U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
[X] EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED 12/31/98
TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
- ---
FOR THE TRANSITION PERIOD FROM TO
------ -------
Commission file number 000-22996
GILMAN & CIOCIA, INC.
(Name of small business issuer in its charter)
Delaware 11-2587324
- ------------------------- -------------------------
( State of jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
475 Northern Boulevard, Great Neck, NY 11021
- -------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(516) 482-4860
------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months ( or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each class of the issuer's
classes of common equity, as of the latest practicable date. As of February 12,
1999, 6,565,875 shares of the issuer's common equity were outstanding.
<PAGE>
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. PAGE
Consolidated Balance Sheet as of December 31, 1998 F-1-F-2
Consolidated Statements of Operations for the three and six-months
Ended December 31, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the six months
Ended December 31, 1998 F-4
Consolidated Statements of Cash Flows for the six months ended
December 31, 1998 and 1997 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
PLAN OF OPERATION
Over the past three fiscal years, the Company opened 62 new offices,
which represents 46% of all offices at December 31, 1998. During the six months
ended December 31, 1998, the Company purchased four new tax practices, two of
which are located in Florida and two are located in New York. The Company plans
to continue its tax practice expansion and recruit successful financial
planners.
In November, 1998, the Company acquired all of the outstanding stock
of North Ridge Securities Corp.,("North Ridge") a securities broker/dealer, and
North Shore Capital Management Corp.,("North Shore"), a company that supplies
management services to North Ridge for $5,250,000 in cash and short-term notes.
The acquired companies are a full-service financial organization, which provides
its clients with a wide range of financial investment services. The acquisition
has been accounted for by the purchase method. The results of operations of
North Shore and North Ridge have been included in the Company's operations from
November 1, 1998.
The Company has funded its growth from the proceeds of equity
offerings, the proceeds received in October 1998 pursuant to the exercise of the
Company's public and underwriter warrants, operating profits and use of its
short-term line of credit.
The Company continued its operations of a direct mail division in order
to control the substantial costs of advertising its many offices. This division
was acquired to specifically reduce the costs of advertising for the Company.
The Company believes that the direct mail division results in lower advertising
costs on a per-office basis by taking advantage of economies of scale .The
Company's direct mail division operates as an independent division and solicits
its own customers for its direct mail services.
2
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 COMPARED.
The Company's revenues for the six months ended December 31, 1998 were
$11,857,351 as compared to revenues of $8,612,686 for the comparable period of
the prior year. This increase was attributable primarily to increased
commissions from increased sales of financial planning services and additional
affiliated financial planners.
The Company's total revenues for the six months ended December 31, 1998
consist of $426,872 for tax preparation services, $10,652,539 for financial
planning services, and $777,940 for direct mail services. The Company's total
revenues for the six months ended December 31, 1998 consist of $444,116 for tax
preparation services, $6,732,211 for financial planning services and $1,436,359
for direct mail services.
The consolidated statement of operations for the six months ended
December 31, 1997 has been restated to reflect the total of the commission
revenue received by the Company and the commissions paid by Royal Alliance
directly to the financial planners (who are registered representatives of Royal
Alliance but are affiliated with the Company) as the Company's revenue from
financial planning services. The resulting increase in commission revenue is
offset by an increase in commission expense equal to the same amount.
Accordingly, this restatement had no effect on the Company's consolidated
financial position, net income (loss) or cash flows.
The increase in the Company's financial planning revenues for the six
months ended December 31, 1998 compared to the prior year's period is
approximately 58%. The increase in such financial planning revenues is
attributable to the continued growth of the existing offices and the increase of
production from new financial planners. The remaining growth in financial
planning revenues is a result of increased securities and insurance transactions
attributable to existing financial planners and additional revenues generated
from the acquisition of North Ridge and North Shore.
The Company's operating expenses for the six months ended December 31,
1998 were $12,202,153 as compared to operating expenses of $8,860,476 for the
comparable period of the prior year. The increase in operating expenses was
attributable to an increase in salaries and commissions in the amount of
$2,867,374, an increase in general and administrative expenses of $224,581, an
increase in advertising expenses of $436,161, an increase in depreciation and
amortization of $26,967 and an increase in rent expense of $20,717. These
increases in operating expenses were offset by a decrease in direct mail costs
of $234,123.
The increase in operating expenses was primarily attributable to the
costs associated with an increase of financial planning services (including the
number of financial planners and the overall financial planning revenues).
The increase in salaries and commissions is primarily due to an
increase in commissions payable to financial planners as a result of the
increased sales of financial planning services and the addition of financial
planners from the acquisition of North Ridge and North Shore.
The increase in general and administrative expenses is due primarily to
the Company's expansion of operations from the opening of seven new offices in
January 1998 and the four tax practices purchased in the six months ended
December 31, 1998. This expansion resulted in an increase in office expenses for
the six months ended December 31, 1998.
3
<PAGE>
Advertising costs increased due to expenses associated with the mailing
costs relating to newsletters and financial planning seminars.
The increase in depreciation and amortization expense is due primarily
to the depreciation of new computer equipment and the amortization of additional
intangible assets.
The Company's net loss for the six months ended December 31, 1998 was
$197,923 as compared to $182,674 for the six months ended December 31, 1997. The
increase of approximately 8% is primarily due to the operating results of the
direct mail division.
The Company's business is highly seasonal, with the majority of its revenue
earned in the first four months of the calendar year. The Company does not
consider inflation to be a risk to the cost of doing business in the current or
foreseeable future.
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 COMPARED
The Company's revenues for the three months ended December 31, 1998
were $6,092,917 as compared to revenues of $4,616,592 for the comparable period
of the prior year. This increase was attributable primarily to increased
commissions from increased sales of financial planning services and additional
affiliated financial planners.
The Company's total revenues for the quarter ended December 31, 1998
consist of $185,681 for tax preparation services, $5,472,573 for financial
planning services, and $434,663 for direct mail services. The Company's total
revenues for the quarter ended December 31, 1997 consist of $164,172 for tax
preparation services, $3,375,905 for financial planning services and $1,076,515
for direct mail services.
The consolidated statement of operations for the quarter ended December
31, 1997 has been restated to reflect the total of the commission revenue
received by the Company and the commissions paid by Royal Alliance directly to
the financial planners (who are registered representatives of Royal Alliance but
are affiliated with the Company) as the Company's revenue from financial
planning services. The resulting increase in commission revenue is offset by an
increase in commission expense equal to the same amount. Accordingly, this
restatement had no effect on the Company's consolidated financial position, net
income (loss) or cash flows.
The increase in the Company's financial planning revenues for the
quarter ended December 31, 1998 compared to the prior year's period is
approximately 62%. The increase in such financial planning revenues is
attributable to the continued growth of the existing offices and the increase of
production from new financial planners. The remaining growth in financial
planning revenues is a result of increased securities and insurance transactions
attributable to existing financial planners and additional revenues generated
from the acquisition of North Ridge and North Shore.
The Company's operating expenses for the quarter ended December 31,
1998 were $6,197,858 as compared to operating expenses of $4,690,697 for the
comparable period of the prior year. The increase in operating expenses was
attributable to an increase in salaries and commissions in the amount of
$1,512,379, an increase in general and administrative expenses of $19,110, an
increase in advertising expenses of $206,117, and an increase in rent expense of
$49,708. These increases in operating expenses were offset by a decrease in
direct mail costs of $248,083 and a decrease in depreciation and amortization of
$32,070.
4
<PAGE>
The increase in operating expenses was primarily attributable to the
costs associated with an increase of financial planning services (including the
number of financial planners and the overall financial planning revenues).
The increase in salaries and commissions is primarily due to an
increase in commissions payable to financial planners as a result of the
increased sales of financial planning services and the addition of financial
planners from the acquisition of North Ridge and North Shore.
The increase in general and administrative expenses is due primarily to
the Company's expansion of operations from the opening of seven new offices in
January 1998 and four tax practices purchased in the six ended December 1998.
This expansion resulted in an increase in office expenses for the quarter ended
December 31, 1998.
Advertising costs increased due to expenses associated with the mailing
costs relating to newsletters and financial planning seminars.
The Company's net loss for the three months ended December 31, 1998 was
$75,456 as compared to $70,033 for the three months ended December 31, 1997. The
increase of approximately 8% is primarily due to a net increase in overall
operating expenses for the quarter.
The Company's business is highly seasonal, with the majority of its
revenue earned in the first four months of the calendar year. The Company does
not consider inflation to be a risk to the cost of doing business in the current
or foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues have been, and are expected to be, highly
seasonal. As a result, the Company must generate sufficient cash during the tax
season, in addition to its available bank credit facility, to fund its
operations. Operations during the non-tax season are primarily focused on
financial planning services.
The Company's cash flows used in operating activities was $3,507,359
and $2,455,191 for the six months ended December 31, 1998 and 1997,
respectively. The increase of $1,052,168 is due primarily to an increase in
purchases of new businesses and offset by a decrease in prepaid expenses and
other current assets.
Net cash used in investing activities was $5,452,924 and $992,479 for
the six months ended December 31, 1998 and 1997, respectively. The increase of
$4,460,445 is primarily due to an increase in purchases of businesses of
$4,341,337 and an increase in capital expenditures of $418,258. These increases
were offset by a net decrease in notes receivable/repayments from related
parties of $317,301.
Net cash provided by financing activities was $ 8,453,912 and $930,030
for the six months ended December 31, 1998 and 1997, respectively. The increase
in net cash provided by financing activities of $7,523,882 is primarily due to a
net increase in the proceeds of bank and other loans of $4,743,430 and an
increase in the proceeds from the sale of common stock and the exercise of stock
options and warrants of $2,732,571.
5
<PAGE>
At December 31, 1998, short-term borrowings include $4.5 million in the
aggregate due to two banks. Such debt is guaranteed by significantly all of the
Company's assets and is also guaranteed by three shareholders. This borrowing,
which is pursuant to a line of credit with two banks, was extended to $5.0
million subsequent to December 31, 1998.
The Company believes that it could continue to operate without any
additional financing (other than its seasonal bank loans) during the next 12
months. The Company anticipates that it will not pay dividends on its Common
Stock in the foreseeable future, but will apply any profits to fund the
Company's expansion.
During October and November 1998, the Company's public and underwriter
warrants and stock options for 65,000 shares were exercised resulting in gross
proceeds of approximately $3,115,000.
YEAR 2000 COMPLIANCE
The Company has finalized the installation of the Great Plains
accounting system, which is 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
In April 1998, Texas Capital Securities, Inc. ("Texas Capital") and its
assignee, Harbor Financial, Inc. (Harbor Financial") instituted a suit in the
U.S. District Court in Austin Texas, demanding issuance, collectively, of
100,000 warrants to purchase the Company's common stock at $5.125 per share
(alleged to have been issuable under an investment banking agreement pursuant to
which Texas Capital was to have provided investment banking services to the
Company), as well as attorney's fees and exemplary damages. The Company entered
into a settlement with Texas Capital and Harbor Financial whereby the Company
agreed to issue warrants to purchase 72,250 shares of Common Stock at $5 1/8 to
Harbor Financial and 12,750 shares of Common Stock to Woodward, Hall & Primm;
and Thomas Povinelli, the Company's Chief Operating Officer, agreed to transfer
1,875 shares of the Company's Common Stock to Woodward, Hall & Primm and 10,625
shares of the Company's Common Stock to Harbor Financial. The Company is to
reimburse Mr. Povinelli for such shares at the market value of the shares
transferred.
In addition, the Company has received a demand letter from Euromarket
Advisory, Inc. an entity believed to be affiliated with Texas Capital
Securities, Inc.) demanding the issuance of 150,000 warrants to purchase the
Company's common stock at $5.13 per share, alleged to have been issuable under a
consulting agreement pursuant to which Euromarket Advisory, Inc. was to have
provided consulting services to the Company. The Company believes that
Euromarket Advisory, Inc. defaulted under such agreement and provided no
material services to the Company. The Company has denied such demand.
6
<PAGE>
In August 1998, a legal action was instituted against the Company
pertaining to a wrongful death matter allegedly sustained in a Company
automobile more than nine years ago. The complaint seeks indemnification in the
amount of up to $3.5 million. The allegations in the complaint are based upon a
$1.7 million payment made by the plaintiffs plus an additional $1.8 million
payment for which plaintiffs ultimately may be held liable. An additional action
is currently pending to determine the liability allocation. The Company answered
the complaint by asserting numerous defenses which it believes are meritorious.
The case is currently entering the discovery phase, and, therefore, the Company
is unable to determine at this time the ultimate likelihood of success of any
asserted allegation or defense.
ITEM 6. EXHIBITS; LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Registrant's Articles of Incorporation, as amended,
incorporated by reference to the like-numbered exhibit in the
Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY
3.2 Registrant's by-laws, incorporated by reference to the
like-numbered exhibit in the Registrant's Registration
Statement on Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
27 Gilman & Ciocia, Inc. - Financial Data Schedule, Dated
December 31, 1998
(b) Reports on Form 8-K
The Company filed current reports on Form 8-K dated August 31,
1998 and September 23, 1998 in connection with extensions to
the expiration of the Company's redeemable public warrants.
The Company filed a current report on Form 8-K dated November
19, 1998, amended February 4, 1999 in connection with the
acquisition of North Ridge Securities Corp. and North Shore
Capital Management Corp.
7
<PAGE>
SIGNATURE
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: February 22, 1999
GILMAN & CIOCIA, INC.
By/s/Thomas Povinelli
- ----------------------
Thomas Povinelli
Chief Operating Officer
By/s/Stephen B. Sacher
- ----------------------
Stephen B. Sacher
Chief Financial Officer
8
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31
1998
(UNAUDITED)
-----------
CURRENT ASSETS:
CASH $ 1,199,460
MARKETABLE SECURITIES 127,041
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $87,500 3,332,979
RECEIVABLE FROM RELATED PARTIES, CURRENT PORTION 681,195
PREPAID EXPENSES AND OTHER CURRENT ASSETS 2,568,287
DEFERRED TAX ASSETS, CURRENT PORTION
96,000
-----------
TOTAL CURRENT ASSETS 8,004,962
-----------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 2,586,990
-----------
OF $2,204,708
OTHER ASSETS:
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION 6,913,002
OF $1,057,633
RECEIVABLES FROM RELATED PARTIES, NET OF CURRENT
PORTION 651,106
DEFERRED TAX ASSETS 139,000
OTHER ASSETS 480,523
-----------
TOTAL OTHER ASSETS 8,183,631
-----------
TOTAL ASSETS $18,775,583
===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31
1998
(UNAUDITED)
-----------
CURRENT LIABILITIES:
SHORT-TERM BORROWINGS $ 4,550,000
DUE TO FORMER OWNERS OF ACQUIRED BUSINESSES 1,833,611
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 861,766
------------
TOTAL CURRENT LIABILITIES 7,245,377
------------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY:
PREFERRED STOCK-$.001 PAR VALUE - SHARES AUTHORIZED
100,000: NONE ISSUED AND OUTSTANDING --
COMMON STOCK - $.01 PAR VALUE - SHARES AUTHORIZED
9,000,000: ISSUED 6,546,359 (DECEMBER 31, 1998) 65,463
PAID-IN-CAPITAL 9,118,636
RETAINED EARNINGS 3,406,791
------------
12,590,890
LESS- TREASURY STOCK, AT COST: 218,815 SHARES (DEC. 31, 1998) (840,176)
STOCK SUBSCRIPTIONS AND ACCRUED INTEREST RECEIVABLE (148,845)
ACCUMULATED COMPREHENSIVE INCOME:
UNREALIZED LOSS ON MARKETABLE SECURITIES, NET
OF INCOME TAXES (71,663)
TOTAL STOCKHOLDERS' EQUITY 11,530,206
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,775,583
============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 31 December 31
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Restated Restated
REVENUES:
TAX PREPARATION FEES $ 185,681 $ 164,172 $ 426,872 $ 444,116
FINANCIAL PLANNING SERVICES 5,472,573 3,375,905 10,652,539 6,732,211
DIRECT MAIL SERVICES 434,663 1,076,515 777,940 1,436,359
------------ ------------ ------------ -------------
TOTAL REVENUES 6,092,917 4,616,592 11,857,351 8,612,686
------------ ------------ ------------ -------------
OPERATING EXPENSES:
SALARIES AND COMMISSIONS 4,191,333 2,678,954 8,148,484 5,281,110
GENERAL AND ADMINISTRATIVE EXPENSES 849,396 830,286 1,711,369 1,486,788
ADVERTISING 247,546 41,429 506,777 70,616
DIRECT MAIL COSTS 86,061 334,144 302,125 536,248
RENT 575,447 525,739 1,032,499 1,011,782
DEPRECIATION AND AMORTIZATION 248,075 280,145 500,899 473,932
------------ ------------ ------------ -------------
TOTAL OPERATING EXPENSES 6,197,858 4,690,697 12,202,153 8,860,476
------------ ------------ ------------ -------------
OPERATING (LOSS) (104,941) (74,105) (344,802) (247,790)
------------ ------------ ------------ -------------
OTHER INCOME (EXPENSE):
INTEREST AND INVESTMENT INCOME 25,281 (9,512) 50,324 17,804
INTEREST EXPENSE (48,281) (35,803) (49,420) (74,456)
OTHER INCOME 50 2,700 8,436 37,488
------------ ------------ ------------ -------------
TOTAL OTHER INCOME (EXPENSE) (22,950) (42,615) 9,340 (19,164)
------------ ------------ ------------ -------------
LOSS BEFORE INCOME TAX (BENEFIT) (127,891) (116,720) (335,462) (266,954)
INCOME TAX BENEFIT (52,435) (46,687) (137,539) (84,280)
------------ ------------ ------------ -------------
NET LOSS $ (75,456) $ (70,033) $ (197,923) $ (182,674)
============ ============ ============ =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.01) $ (0.01) $ (0.03) $ (0.03)
============ ============ ============ =============
WEIGHTED AVERAGE COMMON SHARES:
BASIC AND DILUTED 6,052,768 5,372,800 5,724,183 5,374,348
============ ============ ============ =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS ACCUMULATED
AND ACCRUED OTHER
COMMON STOCK PAID-IN RETAINED INTEREST COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE INCOME
-------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1998 5,606,913 $ 56,069 $ 6,377,334 $ 3,604,714 $ (148,845) $ (86,903)
PURCHASE OF TREASURY STOCK
ISSUANCE OF COMMON STOCK UPON
EXERCISE OF STOCK OPTIONS 238,547 2,385 42,615
ISSUANCE OF COMMON STOCK UPON
EXERCISE OF WARRANTS - NET 700,899 7,009 2,698,687
COMPREHENSIVE INCOME:
UNREALIZED GAIN ON MARKETABLE
SECURITIES 15,240
NET LOSS (197,923)
----------- -----------
TOTAL COMPREHENSIVE INCOME (197,923) 15,240
----------- -----------
BALANCE AT DECEMBER 31, 1998 6,546,359 $ 65,463 $ 9,118,636 $ 3,406,791 $ (148,845) $ (71,663)
========= =========== =========== =========== =========== ===========
TOTAL STOCK-
TREASURY STOCK HOLDERS'
SHARES AMOUNT EQUITY
----------------------------------------
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1998
BALANCE AT JULY 1, 1998 211,315 $ (784,782) $ 9,017,587
PURCHASE OF TREASURY STOCK 7,500 (55,394) (55,394)
ISSUANCE OF COMMON STOCK UPON
EXERCISE OF STOCK OPTIONS 45,000
ISSUANCE OF COMMON STOCK UPON
EXERCISE OF WARRANTS - NET 2,705,696
COMPREHENSIVE INCOME:
UNREALIZED GAIN ON MARKETABLE
SECURITIES 15,240
NET LOSS (197,923)
-----------
TOTAL COMPREHENSIVE INCOME (182,683)
-----------
BALANCE AT DECEMBER 31, 1998 218,815 $ (840,176) $11,530,206
======= =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
--------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
NET (LOSS) $ (197,923) $ (182,674)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) OPERATING ACTIVITIES:
COMPENSATION EXPENSE RECOGNIZED IN CONNECTION WITH THE
ISSUANCE OF STOCk OPTIONS 41,874 47,149
DEPRECIATION AND AMORTIZATION 500,899 361,379
LOSS FROM INVESTMENT - 4,248
LOSS ON SALE OF MARKETABLE SECURITIES - 16,213
DEFERRED TAX BENEFIT (83,101) (114,000)
UNREALIZED LOSS ON MARKETABLE SECURITIES 2,558 2,548
DEFERRED COMPENSATION EXPENSE 99,457 112,553
INTEREST ON STOCK SUBSCRIPTIONS
- (7,643)
PROCEEDS FROM SALE OF MARKETABLE SECURITIES - 22,323
(INCREASE) DECREASE IN:
ACCOUNTS RECEIVABLE (659,387) (219,031)
ADVANCES TO FINANCIAL PLANNERS 13,763 150
SECURITY DEPOSITS (128,860) (25,926)
PREPAID EXPENSES AND OTHER CURRENT ASSETS (1,484,890) (2,216,456)
INCREASE(DECREASE)IN:
ACCOUNTS PAYABLE,ACCRUED EXPENSES, AND OTHER CURRENT LIABILITIES 221,862 (256,024)
PURCHASES OF NEW BUSINESSES (1,833,611) -
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (3,507,359) (2,455,191)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (872,478) (454,220)
ACQUISITION OF INTANGIBLE ASSETS/ OTHER BUSINESSES (600,042) (141,367)
ACQUISITION OF NORTH SHORE CAPITAL MANAGEMENT CORP.
AND NORTH RIDGE SECURITIES CORP.
- NET OF CASH ACQUIRED (3,882,662) -
INVESTMENTS (1,200) 16,951
REPAYMENTS OF NOTES RECEIVABLE FROM RELATED PARTIES 33,956 62,385
NOTES RECEIVABLE FROM RELATED PARTIES (130,498) (476,228)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (5,452,924) (992,479)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
ACQUISITION OF TREASURY STOCK (55,395) (179,123)
PROCEEDS FROM BANK AND OTHER LOANS 5,758,611 1,750,000
PROCEEDS FROM SALE OF COMMON STOCK , EXERCISE OF STOCK
OPTIONS AND WARRANTS 2,750,696 18,125
PAYMENTS OF BANK AND OTHER LOANS - (734,819)
PROCEEDS FROM STOCK SUBSCRIPTIONS - 75,847
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,453,912 930,030
------------- -------------
NET DECREASE IN CASH (506,371) (2,517,640)
CASH AT BEGINNING OF PERIOD 1,705,831 2,920,489
------------- -------------
CASH AT END OF PERIOD $ 1,199,460 $ 402,849
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 1998 1997
---- ----
CASH PAYMENTS FOR THE PERIOD:
INTEREST $ 48,281 $ 64,811
---------- ----------
INCOME TAXES $ 402,200 $ 108,390
---------- ----------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
DETAILS OF BUSINESS COMBINATIONS:
FAIR VALUE OF ASSSETS ACQUIRED $6,776,899 --
LESS:
LIABILITIES ASSUMED 460,584 --
DUE TO FORMER OWNER'S OF ACQUIRED BUSINESSES 1,833,611 --
NET CASH PAID FOR ACQUISITIONS 4,482,704 --
CASH ACQUIRED IN ACQUISITIONS 108,727 --
---------- ----------
CASH PAID FOR ACQUISITIONS $4,591,431 $ --
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
GILMAN & CIOCIA, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
NOTE 1 - BASIS OF FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Gilman & Ciocia,
Inc. and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
The consolidated financial statements and the related notes thereto as of
December 31, 1998 and for the three months and six months ended December 31,
1998 and 1997 are presented as unaudited, but in the opinion of management
include all adjustments necessary to present fairly the information set forth
therein. These adjustments consist solely normal recurring accruals. These
interim financial statements are not necessarily indicative of the results for
any future periods. This Form 10-QSB should be read in conjunction with the
Company's Form 10-KSB for June 30, 1998.
The Company's business is highly seasonal, with a majority of its revenue earned
in the first four months of the calendar year In preparing financial statements
in conformity with generally accepted accounting principles, management is
required to make estimates and assumptions that effect the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated statement of operations for the three months and six months
ended December 31, 1997 has been restated to reflect the total of the commission
revenues received by the Company and the commissions paid by Royal Alliance
directly to the financial planners (who are registered representatives of Royal
Alliance but are affiliated with the Company) as the Company's revenue from
financial planning services. The resulting increase in commission revenue is
offset by an increase in commission expense equal to the same amount.
Accordingly, this restatement had no effect on the Company's consolidated
financial position, net income (loss) or cash flows.
SFAS No. 130 "Reporting Comprehensive Income" establishes rules for the
reporting of comprehensive income and its components. Comprehensive income
consists of net income and unrealized gain/loss on marketable securities and is
presented in the consolidated statement of stockholders' equity. The compliance
with SFAS No. 130 has no impact on total stockholders' equity.
F-7
<PAGE>
NOTE 2 - BUSINESS COMBINATION
In November, 1998, the Company acquired all of the outstanding stock
of North Ridge Securities Corp., ("North Ridge"), a securities broker/dealer,
and North Shore Capital Management Corp., ("North Shore") a company that
supplies management services to North Ridge for $5,250,000 including $1,250,000
in short-term notes. The acquired business is a full-service financial
organization, which provides its clients with a wide range of financial
investment services. The acquisition has been accounted for by the purchase
method. The results of operations of North Ridge and North Shore have been
included in the Company's results of operations from November, 1998.
The schedule below shows the pro forma amounts assuming the business
combination was completed on July 1, 1998. :
Pro Forma Pro Forma
Quarter Ended Six Months Ended
Dec. 31, 1998 Dec. 31, 1998
------------- ----------------
Revenues $ 7,010,826 $ 14,127,894
Loss before income tax benefit (202,604) (430,960)
Net Loss (131,212) (269,529)
Loss per share of common stock $ (0.02) $ (0.05)
============ ============
NOTE 3 - CONTINGENCIES
In April 1998, an investment banker and its assignee, instituted a suit in the
U.S. District Court in Austin Texas, demanding issuance, collectively, of
100,000 warrants to purchase the Company's common stock at $5.125 per share
(alleged to have been issuable under an investment banking agreement pursuant to
which the investment banker was to have provided investment banking services to
the Company), as well as attorney's fees and exemplary damages. The Company
entered into a settlement with the defendants whereby the Company agreed to
issue warrants to purchase 85,000 shares of Common Stock in the aggregate at $5
1/8 and the Company's Chief Operating Officer, agreed to transfer 12,500 shares
of the Company's Common Stock in the aggregate. The Company is to reimburse its
officer for such shares at the market value of the shares transferred. Should
the shares underlying the 85,000 warrants not be registered by June 4, 1999, the
defendants have 60 days from that date to exchange these warrants for an
additional 31,000 shares of the Company's common stock. The Company valued this
settlement at $348,000, and included this amount in general and administrative
expenses, net of previous reserves, for the six months ended December 31, 1998.
In addition, the Company has received a demand letter from a consultant
(an entity believed to be affiliated with the investment banker.) demanding the
issuance of 150,000 warrants to purchase the Company's common stock at $5.13 per
share, alleged to have been issuable under a consulting agreement pursuant to
which the investment banker was to have provided consulting services to the
Company. The Company believes that the consultant defaulted under such agreement
and provided no material services to the Company. The Company has denied such
demand.
F-8
<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
nine years ago. The complaint seeks indemnification in the amount of up to $3.5
million. The allegations in the complaint are based upon a $1.7 million payment
made by the plaintiffs plus an additional $1.8 million payment for which
plaintiffs ultimately may be held liable. An additional action is currently
pending to determine the liability allocation. The Company answered the
complaint by asserting numerous defenses which it believes are meritorious. The
case is currently entering the discovery phase, and, therefore, the Company is
unable to determine at this time the ultimate success of any asserted allegation
or defense.
F-9
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