether the Board of
Directors or a committee thereof, is referred to herein as the "Committee"). In
selecting individuals for options and determining the terms, the Board may
consider any factors that it deems relevant, including present and potential
contributions to the success of the Company. Options granted under the Plan must
be exercised within a period fixed by the Board, which may not exceed ten years
from the date of grant. Options may be made exercisable immediately or in
installments, as determined by the Board.
The purchase price of each share for which an incentive stock option is
granted and the number of shares covered by such Option will be within the
discretion of the Committee based upon the value of the grantee's services, the
number of outstanding shares of Common Stock, the market price of such Common
Stock, and such other factors as the Committee determines are relevant; provided
however, that such purchase price may not be less than the par value of the
Common Stock. The purchase price of each share for which an incentive stock
option is granted under the Plan ("Incentive Option Price") shall not be less
than the amount which the Committee determines, in good faith, at the time such
incentive stock option is issued or granted, constitutes 100% of the then Fair
Market Value of a Share of Common Stock.
Grantees under the Plan may not transfer options otherwise than by will
or the laws of descent and distribution; provided that the Committee may
determine with respect to any particular Option that such Option shall be
transferable. No transfer of an Option permitted by terms of such Option or by
will or the laws of descent and distribution will bind the Company unless the
Company has been furnished with written notice thereof and a copy of the will
and/or such other evidence as the Company may deem necessary to establish the
validity of the transfer and the acceptance by the transferee or transferees of
the terms and conditions of such Option. In the case of an Option, during the
lifetime of the grantee, unless transferred as permitted by this Plan and the
Option, the Option may only be exercised by the grantee, except in the case of
disability of the grantee resulting in termination of employment, in which case
the Option may be exercised by such grantee's legal representative.
The Committee will adjust the total number of shares of Common Stock
which may be purchased upon the exercise of Options granted under the Plan for
any increase or decrease in the number of outstanding shares of Common Stock
resulting from a stock dividend, subdivision, combination or reclassification of
shares or any other change in the corporate structure or shares of the Company;
provided, however, in each case, that, with respect to incentive stock options,
no such adjustment shall be authorized to the extent that such authority would
cause the Plan to violate Section 422(b)(1) of the Code. If the Company
dissolves or liquidates or upon any merger or consolidation, the Committee may
make such adjustment with respect to Options or act as it deems necessary or
appropriate to reflect or in anticipation of such dissolution, liquidation,
merger or consolidation including, without limitation, the substitution of new
Options or the termination of existing options.
Under the Plan, the Company will grant to each employee and those
affiliated financial planners
<PAGE>
who have entered into commission sharing agreements with the Company, including
officers and directors, 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 the calendar years 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. The Company
will grant options following the end of the calendar year. The Company
anticipates that it will grant between 50,000 and 100,000 options per year under
this program.
For Federal income tax purposes, an optionee will not recognize any
income upon the grant of a non-qualified stock option or an incentive stock
option.
Upon the exercise of a non-qualified stock option, the optionee will
realize ordinary income equal to the excess (if any) of the fair market value of
the shares purchased upon such exercise over the exercise price. The Company
will be allowed a deduction from income in the same amount and at the same time
as the optionee realizes such income. Upon the sale of shares purchased upon
such exercise, the optionee will realize capital gain or loss measured by the
difference between the amount realized on the sale and the fair market value of
the shares at the time of exercise of the option. In the case of options granted
to executive and principal officers, directors and stockholders owning greater
than 10% of the outstanding Common Stock, income will be recognized upon
exercise of a non-qualified option only if the option has been held for at least
six months prior to exercise. If such option is exercised within six months
after the date of grant, then such an officer, director or greater than 10%
stockholder will recognize income six months after the date of grant, unless he
or she files an election under Section 83(b) of the Code to be taxed on the date
of exercise.
In contrast, upon the exercise of an incentive stock option, an
optionee will not realize income, and the Company will not be allowed a
deduction. If the optionee retains the shares issued to him upon exercise of an
incentive stock option for more than one year after the date of issuance of such
shares and two years after the date of grant of the option, then any gain or
loss realized on a subsequent sale of such shares will be treated as long-term
capital gain or loss. If, on the other hand, the optionee sells the shares
issued upon exercise within one year after the date of issuance or within two
years after the date of grant of the option, then the optionee will realize
ordinary income, and the Company will be allowed a deduction from income, to the
extent of the excess of the fair market value of the shares on the date of
exercise or the amount realized on the sale (whichever is less) over the
exercise price. Any excess of the sale price over the fair market value of such
shares on the date of exercise will be treated as capital gain. In addition, the
difference between the fair market value of the shares on the date of exercise
and the exercise price constitutes an item of tax preference for purposes of
calculating an alternative minimum tax, which, under certain circumstances,
could cause tax liability as a result of an exercise.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 14, 1999, 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.
<PAGE>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------ -------------------- ----------------
James Ciocia 1,003,616(1) 13%
1311 Mamaroneck Avenue
White Plains, NY 10605
Thomas Povinelli 1,058,616(2) 14%
1311 Mamaroneck Avenue
White Plains, NY 10605
Kathryn Travis 375,481(3) 5%
1311 Mamaroneck Avenue
White Plains, NY 10605
Seth Akabas 8,966(4) *
488 Madison Avenue - 11th Floor
New York, NY 10022
Louis Karol 780 *
600 Old Country Road
Garden City, NY 11530
Michael P. Ryan 755,004(5) 10%
11 Raymond Avenue
Poughkeepsie, NY 12603
Steven Gilbert 684,000(6) 9%
2420 Enterprise Road, Suite 100
Clearwater, FL 33763
Stephen Sacher 35,000(7) *
1311 Mamaroneck Avenue
White Plains, NY 10605
Arlington Financial Services, Inc. 755,004(8) 10%
11 Raymond Avenue
Poughkeepsie, NY 12603
All directors and officers
as a group (6 persons) 3,237,463(1)(2)(3) 43%
(4)(5)(7)(8)
- ---------------------------
* Less than 1%.
(1) Includes 10,000 shares of Common Stock issuable upon the exercise of
currently exercisable options at prices of $2.75. Does not include
60,000 shares issuable upon the exercise of options that do not vest
until 2001.
(2) Includes 10,000 shares of Common Stock issuable upon the exercise of
currently exercisable options at prices of $2.75. Does not include
60,000 shares issuable upon the exercise of options that do not vest
until 2001.
(3) Includes 10,000 shares of Common Stock issuable upon the exercise of
<PAGE>
currently exercisable options at prices of $2.75. Does not include
30,000 shares issuable upon the exercise of options that do not vest
until 2001.
(4) Includes 8,081 shares owned by the law firm of Akabas & Cohen of which
Mr. Akabas is a partner.
(5) Shares owned by Arlington Financial Securities, Inc. Mr. Ryan owns 50%
of the Capital Stock of Arlington Financial Services, Inc.
(6) Includes 169,000 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. Does not
include 100,000 shares and 75,000 shares issuable upon exercise of
options at $4.75, and $13.75 respectively.
(7) Includes 20,000 shares of Common Stock issuable upon exercise of
currently exercisable options at $7.00. Does not include 15,000 shares
issuable upon the exercise of options that do not vest until 2001, or
180,000 shares issuable upon exercise of options vesting yearly after
2000.
(8) Includes 604,000 shares held in Arlington Financial Services, Inc. and
151,004 shares held in escrow for Arlington. Mr. Ryan owns 50% of the
capital stock of Arlington Financial Services, Inc.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each of James Ciocia, Thomas Povinelli and Kathryn Travis acted as a
Registered Representative for Royal Alliance and as an authorized agent for
insurance carriers until July 1, 1999. The amount earned is set forth in the
table under "Executive Compensation".
The three principal stockholders, Messrs. Ciocia, Povinelli and Ms.
Travis personally guaranteed the repayment of the Company's long-term loan in
the amount of $4,000,000 collectively from the State Bank of Long Island,
European American Bank, as well as the seasonal loans in the form of lines of
credit as described in the "Management's Discussion and Analysis" section. These
referenced loans were refinanced with Merrill Lynch subsequent to June 30, 1999.
Said stockholders guaranteed the Merrill Lynch loans, each with an individual
limit of $1,250,000. Such stockholders received no consideration for such
guarantees other than their salaries and other compensation.
On July 1, 1995, the Company, Ralph Esposito, who was then its Chief
Financial Officer, Kathryn Travis, an 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 Chief Operating
Officer - $198,000, Thomas Povinelli, Sr., father of the 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. During Fiscal 1998, the Partnership was
dissolved, and the Company wrote-off a $100,000 loan to the Partnership.
The Company loaned the following individuals the following amounts:
$100,000 in fiscal June 1997 and $240,000 in fiscal June 1998 to James Ciocia,
$100,000 in fiscal June 1997 and $240,000 in fiscal June 1998 to Thomas
Povinelli, $50,000 in fiscal June 1997 and $72,000 in fiscal June 1998 to
Kathryn Travis, and $50,000 in fiscal June 1998 to Steven Gilbert. These loans
are due in fully amortizing biweekly installments (including interest at 7% per
annum) through maturity on June 30, 2000, with the exception of the $240,000
loans to Messrs. Ciocia and Povinelli and the $72,000 loan to Kathryn Travis,
which have a maturity date of August 1, 2001. During Fiscal 1999, additional
loans of $100,000 to Thomas Povinelli, $339,877 to James Ciocia and $228,589 to
Kathryn Travis were loaned and are payable upon demand. The officers, namely
James Ciocia, Thomas Povinelli and Kathryn Travis have pledged certain shares of
their stock in the company (with an aggregate market value of approximately
$1,440,000) as collateral for these loans.
<PAGE>
In December 1997, the Company loaned $225,000 each to James Ciocia and
Thomas Povinelli. These loans were non-interest bearing loans and were repaid by
such officers/stockholders in March 1998.
From time to time the Company employs the professional services of
Sacher & Co. P.C. The President of Sacher & Co. P.C. is the Chief Financial
Officer of the Company. The amounts paid to Mr. Sacher in this capacity are set
forth above in "Executive Compensation."
Seth Akabas, a partner in the law firm of Akabas & Cohen and also a
director of the Company. Akabas & Cohen was paid $260,313.00 in fiscal 1999.
The Company has also made two loans to Steven Gilbert, a stockholder of
the Company. The first loan is for $150,000, due in bi-weekly installments
through June 15, 1999. Interest is charged at 9% per annum. This loan has been
paid in full at June 30, 1999. The second loan is for $100,000, due on October
9, 1999. Interest on this loan is charged at 9% per annum.
In addition, the Company holds a note receivable from Dominic Ciocia,
the brother of the Company's Chief Executive Officer. The note receivable is for
$112,000 and is due on June 19, 2000. Interest is charged at 6% per annum,
respectively.
Item 13. EXHIBITS, LIST AND REPORTS OF FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
In June 1999, the Company filed Amendment No. 1 to its Current Report
on Form 8-K dated April 5, 1999, amending Item 7 Financial Statements and
Exhibits. The Amendment included the following financial statements:
Prime Capital Services, Inc. (PFSI), Prime Financial Services,
Inc., a New York Corporation (Oldco), and Asset & Financial
Planning, Ltd. (AFPL) Audited Combined Balance Sheets as of
April 30, 1998 and March 31, 1999.
PCSI, Oldco and AFPL Audited Combined Statement of Income and
Retained Earnings for the fiscal year ended April 30, 1998.
PCSI, Oldco and AFPL Audited Combined Statement of Cash Flows
for the fiscal year ended April 30, 1998.
PCSI, Oldco and AFPL Audited Combined Statement of Income and
Retained Earnings for the eleven months ended March 31, 1999.
PCSI, Oldco and AFPL Audited Combined Statement of Cash Flows
for the eleven months ended March 31, 1999.
PCSI's, Oldco's and AFPL's Notes to Combined Financial
Statements for fiscal year ended April 30, 1998 and eleven
months ended March 31, 1999.
<PAGE>
Gilman + Ciocia, Inc. & Subsidiaries Combined Balance Sheet
Pro Forma as of March 31, 1999.
Gilman + Ciocia, Inc. & Subsidiaries Combined Statements of
Income Pro Forma for the year ended June 30, 1998 and the nine
months ended March 31, 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this amendment 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 has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James Ciocia
- ---------------------------
James Ciocia Chief Executive Officer October 20, 1999
and President (principal
executive officer)
/s/ Stephen B. Sacher
- ---------------------------
Stephen B. Sacher Chief Financial Officer, October 20, 1999
and Treasurer
(principal financial officer and principal
accounting officer)
/s/ Thomas Povinelli
- ---------------------------
Thomas Povinelli Director October 20, 1999
/s/ Kathryn Travis
- ---------------------------
Kathryn Travis Director October 20, 1999
/s/ Michael Ryan
- ---------------------------
Michael Ryan Director October 20, 1999
/s/ Louis Karol
- ---------------------------
Louis Karol Director October 20, 1999
/s/ Seth Akabas
- ---------------------------
Seth Akabas Director October 20, 1999
</TABLE>
<PAGE>
INDEX
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5-6
Consolidated Statements of Stockholders' Equity F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8-22
<PAGE>
To Gilman + Ciocia, Inc.:
We have audited the accompanying consolidated balance sheet of Gilman +
Ciocia, Inc. and subsidiaries as of June 30, 1999, and the related consolidated
statements of income, stockholder's equity and cash flows for the years then
ended June 30, 1999 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures to 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, 1999, and the results of their operations and cash
flows for the years ended June 30, 1999 and 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
New York, New York
October 6, 1999
F-2
<PAGE>
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,453,354
Marketable securities 316,937
Accounts receivable, net of allowance
for doubtful accounts of $87,500 3,585,518
Receivables from officers and stockholders,
current portion 568,233
Prepaid expenses and other current assets 983,130
Prepaid income taxes 1,460,259
Deferred tax assets, current portion 183,000
------------
Total current assets 10,550,431
Property and equipment, net 2,372,174
Intangible assets, net of accumulated
amortization of $1,635,581 17,387,317
Receivables from officers and stockholders,
net of current portion 1,570,964
Security deposits 374,348
Deferred tax assets 10,000
Other assets 733,746
------------
Total assets $ 32,998,980
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,695,529
Accounts payable and accrued expenses 3,605,386
------------
Total current liabilities 5,300,915
------------
Long-term debt - net of current protion 2,738,124
------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value - shares
authorized 100,000; none issued and outstanding
Common stock - $.01 par value - shares authorized
20,000,000; issued and outstanding 7,508,266 shares 75,083
Paid-in capital 20,027,444
Retained earnings 5,785,858
------------
25,888,385
Less- Treasury Stock, at cost; 199,645 shares (777,039)
Stock subscriptions and accrued interest receivable (159,646)
Unrealized gain on marketable securities, net of income taxes 8,241
------------
Total stockholders' equity 24,959,941
------------
Total liabilities and stockholders' equity $ 32,998,980
============
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
GILMAN + CIOCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
------------ ------------
REVENUES:
TAX PREPARATION FEES $ 12,813,113 $ 10,164,550
FINANCIAL PLANNING SERVICES 36,137,862 16,578,032
DIRECT MAIL SERVICES 1,492,431 1,790,501
------------ ------------
TOTAL REVENUES 50,443,406 28,533,083
------------ ------------
OPERATING EXPENSES:
SALARIES AND COMMISSIONS 31,915,652 14,537,505
GENERAL AND ADMINISTRATIVE EXPENSES 6,344,215 4,194,061
ADVERTISING 3,873,580 2,732,867
DIRECT MAIL COSTS 591,653 770,472
RENT 2,480,067 2,037,117
DEPRECIATION AND AMORTIZATION 1,441,388 858,391
------------ ------------
TOTAL OPERATING EXPENSES 46,646,555 25,130,413
------------ ------------
OPERATING INCOME 3,796,851 3,402,670
------------ ------------
OTHER INCOME (EXPENSE):
INTEREST AND INVESTMENT INCOME 129,041 107,953
INTEREST EXPENSE (280,961) (175,536)
OTHER INCOME 56,212 83,068
------------ ------------
TOTAL OTHER (EXPENSE) INCOME (95,708) 15,485
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,701,143 3,418,155
PROVISION FOR INCOME TAXES 1,520,000 1,406,810
------------ ------------
NET INCOME $ 2,181,143 $ 2,011,345
============ ============
NET INCOME PER SHARE:
BASIC $ 0.35 $ 0.37
DILUTED 0.32 0.32
WEIGHTED AVERAGE SHARES:
BASIC 6,264,228 5,383,093
DILUTED 6,917,436 6,315,345
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,181,143 $ 2,011,345
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensation expense recognized in connection
with the reissuance of treasury stock and the
issuance of stock options 184,927 61,831
Depreciation and amortization 1,441,388 858,391
Income from investment in partnership 5,984 (25,051)
Deferred tax provision (benefit) (42,000) (124,000)
(Gain) loss on sale of marketable securities (342) 16,213
Deferred and other compensation expense 458,332 162,477
Provision for doubtful collections (100,000) 100,000
Interest on stock subscriptions (10,801) (13,546)
Proceeds from sale of marketable securities -- 22,323
(Increase) decrease in:
Accounts receivable 612,662 (1,141,576)
Prepaid expenses and other current assets (743,382) (180,974)
Advances to financial planners 133,039 (87,500)
Security deposits (70,949) (28,732)
Accounts payable and accrued expenses (284,712) 33,883
Income taxes payable (162,889) 94,689
----------- -----------
Net cash provided by operating activities 3,602,400 1,759,773
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (751,394) (772,930)
Cash payments for acquisitions- net of cash acquired (3,997,569)
Acquisition of intangible assets (2,714,039) (145,176)
Investments (97,272) (105,172)
Deferred acquisition costs -- (54,955)
Proceeds from sales of investments -- 214,652
Loan repayments from officers and stockholders 385,819 273,813
Loans to officers and stockholders (1,232,180) (631,228)
----------- -----------
Net cash used in investing activities (8,406,635) (1,220,996)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock (136,116) (179,123)
Proceeds from bank and other loans 8,500,000 3,000,000
Payments of bank and other loans (4,786,371) (4,401,487)
Proceeds from sale of common stock
and exercise of stock options and warrants 2,974,245 54,125
Proceeds from stock subscriptions -- 87,869
Incurrence of deferred registration costs -- (314,819)
----------- -----------
Net cash provided by (used in)
financing activities 6,551,758 (1,753,435)
----------- -----------
Net increase (decrease) in cash 1,747,523 (1,214,658)
CASH, and cash equivalents beginning of year 1,705,831 2,920,489
----------- -----------
CASH, and cash equivalents end of year 3,453,354 1,705,831
=========== ===========
</TABLE>
F-5
<PAGE>
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for-
Interest $ 280,961 $ 188,592
Income taxes 2,267,011 1,297,320
Noncash transactions-
Liquidation of investment in partnership into
marketable securities -- 110,793
Reissuance of treasury stock at fair value -- 32,897
Issuance of common stock as consideration
in business combinations 9,420,995
Exercise of stock options 2,412
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Details of business combinations:
Fair value of assets acquired $21,424,445
Less: Liabilities assumed (4,039,411)
Stock issued (9,420,995)
-----------
Cash paid for acquisitions 7,964,039
Cash acquired in acquisitions (1,252,431)
-----------
Net cash paid for acquisitions $ 6,711,608
===========
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN RETAINED TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1997 5,578,913 $ 55,789 $ 6,231,555 $ 1,593,369 157,433 $ (638,556)
PAYMENTS RECEIVED ON STOCK
PURCHASE OF TREASURY STOCK 60,700 (179,123)
REISSUANCE OF TREASURY STOCK 28,934 (6,818) 32,897
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 28,000 280 53,845
ACCRUED INTEREST INCOME
INCOME TAX BENEFIT ON EXERCISE OF
STOCK OPTIONS 63,000
COMPREHENSIVE INCOME:
UNREALIZED LOSS ON MARKETABLE SECURITIES
NET INCOME 2,011,345
------------
TOTAL COMPREHENSIVE INCOME 2,011,345
------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 5,606,913 $ 56,069 $ 6,377,334 $ 3,604,714 211,315 $ (784,782)
====================================================================================
BALANCE AT JULY 1, 1998 5,606,913 $ 56,069 $ 6,377,334 $ 3,604,714 211,315 $ (784,782)
PURCHASE OF TREASURY STOCK 16,400 (136,116)
REISSUANCE OF TREASURY STOCK 86,067 (28,070) 143,859
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 372,227 3,722 361,529
ISSUANCE OF COMMON STOCK UPON
EXERCISE OF WARRANTS-NET 700,852 7,009 2,556,986
ISSUANCE OF COMMON STOCK UPON
PURCHASE ACQUISITIONS 793,774 7,938 9,413,056
ACCRUED INTEREST INCOME
DEFERRED COMPENSATION 136,867
SHARES TO BE ISSUED UPON
SETTLEMENT OF LITIGATION 34,500 345 138,605
INCOME TAX BENEFIT ON EXERCISE OF
STOCK OPTIONS 957,000
COMPREHENSIVE INCOME:
UNREALIZED GAIN ON MARKETABLE SECURITIES
NET INCOME 2,181,143
------------
TOTAL COMPREHENSIVE INCOME 2,181,143
------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 7,508,266 $ 75,083 $ 20,027,444 $ 5,785,858 199,645 $ (777,039)
====================================================================================
<CAPTION>
STOCK ACCUMULATED
SUBSCRIPTIONS AND AND OTHER TOTAL
ACCRUED INTEREST COMPREHENSIVE STOCKHOLDERS'
RECEIVABLE INCOME EQUITY
-----------------------------------------------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1997 $ (223,168) $ -- $ 7,018,989
PAYMENTS RECEIVED ON STOCK 87,869 87,869
PURCHASE OF TREASURY STOCK (179,123)
REISSUANCE OF TREASURY STOCK 61,831
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 54,125
ACCRUED INTEREST INCOME (13,546) (13,546)
INCOME TAX BENEFIT ON EXERCISE OF
STOCK OPTIONS 63,000
COMPREHENSIVE INCOME:
UNREALIZED LOSS ON MARKETABLE SECURITIES (86,903) (86,903)
NET INCOME 2,011,346
----------------------------
TOTAL COMPREHENSIVE INCOME (86,903) 1,924,443
-----------------------------------------------
BALANCE AT JUNE 30, 1998 $ (148,845) $ (86,903) $ 9,017,587
===============================================
BALANCE AT JULY 1, 1998 $ (148,845) $ (86,903) $ 9,017,587
PURCHASE OF TREASURY STOCK (136,116)
REISSUANCE OF TREASURY STOCK 229,926
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 365,251
ISSUANCE OF COMMON STOCK UPON
EXERCISE OF WARRANTS-NET 2,563,995
ISSUANCE OF COMMON STOCK UPON
PURCHASE ACQUISITIONS 9,420,994
ACCRUED INTEREST INCOME (10,801) (10,801)
DEFERRED COMPENSATION 136,867
SHARES TO BE ISSUED UPON
SETTLEMENT OF LITIGATION 138,950
INCOME TAX BENEFIT ON EXERCISE OF
STOCK OPTIONS 957,000
COMPREHENSIVE INCOME:
UNREALIZED GAIN ON MARKETABLE SECURITIES 95,144 95,144
NET INCOME 2,181,143
----------------------------
TOTAL COMPREHENSIVE INCOME 95,144 2,276,287
-----------------------------------------------
BALANCE AT JUNE 30, 1999 $ (159,646) $ 8,241 $ 24,959,941
===============================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
GILMAN + CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. ORGANIZATION AND
NATURE OF BUSINESS
Business
Gilman + Ciocia, Inc. and subsidiaries (the "Company" or "G+C"), 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 nine
wholly owned subsidiaries, three of which are inactive. The active subsidiaries
are: Prime Capital Services, Inc ("PCS") and North Ridge Securities, Inc.
("North Ridge") which are registered broker-dealers pursuant to the provisions
of the Securities Exchange Act of 1934; Prime Financial Services, Inc. ("PFS")
and NorthShore Capital Management, Inc. ("North Shore"), which manage PCS and
North Ridge, respectively, as well as sell life insurance and fixed annuities;
Asset and Financial Planning, Ltd. ("AFP"), an asset management business; and
e1040.com, Inc. ("e1040") an internet tax preparation business.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly owned
subsidiaries. All significant intercompany transactions have been eliminated.
The Company has several investments in 20% to 50% owned companies, which are
accounted for on the equity method. Accordingly, the Company's share of the
earnings of these companies, of approximately $4,000, is included in other
income as of June 30, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include
investments in money market funds and are stated at cost, which approximates
market value.
F-8
<PAGE>
Marketable Securities
The Company has classified its short-term investments in debt instruments as
available for sale securities that are reported at fair value with unrealized
gains and losses included in earnings or stockholders' equity, respectively.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization are
determined using straight-line or accelerated methods over the estimated useful
lives of the assets or, for leasehold improvements, over lease terms which range
from one to seven years.
Intangible Assets
Intangible assets represent the identifiable intangible assets and goodwill in
connection with the acquisitions of income tax businesses, broker-dealers,
related covenants not to compete, customer lists and others. Amortization
expense is computed on a straight-line basis over a period of five to twenty
years, and amounted to $814,683 and $354,649 for the years ended June 30, 1999
and 1998, respectively.
The Company's operational policy for the assessment and measurement of any
impairment in the value of the intangible assets acquired which is other than
temporary is to evaluate the recoverability and remaining life of the intangible
assets and determine whether the intangible assets should be completely or
partially written-off or the amortization period accelerated. The Company will
recognize impairment in the value of the intangible assets if the un-discounted
estimated future operating cash flows of the relevant assets acquired are
determined to be less than their carrying amount. If the Company determines that
impairment has occurred, the measurement of the impairment will be equal to the
excess of the carrying amount of the intangible assets over the amount of the
discounted estimated operating cash flows.
During fiscal 1999 and 1998, the Company acquired intangible assets for
approximately $2,994,445 and $145,000, respectively.
Impairment of Long-Lived Assets
The Company follows the Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that full recoverability is questionable. Management
evaluates the recoverability of its intangible assets and other long-lived
assets and several factors are used in the valuation including, but not limited
to, management's plans for future operations, recent operating results and
projected cash flows.
Website Costs
In accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use, " the Company
capitalizes costs incurred in the application development stage related to the
development of its website.
F-9
<PAGE>
Deferred Rent
Certain of the Company's lease agreements provide for scheduled rent increases
during the lease term or for rental payments commencing at a date other than
initial occupancy. Provision has been made for the excess of operating lease
rental expense, computed on a straight-line basis over the lease term, over cash
rentals paid.
Revenue Recognition
The Company recognizes all revenues associated with income tax preparation and
direct mail services upon completion of the services. Securities transactions
and related commission revenue and expenses are recognized on a trade date
basis. Commission revenue and expenses on sales of life insurance policies are
recognized when the policies are effective.
The consolidated statements of income includes as revenue, commissions received
from financial planning services and insurance underwriters, the commissions
received directly by the Company as well as the commissions paid by Royal
Alliance, Inc. ("Royal") to financial planners. Accordingly, the payments made
directly to the financial planners are also included in salaries and commission
expense.
As of July 1, 1999, all of these financial planners had removed their security
licenses from Royal and placed them with PCS. Accordingly, effective as of that
date, the financial planners received their commissions directly from the
Company.
Advertising
Costs to develop advertising are accumulated and expensed upon the first mailing
of such advertising in accordance with "SOP" 93-7. Costs to develop tax season
programs and associated printing and paper costs are deferred in the first and
second fiscal quarters and expensed in the third fiscal quarter upon the first
use of such advertisement in the advertising programs.
Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS No. 109 "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
estimated tax rates and laws to taxable years in which such differences are
expected to reverse.
Stock-based Compensation
SFAS No. 123, "Accounting for Stock Based Compensation," encourages, but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation awards to employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options awarded to employees and
directors is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee or director
must pay to acquire the stock.
As required, the Company follows SFAS No. 123 to account for stock-based
compensation awards to outside consultants. Accordingly, compensation costs for
stock option awards granted to outside consultants and non-employee financial
planners is measured at the date of grant based on the fair value of the award
using the Black-Scholes option pricing model (Note 10).
F-10
<PAGE>
Net Income Per Share
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings
Per Share" which establishes standards for computing and presenting earnings per
share (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. 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. (Note 11)
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, 1999 because of the
relatively short-term maturity of these instruments and their market interest
rates.
Comprehensive Income
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
established standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity, except those resulting from investments by owners, and
distributions to owners. Among other disclosures, SFAS No. 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Segment Disclosure
The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 131 requires entities to disclose financial and
detailed information about their operating segments in a manner consistent with
internal segment reporting used by the Company to allocate resources and assess
financial performance. (Note 13).
New Accounting Pronouncements
In April 1998, the AICPA issued Statement of Position "SOP" 98-5 "Reporting
Costs of Start-Up Activities," which establishes standards for the accounting of
start-up costs. Costs of start-up activities, including organization costs,
should be expensed as incurred. SOP 98-5 is effective for financial statements
for fiscal years beginning after December 15, 1998, although earlier application
is encouraged. The Company has adopted SOP 98-5 during fiscal year 1998;
however, the effects of this standard have no material impact on the Company's
results of operations, earnings per share or financial position.
3. Business Combinations
In November 1998, the Company acquired all of the outstanding stock of North
Ridge and North Shore (collectively "NSR") for $5,250,000. 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
under the purchase method of accounting. The results of operations of NSR have
been included in the Company's results of operations from November 1998.
F-11
<PAGE>
On April 5, 1999 the Company consummated the acquisition of all of the issued
and outstanding capital stock of PCS and AFP. A newly-formed subsidiary of the
Company, consummated the acquisition of certain assets of PFS, pursuant to a
Stock and Asset Purchase Agreement. PCS, AFP and PFS are collectively
hereinafter referred to as Prime.
The Company delivered at the closing of the Acquisition 751,004 shares of its
Common Stock, for all the outstanding shares of the common stock of PCS and AFP
and for the assets acquired from PFS. The amount of Purchase Shares may be
adjusted downward, if the 1999 adjusted pre-tax profits of Prime fails to meet
certain targets set forth in the Purchase Agreement. The purchase method of
accounting was used to record the transaction.
Unaudited proforma data assuming the business combinations were completed
effective the beginning of Fiscal 1999 and Fiscal 1998 is as follows:
<TABLE>
<CAPTION>
Fiscal 1999: G+C NSR Prime Pro Forma
<S> <C> <C> <C> <C>
Revenues $36,491,000 $ 5,529,000 $24,993,000 $67,013,000
Net Income $ 1,110,000 $ 42,000 $ 982,000 $ 2,134,000
Income per share of common stock - basic $0.30
$0.18
Income per share of common stock - diluted $0.28
$0.16
Weighted average shares outstanding - basic 6,264,228 751,000 7,015,228
Weighted average shares outstanding - 6,917,430 751,000 7,668,436
diluted
Fiscal 1998: G+C NSR Prime Pro Forma
Revenues $28,533,000 $ 6,016,000 $15,562,000 $50,511,000
Net Income (Loss) $ 2,011,000 ($ 324,000) $ 181,000 $ 1,868,000
Income per share of common stock - basic $0.30
$0.37
Income per share of common stock - diluted $0.26
$0.32
Weighted average shares outstanding - basic 5,383,093 751,000 6,134,093
Weighted average shares outstanding - 6,315,345 751,000 7,066,345
diluted
</TABLE>
F-12
<PAGE>
4. RECEIVABLES FROM OFFICERS AND STOCKHOLDERS
<TABLE>
<CAPTION>
<S> <C>
Notes receivable from officers of the Company that are due in $ 142,450(a)
aggregate bi-weekly installments of $2,295 (including interest at 7%
per annum) through June 30,2000
Notes receivable from officers of the Company that are due in
aggregate monthly payments of $9,634 (including interest at 7% per
annum) commencing September 1, 1998
through August 1, 2001. 590,640(a)
Demand loans to officers 689,512(a)
Notes receivable from stockholders of the Company that are due in aggregate
bi-weekly installments of $2,295 (including interest at 7%
per annum) through June 30,2000 74,168
Notes receivable of $33,915 and $112,000 from stockholders of the
Company due on June 3, 2000 and June 19, 2000 respectively. Interest is
charged at 8.5% and 6% per annum, respectively. 145,915
Receivable from stockholders of the Company, due in biweekly
installments of $500 through March 9, 2007. Interest is charged at 7%
per annum. 81,502
Note receivable from a stockholder of the Company due on October 9,
1999. Interest is charged at 8% per annum. 129,989
Other 285,021
-----------
2,139,197
Less- Current portion 568,233
-----------
$ 1,570,964
-----------
(a) The officers have pledged their stock in the Company (with an aggregate
market value of approximately $1,440,000) as collateral for these loans.
Interest income from officers and stockholders was approximately $82,000 and
$21,000, for the years ended June 30, 1999 and 1998, respectively.
5. PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment, net consist of the following:
Buildings $ 626,864
Equipment 3,330,151
Furniture and fixtures 495,175
Leasehold improvements 340,769
-----------
4,792,959
Less- Accumulated depreciation and amortization 2,420,785
-----------
$ 2,372,174
===========
</TABLE>
F-13
<PAGE>
For the years ended June 30, 1999 and 1998 depreciation and amortization expense
from property and equipment was approximately $605,000 and $504,000,
respectively.
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Intangible assets consit of the following as of June 30, 1999
<S> <C>
Customer Lists $4,652,918
Broker-Dealer Registration 200,000
Non-Compete Contracts 800,000
House Accounts 900,000
Administrative Infrastructure 700,000
Independent Contractor Agreements 5,700,000
Goodwill 6,069,980
-----------
19,022,898
Less: Accumulated Amortization 1,635,581
-----------
Net $17,387,317
===========
Amortization expense is computed on a straight-line basis over periods of five
to twenty years, and amounted to $814,683 and $354,649 for the years ended June
30, 1999 and 1998, respectively.
7. DEBT
Debt consists of the following:
Bank line of credit (a) $ 1,500,000
Revolving line of credit (b) 2,500,000
Notes payable for client settlements, payable over periods of 3-5
years at varying interest rates between 9% to 10% 304,141
Capitalized lease obligations 129,512
-----------
4,433,653
Less: Current portion 1,695,529
-----------
2,738,124
===========
</TABLE>
(a) The line of credit facility provided for borrowings up to $4,500,000. The
purpose of the line is to be used to support the Company's working capital
needs. The rate of interest charged is prime plus 1.5%. The maturity date is
November 30, 1999
(b) Represent drawdowns in an aggregate principal amount not to exceed, at any
one time outstanding, $3,500,000. The proceeds of the revolving credit loans are
used by the Company to fund new acquisitions. The rate of interest charged is
prime plus 1.5%. The maturity date is October 31, 2001.
Both loan facilities are secured by all of the Company's assets and are
personally guaranteed by the three principal officers of the Company. The
Company is required, under this agreement to maintain financial ratios and
agrees not to pay or accrue for any dividends on distributions to any of its
shareholders or officers.
F-14
<PAGE>
Subsequent to year-end, the Company has replaced both its revolving credit
facility and its line of credit with a new facility. The new facility of $10
million comprises a line of credit of $4 million, and two revolver loans for a
total of $6 million. The interest rate on the line of credit is 2.9% plus the
30-day commercial paper rate. The line of credit facility expires on June 30,
2000. The interest rate on the two revolver loans is 3.15% plus the 30-day
commercial paper rate. The terms of the two revolving loan facilities are sixty
months. Both facilities are secured by all of the business assets of the Company
and guaranteed by each of the three principal officers of the Company up to
$1,250,000 each. The facility contains covenants that require, among other
things, the maintenance of a minimum tangible net worth, a maximum debt to
tangible net worth ratio, and minimum net cash flow as defined in the agreement.
8. CAPITALIZED LEASE OBLIGATIONS
The Company is the leasee of certain equipment under capital leases expiring
through 2002. The assets and liabilities under capital leases are recorded at
the lower of the present value of minimum lease payments or the fair market
value of the asset. The assets are depreciated over their estimated useful
lives. Depreciation of assets under capital leases is included in depreciation
expense for the year ended June 30, 1999.
Minimum future lease payments under capital leases as of June 30 are as follows:
2000 $ 75,992
2001 42,881
2002 10,639
---- ----------
129,512
Less: Amount representing interest 15,744
----------
Present value of net minimum lease payments $ 113,768
==========
Interest rates on capital leases vary from 8.25% to 11.32% and are imputed based
on the lower of the Company's incremental borrowing rate at the inception of
each lease or the lessor's implicit rate of return.
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under various non-cancelable lease agreements for the
rental of office space through 2004. The lease agreements for office space
contain escalation clauses based principally upon real estate taxes, building
maintenance and utility costs. The following is a schedule by fiscal year of
future minimum rental payments required under operating leases as of June 30,
1999.
2000 $ 2,320,066
2001 1,959,283
2002 1,304,059
2003 894,546
2004 765,094
thereafter 1,435,417
-----------
$ 8,678,465
===========
Subsequent to year-end, the Company entered into a ten-year lease for corporate
office space. The lease commences on December 1, 1999 and calls for annual
minimum rental payments of approximately $265,000 per fiscal year.
F-15
<PAGE>
Rent expense for the fiscal years ended June 30, 1999 and 1998 was $2,480,067
and $2,037,117, respectively.
Professional Liability or Malpractice Insurance
The Company does not maintain any professional liability or malpractice
insurance policy. Although the Company believes it complies with all applicable
laws and regulations, no assurance can be given that the Company will not be
subject to professional liability or malpractice suits.
Clearing Agreements
The Company is a party to clearing agreements with unaffiliated correspondent
brokers which state that the Company will assume customer obligations should a
customer default. At June 30, 1999, approximately $100,000 of cash is held as a
deposit requirement by the correspondent brokers.
Net Capital Requirements
PCS and North Ridge are subject to the SEC's Uniform Net Capital Rule 15c 3-1
[PCS] and 15c 3-3 [North Ridge], which require the maintenance of minimum
regulatory net capital and that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed the greater of 15 to 1 or $100,000.
At June 30, 1999, PCS and North Ridge had net capital of $302,055 and $111,998,
which was $91,732 and $86,998 in excess of its required net capital of $210,323
and $25,000, respectively.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, PCS and North Ridge execute, as agents,
transactions on behalf of customers. If the agency transactions do not settle
because of failure to perform by either the customer or the counterparties, PCS
and North Ridge 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.
PCS and North Ridge do not anticipate nonperformance by customers or
counterparties in the above situation. The Company's policy is to monitor its
market exposure and counterparty risk. In addition, PCS and North Ridge have a
policy of reviewing, as considered necessary, the credit standing of each
counterparty and customer with which it conducts business.
Litigation
In April 1998, an investment banker and its assignee, instituted a suit in the
U.S. District Court in Austin Texas, demanding issuance, collectively, of
100,000 warrants to purchase the Company's common stock at $5.13 per share
(alleged to have been issuable under an investment banking agreement pursuant to
which the investment banker was to have provided investment banking services to
the Company), as well as attorney's fees and exemplary damages. This action was
settled in December 1998 in a settlement agreement under which the Company
issued warrants to purchase an aggregate of 85,000 shares of the Company's
common stock and agreed to reimburse its Executive Vice President for the
transfer of an aggregate of 12,500 shares to the plaintiffs. The Company
subsequently exchanged the warrants for an aggregate of 34,500 shares of common
stock. Expense of $139,000 was recognized in fiscal year 1999 relating to the
34,500 shares of common stock.
F-16
<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 (former defendants) 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 success of any
asserted allegation or defense.
In addition, in July 1999, a lawsuit was initiated against the Company by a
consultant (an entity believed to be affiliated with the investment banker)
demanding the issuance of 150,000 warrants to purchase the Company's common
stock at $5.13 per share, alleged to have been issuable under a consulting
agreement pursuant to which the consultant was to have provided consulting
services to the Company. The Company believes that the consultant 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.
Payroll Taxes
The Company annually provides its employees with Form W-2 and its outside
consultants with Form 1099 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.
10. STOCKHOLDERS' EQUITY
Warrants
During fiscal 1999, 507,926 and 50,783 warrants were exercised that had been
outstanding to the public and the underwriter, respectively, in connection with
the Initial Public Offering in 1994. The exercise resulted in net proceeds of
$2,563,995.
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, 1999, of the 420,002 options that had been granted under the Option
Plan, 344,779 were exercised and 75,223 had expired during fiscal 1999.
The Company charged earnings for compensation expense of $90,124 and $134,823
for the years ended June 30, 1999 and 1998 respectively, in connection with the
issuance of stock options.
F-17
<PAGE>
The table below summarizes plan and nonplan stock option activity:
Weighted
Average
Number of Shares Exercise Price
--------------- --------------
Outstanding, July 1, 1997 1,366,002 3.59
Granted 1,748,000 9.18
Exercised (28,000) 1.93
Canceled (250,000) 5.13
---------
Outstanding, June 30, 1998 2,836,002 6.92
Granted 525,500 8.59
Exercised (560,779) 3.16
Cancelled (75,223) 3.07
---------
Outstanding, June 30, 1999 2,725,500 8.12
Exercisable, June 30, 1998 845,000 3.54
Exercisable, June 30, 1999 522,000 3.82
=========
The weighted average grant date fair value of options granted during the years
ended June 30, 1999 and 1998 is $ 5.72 and $5.41 per option, respectively.
Options outstanding and exercisable at June 30, 1999 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> <C>
1995 340,000 3.50 340,000 3.50 7
1996 - - - - -
1997 162,000 2.75 162,000 2.75 4
1998 1,698,000 9.29 20,000 7.50 8
1999 525,000 8.59 - - 5
</TABLE>
The Company has adopted the disclosure-only provision of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the employee stock
options. Had compensation cost for the Company's employee stock options been
determined based on the fair value at the grant date for options granted since
July 1, 1995 consistent with the provisions of SFAS No. 123, the Company's net
income or loss and earnings or loss per share would have been reduced to the pro
forma amounts indicated below:
F-18
<PAGE>
Years ended June 30,
1999 1998
---- ----
Net income , as reported $2,181,143 $2,011,345
Net loss, pro forma (3,506,734) (46,191)
Earnings per share, as reported
0.32 0.32
Loss per share, pro forma
(0.51) (0.01)
The pro forma effect on net income or loss for fiscal years 1999 and 1998 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:
Expected life (years) 3
Interest rate 7.00%
Volatility:
June 30, 1999 74.5%
June 30, 1998 73.6%
Dividend yield 0%
The Company adopted the Company's 1999 Common Stock and Incentive and
Non-Qualified Stock Option Plan of Gilman + Ciocia, Inc. (the "1999 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").
On April 20, 1999, the Board of Directors of the Company adopted the Company's
1999 Common Stock and Incentive and Non-Qualified Stock Option Plan (the
"Plan"). The Plan was approved by the Company's stockholders on June 22, 1999.
Treasury Stock
During fiscal 1999, the Company acquired 16,400 shares of its common stock for
an aggregate cost of $136,116 and reissued 28,070 of these shares to employees.
The re-issuance gave rise to the recognition of compensation expense in the
amount of $229,926 representing the excess of the fair value of these shares at
re-issuance over proceeds received.
During fiscal 1998, the Company acquired 60,700 shares of its common stock for
an aggregate cost of $179,123 and reissued 6,818 of these shares to employees.
The re-issuance gave rise to the recognition of compensation expense in the
amount of $61,831 representing the excess of the fair value of these shares at
reissuance over proceeds received.
F-19
<PAGE>
Stock Subscriptions and
Accrued Interest Receivable
Stock subscription receivable of $159,646 at June 30, 1999; bear interest at a
rate of 9% per annum. For the years ended June 30, 1999 and 1998, the Company
recognized interest income of $10,801 and $13,546, respectively. At June 30,
1999 accrued interest receivable was $33,661. Principal and interest is expected
to be paid in fiscal 2000.
The Company is holding in escrow all of the shares of its common stock related
to the stock subscription receivable. The shares will be released when the stock
subscription receivables are collected.
The following is a schedule by year of principal payments to be received:
Year ending June 30:
2000 $ 125,985
11. EARNINGS PER SHARE
In accordance with SFAS No. 128, a reconciliation between the numerators and
denominators of the basic and diluted EPS computations for net earnings is as
follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 1998
Per Share Per Share
Net Income Shares Amounts Net Income Shares Amounts
---------- ------ ------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $2,181,143 6,264,228 $ 0.35 $2,011,345 5,383,093 $ 0.37
Dilutive Stock options
& warrants 653,208 932,252
--------- ---------
Dilutive EPS $2,181,143 6,917,436 $ 0.32 $2,011,345 6,315,345 $ 0.32
</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, 1999 520,000
Year Ended June 30, 1998 675,000
12. 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 former (the "Partnership"), an Investment Partnership. At July 1,
1997, the Company had approximately a 41%, interest in the Partnership. Such
partnership fully liquidated its remaining investment in fiscal 1998. During
fiscal 1998, the Company wrote-off a $100,000 receivable due from the
Partnership.
F-20
<PAGE>
Professional Fees
During fiscal 1999 and 1998, professional firms related to officers and
directors of the Company charged the Company fees totaling approximately
$440,000 and $200,000, respectively.
13. SEGMENTS OF BUSINESS
The Company is a provider of income tax preparation and financial planning
services to individuals and businesses in various states across the country.
Direct mail services are provided primarily to businesses and individuals in the
New York metropolitan area.
<TABLE>
<CAPTION>
Tax Financial
Preparation Planning Direct Mail Eliminations Consolidation
Year ended June 30, 1999
<S> <C> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 12,813,113 $ 36,137,862 $ 1,492,431 $ 50,443,406
Intersegment revenues 2,629,833 (2,629,833) --
------------ ------------ ------------ ------------ ------------
Total revenues 12,813,113 36,137,862 4,122,264 (2,629,833) 50,443,406
Direct costs 5,951,233 25,550,995 3,608,124 (2,629,833) 32,480,519
Depreciation and amortization 262,820 1,148,002 30,566 1,441,388
General corporate expenses 2,229,218 10,237,421 258,009 12,724,648
------------ ------------ ------------ ------------ ------------
Operating income (loss) $ 4,369,842 $ (798,556) $ 225,565 $ -- $ 3,796,851
------------ ------------ ------------ ------------ ------------
Interest expense 73,050 207,911 280,961
Identifiable assets 12,914,444 40,653,346 513,629 (21,082,439) 32,998,980
Capital expenditures 567,905 29,915 131,592 729,412
Direct costs consist of the following:
Direct mail costs 591,653 591,653
Advertising 1,003,530 2,861,776 2,638,107 (2,629,833) 3,873,580
Rent 596,112 1,827,435 56,519 2,480,066
Salaries and commissions 4,351,591 20,861,784 321,845 25,535,220
------------ ------------ ------------ ------------ ------------
Total direct costs $ 5,951,233 $ 25,550,995 $ 3,608,124 $ (2,629,833) $ 32,480,519
------------ ------------ ------------ ------------ ------------
Year ended June 30, 1998:
Revenues from unaffiliated customers 10,164,550 16,578,032 1,790,501 -- 28,533,083
Intersegment revenues -- -- 2,369,447 (2,369,447) --
------------ ------------ ------------ ------------ -----------
Total revenues 10,164,550 16,578,032 4,159,948 (2,369,447) 28,533,083
Direct costs 6,608,421 9,868,394 3,553,154 (2,369,447) 17,660,522
Depreciation and amortization 311,418 508,102 38,871 -- 858,391
General corporate expenses 2,427,443 3,960,564 223,493 -- 6,611,500
------------ ------------ ------------ ------------ -----------
Operating income 817,268 2,240,972 344,430 -- 3,402,670
Interest expense 89,207 86,329 -- -- 175,536
Identifiable assets 6,245,447 6,043,903 593,101 (3,131,264) 9,751,187
Capital expenditures 772,930 -- 79,867 -- 852,797
Direct costs consist of the following:
Direct mail costs -- -- 770,472 -- 770,472
Advertising 1,376,457 1,332,030 2,393,827 (2,369,447) 2,732,867
Rent 746,906 1,218,636 71,575 -- 2,037,117
Salaries and commissions 4,485,058 7,317,728 317,280 -- 12,120,066
------------ ------------ ------------ ------------ -----------
Total direct costs 6,608,421 9,868,394 3,553,154 (2,369,447) 17,660,522
</TABLE>
F-21
<PAGE>
14. TAXES ON INCOME
Provisions for income taxes in the consolidated financial statements consist of
the following:
<TABLE>
<CAPTION>
June 30, June 30,
---------- ----------
1999 1998
---------- ----------
Current:
<S> <C> <C>
Federal $ 1,292,165 $ 1,247,828
State and local 269,835 282,982
----------- -----------
Total current 1,562,000 1,530,810
----------- -----------
Deferred:
Federal (34,734) (90,304)
State and local (7,266) (33,696)
----------- -----------
Total deferred tax (benefit) (42,000) (124,000)
$ 1,520,000 $ 1,406,810
----------- -----------
Deferred tax assets as of June 30, 1999 consist of the following:
Compensation expense recognized for financial reporting purposes in
connection with common
stock option grants $ 152,000
Book amortization of intangibles in excess of tax 225,000
Provision for bad debts
36,000
Provision for deferred rent liability
(15,000)
Book depreciation in excess of tax (157,000)
Investments in marketable securities
10,000
Investments accounted for under equity method (58,000)
-----------
$ 193,000
===========
</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 provision for income taxes
is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- --------------------
Year ended June 30:
<S> <C> <C> <C> <C>
Federal income taxes computed at statutory $1,257,000 34.0% $1,162,173 34.0%
rates
State and local taxes, net of federal 241,000 6.5 205,089 6.0
tax benefit
Reversal of under/(over) accruals -- 0.0 22,810 0.7
Amortization of intangible assets with
no benefit 145,000 3.9
Other (123,000) (3.3) 16,738 0.5
$1,520,000 41.1% $1,406,810 41.2%
</TABLE>
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,453,354
<SECURITIES> 316,937
<RECEIVABLES> 3,673,018
<ALLOWANCES> 87,500
<INVENTORY> 0
<CURRENT-ASSETS> 10,550,431
<PP&E> 4,792,959
<DEPRECIATION> 2,420,785
<TOTAL-ASSETS> 32,998,980
<CURRENT-LIABILITIES> 5,300,915
<BONDS> 0
0
0
<COMMON> 75,083
<OTHER-SE> 24,884,858
<TOTAL-LIABILITY-AND-EQUITY> 32,998,980
<SALES> 50,443,406
<TOTAL-REVENUES> 50,443,406
<CGS> 0
<TOTAL-COSTS> 46,646,555
<OTHER-EXPENSES> (95,708)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280,961
<INCOME-PRETAX> 3,701,143
<INCOME-TAX> 1,520,000
<INCOME-CONTINUING> 2,181,143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,181,143
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.32
</TABLE>
