<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1999
REGISTRATION NO. 33-80627
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 5 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GILMAN & CIOCIA, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 7291 11-2587324
---------------------- ---------------------- ----------------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classifica- Identification
organization) tion Code Number) No.)
475 Northern Boulevard, Great Neck, NY 11021, (516) 482-4860
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
475 Northern Boulevard, Great Neck, NY 11021
- --------------------------------------------------------------------------------
(Address or principal place of business or intended principal place of business)
Mr. James Ciocia
Gilman & Ciocia, Inc.
475 Northern Boulevard
Great Neck, NY 11021, (516) 482-4860
---------------------------------------------------------
(Name, Address and telephone number of agent for service)
With copies to:
Seth A. Akabas, Esq.
Akabas & Cohen
488 Madison Avenue, 11th Floor
New York, NY 10022
(212) 308-8505
<PAGE> 2
----------
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
<PAGE> 3
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
Title of each class Proposed Proposed
of securities to be offering aggregate Amount of
registered Amount to be price per offering registration
registered share(1) price(1) fee
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock (2) 507,926 shares $4.67 (x) $2,372,014 $ 817.94
- --------------------------------------------------------------------------------
Common Stock (3) 65,000 shares $7.94 $ 516,100 $ 177.97
- --------------------------------------------------------------------------------
Common Stock (4) 101,566 shares $7.94 $ 806,434 $ 278.08
- --------------------------------------------------------------------------------
Warrants (5) 50,783 $3.13(y) $ 158,951 $ 54.81
Warrants
- --------------------------------------------------------------------------------
Common 50,783 $7.94 $ 403,217 $ 139.04
Stock (6) shares
- --------------------------------------------------------------------------------
Common Stock (7) 16,072 shares $7.94 $ 127,612 $ 44.00
================================================================================
Common Stock 72,250 $13.75(z) $ 993,438 $ 342.49
(8) shares
================================================================================
Common Stock 12,750 $13.75(z) $ 175,313 $ 60.45
(9) shares
================================================================================
TOTAL PAID: $[1,914.78]
</TABLE>
(1) Estimated using the market price of the Company's Common Stock or Warrants
(except as noted in footnote (x) below) solely for the purpose of
determining the registration fee.
(2) Issued upon exercise of all of the outstanding Redeemable Public Warrants.
(3) Issued upon exercise of stock options outstanding.
(4) Issued upon exercise of the Underwriter's Warrants outstanding.
(5) Issued upon exercise of the Underwriter's Warrants outstanding.
(6) Issued upon exercise of the Redeemable Public Warrants that were issued
upon exercise of the Underwriter's Warrants.
(7) Outstanding shares of Common Stock owned by an employee of the Company.
(8) Issuable upon exercise of common stock warrants owned by Harbor Financial,
Inc.
(9) Issuable upon exercise of common stock warrants owned by Woodward, Hall &
Primm.
(x) Based on exercise price of the Redeemable Public Warrants and not the
market price of the Company's Common Stock.
(y) Based on market price of the Redeemable Public Warrants.
(z) Based on the public market price of Company's Common Stock on April 16,
1999.
<PAGE> 4
The Registrant hereby amends this Amendment to Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Amendment to Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until this
Registration Statement shall become effective on such date as the Securities and
Exchange Commission (the "Commission"), acting pursuant to said Section 8(a),
may determine.
<PAGE> 5
GILMAN & CIOCIA, INC.
Cross-Reference Sheet
<TABLE>
<CAPTION>
Item Caption Location
<S> <C> <C>
1. Front of Registration Outside Front Cover Page
Statement and Outside Front
Cover of Prospectus
2. Inside Front and Outside Inside Front and Outside
Back Cover Pages of Back Cover Pages
Prospectus
3. Summary Information and Prospectus Summary; Risk
Risk Factors Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Not Applicable
Price
6. Dilution Not Applicable
7. Selling Security Holders Selling Security Holders
8. Plan of Distribution Plan of Distribution; Selling
Security Holders
9. Legal Proceedings Business--Legal Proceedings
10. Directors, Executive Management
Officers, Promoters and
Control Persons
11. Security Ownership of Principal Stockholders
Certain Beneficial Owners
and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts Legal Matters; Experts
and Counsel
14. Disclosure of Commission Remuneration of Officers
Position on and Directors
Indemnification
for Securities Act
Liabilities
15. Organization within Last Not Applicable
Five Years
</TABLE>
<PAGE> 6
<TABLE>
<S> <C> <C>
16. Description of Business Business; Risk Factors; Financial
Statements; Prospectus Summary;
Market Information; Use of Proceeds
17. Management's Discussion Management's Discussion
and Analysis or Plan of and Analysis of Financial
Operation Condition and Results of
Operations
18. Description of Property Description of Property
19. Certain Relationships and Certain Relationships and
Related Transactions Related Transactions
20. Market for Common Equity Market Information;
and Related Stockholder Prospectus Summary
Matters
21. Executive Compensation Remuneration of Officers and
Directors
22. Financial Statements Financial Statements
23. Changes in and Changes in and
Disagreements with Disagreements with
Accountants on Accounting Accountants on Accounting
and Financial Disclosure and Financial Disclosure
</TABLE>
<PAGE> 7
GILMAN & CIOCIA, INC.
507,926 SHARES OF COMMON STOCK
----------
318,421 SHARES OF COMMON STOCK BY SELLING SECURITY HOLDERS
----------
50,783 REDEEMABLE PUBLIC WARRANTS BY SELLING SECURITY HOLDERS
This Prospectus relates to the offering by the Company (the "Offering") of
507,926 shares of common stock (the "Common Stock"), par value $.01 per share,
of Gilman & Ciocia, Inc., a Delaware corporation (the "Company"), which were
issued upon the exercise of the Company's outstanding redeemable public warrants
(the "Redeemable Public Warrants") for the purchase of Common Stock at an
exercise price of $4.67 per share (the "Redeemable Public Warrant Exercise
Price"), which Redeemable Public Warrants have been exercised.
This Prospectus also relates to the offering (the "Offering") by holders
or prospective holders of securities of the Company (the "Selling Security
Holders") of: (i) 65,000 shares of Common Stock which were issued upon the
exercise of outstanding options; (ii) 101,566 shares which were issued upon the
exercise of the 50,783 Underwriter's Warrants (the "Underwriter's Warrants") for
the purchase of Units (each "Unit" consisting of two shares of Common Stock and
one Redeemable Public Warrant), which Underwriter's Warrants were issued to the
underwriter of the Company's initial (Continued on next page)
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF
RISK AND SHOULD BE PURCHASED ONLY BY INVESTORS ABLE TO SUSTAIN A TOTAL LOSS OF
THEIR INVESTMENT. PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS
DISCUSSED UNDER THE CAPTION "RISK FACTORS" LOCATED ON PAGE 6.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The Date of This Prospectus is May , 1999.
<PAGE> 8
public offering of Units; (iii) 50,783 Redeemable Public Warrants which were
issued upon the exercise of the Underwriter's Warrants; (iv) 50,783 shares of
Common Stock were issued upon the exercise of the Redeemable Public Warrants
which were issued upon the exercise of the Underwriter's Warrants; (v) 16,072
shares of Common Stock held by an employee of the Company; (vi) 72,250 shares of
Common Stock issuable upon exercise of Common Stock warrants owned by Harbor
Financial, Inc. and (vii) 12,750 shares of Common Stock issuable upon exercise
of Common Stock warrants owned by Woodward, Hall & Primm.
The Common Stock to be sold by Selling Security Holders will be offered
immediately upon effectiveness of this Registration Statement, but the Selling
Security Holders have not yet determined any specific plan of distribution. Such
Common Stock will be sold by the Selling Security Holders in transactions on the
over-the-counter market, in negotiated transactions, or through a combination of
such methods of sale, or at fixed prices, which may be changed. The Selling
Security Holders may effect such transactions by selling the Common Stock to or
through broker/dealers, and such broker/dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Security Holders
and/or the purchasers of the Common Stock for whom such broker/dealers may act
as agent or to whom they may sell as principal, or both (which compensation as
to a particular broker/dealer might be in excess of customary commissions). See
"PLAN OF DISTRIBUTION" and "SELLING SECURITY HOLDERS."
None of the proceeds of the sale of the shares of Common Stock or by the
Selling Security Holders will be received by the Company. The Company received
approximately $3,100,000 of gross proceeds from the exercise of the outstanding
Redeemable Public Warrants, as well as the 65,000 outstanding stock options, the
Underwriter's Warrants, and the Redeemable Public Warrants issued upon the
exercise of the Underwriter's Warrants. In addition, the Company could receive
approximately $436,050 of gross proceeds from the exercise of the Common Stock
Warrants held by Harbor Financial,Inc. and Woodward, Hall & Primm. However, the
exercise of any of such options and warrants is not assured.
The shares of Common Stock are traded on The Nasdaq National Market System
under the symbol "GTAX". As of April 16,1999, the trading price for shares of
the Company's Common Stock was $13.75 per share.
<PAGE> 9
<TABLE>
<CAPTION>
================================================================================
Underwriting
PRICE TO Discounts and Proceeds to
PUBLIC(1) Commissions(2) Issuer(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of
Common Stock
507,926 Shares $4.67(4) $-0- $2,372,014
- --------------------------------------------------------------------------------
TOTAL......... $2,372,014
================================================================================
</TABLE>
(1) The 507,926 shares of Common Stock of which 491,550 were issued at $4.67
per share consist of the shares issuable upon the exercise of the 507,926
currently outstanding Redeemable Public Warrants.
(2) The securities registered hereunder were not and will not be sold through
an underwriter, however, the Company paid to First Colonial Securities,
Inc. as advisor in connection with this offering a $35,000 advance fee,
although such engagement has expired.
(3) All expenses of this registration other than commissions and concessions
are payable by the Company and are estimated at $390,000, which is
cross-referenced at footnote 2 in the following chart. The Selling
Security Holders are not paying any of the costs associated with this
registration. The expenses payable by the Company in connection with the
issuance and distribution of the securities being registered are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Fees............ $[1,915]
NASDAQ Stock Market listing fees................... -0-
Transfer/Warrant Agent's Fee and Expenses.......... 1,000
Accounting Fees and Expenses....................... 260,000
Blue Sky Fees and Expenses......................... 5,000
Printing Expenses ................................. 15,000
First Colonial Securities Group, Inc............... 35,000
Legal Fees......................................... 75,000
Miscellaneous...................................... [2,085]
-------
TOTAL.................................... $395,000
========
</TABLE>
(4) The price received by the Company is the price at which warrantholders may
buy Common Stock upon the exercise of Redeemable Public Warrants.
<PAGE> 10
The sale of securities of Security Holders does not result in any proceeds
to the Company. However, it presumes exercise of outstanding warrants and
options, and proceeds to the issuer as follows:
<TABLE>
<CAPTION>
================================================================================
Underwriting
PRICE PAID TO Discounts and Proceeds to
ISSUER Commissions(1) Issuer(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of
Common Stock
65,000
Shares $ 2.50(3) $-0- $ 162,500
101,566
Shares $ 4.20(4) $-0- $ 426,577
50,783 $ 4.67(5) $-0- $ 237,157
Shares
72,250 $ 5.13 $-0- $ 370,643
Shares (6)
12,750 (7) $ 5.13 $-0- $ 65,408
Per Redeemable
Public Warrant
$ -0-(8) $-0- $ -0-
50,783
Warrants
- --------------------------------------------------------------------------------
Total......... $-0- $1,262,285
================================================================================
</TABLE>
(1) The securities registered hereunder will not be sold through an
underwriter.
(2) All expenses of this registration other than commissions and concessions
are payable by the Company, and are estimated at $395,000
(cross-referenced in the previous chart footnote 3, which also provides
detail of such expenses). The Selling Security Holders are not paying any
of the expenses associated with this registration.
(3) Shares of Common Stock were issued upon the exercise of outstanding
options.
(4) The 101,566 shares of Common Stock issuable at $4.20 per share are the
shares of Common Stock which were issued upon the exercise of the
Underwriter's Warrants.
(5) The 50,783 Shares of Common Stock issuable at $4.67 per share are the
shares which were issued upon exercise of those Redeemable Public Warrants
that were issued on the exercise of the Underwriter's Warrants.
(6) The 72,250 Shares of Common Stock issuable at $5.13 per share are issuable
upon exercise of Common Stock Warrants owned by Harbor Financial, Inc.
<PAGE> 11
(7) The 12,750 Shares of Common Stock issuable at $5.13 per share are issuable
upon exercise of Common Stock Warrants owned by Woodward, Hall & Primm.
(8) The 50,783 Redeemable Public Warrants were issued upon the exercise of the
Underwriter's Warrants. For the purposes of this chart, the entire
exercise price of the Underwriter's Warrants has been allocated to the
Common Stock issuable thereon.
----------
The Company's fiscal year ends on June 30th. The Company is currently a
reporting company under the Securities Exchange Act of 1934, as amended. The
Company will provide without charge to each shareholder a copy of all reports
filed thereunder. Such requests should be addressed to the Company at 475
Northern Boulevard, Great Neck, NY 11021, telephone number (516) 482-4860,
Attention: Secretary. Such reports will also be available for inspection at The
Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006. In addition,
such reports and other information will be available for inspection at the
public reference facilities of the Securities and Exchange Commission in
Washington D.C., and at its regional offices at 7 World Trade Center, New York,
NY 10048 and at the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60604, and copies of such materials could be obtained from the
Public Reference Section of the Securities and Exchange Commission (the
"Commission") in Washington, D.C. at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Copies of this filing, reports, proxy and information
statements and other information regarding the Company are available on the
Commission's website at http://www.sec.gov.
<PAGE> 12
PROSPECTUS SUMMARY
The following summary is intended only to summarize certain material in
this Registration. This summary is qualified in its entirety by the detailed
information and financial statements that appear elsewhere herein.
THE COMPANY
Gilman & Ciocia, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on September 3, 1993, the successor in interest to Gilman
& Ciocia, Inc., a New York corporation organized on November 4, 1981, and is a
preparer of federal, state and local income tax returns for individuals
predominantly in middle and upper income brackets.
The preparation of a tax return by the Company usually involves a personal
meeting at the office between a client and an employee of the Company. In
addition, while preparing tax returns, clients often consider other aspects of
their financial needs, such as insurance, investments, pension and estate
planning. The Company capitalizes on this situation by providing financial
planning questionnaires to all of its tax preparation clients.
After review of such questionnaires by financial planners, if appropriate,
financial planners will recommend the tax preparer to introduce the tax
preparation client to a financial planner. Each of the financial planners to
which a client might be introduced is a registered representative of an
independent registered securities broker/dealer, Royal Alliance Associates, Inc.
("Royal Alliance"), and each has agreed to share commissions with the Company.
In approximately 20% of the cases, such financial planner is the tax preparer
himself.
If such clients do utilize the financial planners to assist them on their
other financial needs, the Company earns commissions (depending on what service
is provided) from the services that the financial planners provide to the
client. More than 99% of the financial planners are also authorized agents of
insurance underwriters, and approximately 2% of the financial planners are also
authorized to act as mortgage brokers, and thus, the Company also earns revenues
from commissions for acting as an insurance agent and a mortgage broker.
Royal Alliance, unaffiliated with the Company, is a corporation which
is a registered securities broker/dealer and a member of the National
Association of Security Dealers, Inc. ("NASD").
North Ridge Securities Corp. ("North Ridge"), acquired in November 1998,
is a wholly owned subsidiary of the Company, and provides securities brokerage
services, as well as on-going, full-time management and supervision of
asset-allocated portfolios containing stocks, bonds, mutual funds and/or
variable annuities.
1
<PAGE> 13
North Ridge also conducts an insurance brokerage business providing insurance
expertise and products as well as advice to customers as to their insurance
needs.
The Company also has a division operating as a direct mail service. It
assembles, packages and mails, but does not design, create or draft the test for
direct mail materials, however, it provides limited consulting services in these
areas.
Based on the Company's total revenues during its 1998 fiscal year,
approximately 36% of the Company's business is tax preparation services;
approximately 58% of the Company's business is commission sharing on financial
planning services (with approximately 39% from securities transactions and 19%
from mortgage brokerage, insurance and other related services); and
approximately 6% of the Company's business is direct mail and related services.]
The Company has a total of [129 offices: [45] in New York, [15] in New
Jersey, [16] in Florida, [9] in Arizona, [6] in Ohio, [7] in Maryland, [7] in
Connecticut, [7] in Washington, [6] in Massachusetts, [5] in Nevada, [2] in
Pennsylvania, [1] in Virginia, [1] in Illinois, [1] in Georgia and [1] in Texas
and it maintains its principal executive office at 475 Northern Boulevard, Great
Neck, NY 11021, telephone (516) 482-4860.
Out of the total number of offices: [35] offices provide predominantly tax
preparation services and have no regular financial planner associated with them
(although financial planners from other offices do work with clients from all of
such [35] offices); and [94] offices provide both tax preparation and regular
financial planning services.
Out of the [94] offices that provide both tax preparation and financial
planning services: [21] of these offices have only one person who provides both
tax preparation and financial planning services; and [73] of these offices have
two or more persons who perform tax preparation and financial planning services.
No office has more than a total of ten tax preparers and financial planners.
The Company opened fifteen new offices in January 1994, twenty two new
offices in January 1995, forty four new offices in 1996 (closing four in the
first half of 1996), eight new offices in 1997, seven new offices in 1998 and
four new offices in 1999.
2
<PAGE> 14
THE OFFERING
Securities Outstanding:
Before the Offering................. 5,606,913 shares of Common
Stock(1)
507,926 Redeemable
Public Warrants
After the Offering.................. 6,417,188 shares of
Common Stock (2)
Securities Offered........................ 826,347 shares of Common
Stock (3)
50,783 Redeemable
Public Warrants (4)(5)
Use of Proceeds........................... The Company received
approximately
$2,300,000 from the
exercise of the
Redeemable Public
Warrants.
The Company will not
receive any of the
proceeds from the sale of
shares of Common Stock or
Redeemable Public Warrants
by the Selling Security
Holders; all proceeds will
be paid directly to the
Selling Security Holders.
See "SELLING SECURITY
HOLDERS." The Company
received $826,234 of gross
proceeds from the exercise
of the outstanding
options, the Underwriter's
Warrants and the
Redeemable Public Warrants
issuable upon prior
exercise of the
Underwriter's Warrants
described herein. The
Company could receive up
to $436,050 from the
3
<PAGE> 15
exercise of the
outstanding Common Stock
Warrants held by Woodward,
Hall & Primm and Harbor
Financial, Inc. Such
exercise, however, is not
assured. The Company will
use such proceeds for
working capital purposes.
Risk Factors.............................. An investment in the Common
Stock offered hereby
involves a high degree
of risk and immediate
substantial dilution.
Common Stock should not
be purchased by a
person who cannot
afford the loss of his
or her entire
investment. A
prospective purchaser
of Common Stock should
carefully consider the
factors discussed under
the caption "RISK
FACTORS."
The Company's NASDAQ Symbols:
Common Stock.............................. GTAX
Redeemable Warrants....................... GTAX-W
- --------------------------------------------------------------------------------
(1) Does not include 65,000 shares of Common Stock which were issued upon the
exercise of options at $2.50 per share, 101,566 shares of Common Stock and
50,783 Redeemable Public Warrants, all of which were issued pursuant to the
Underwriter's Warrants to acquire up to 50,783 Units, each Unit consisting of
two shares of Common Stock, par value $.01 per share, of the Company, one
redeemable warrant ("Redeemable Public Warrant" as defined above) at an exercise
price of $8.40 per Unit, nor the assumed issuance of 85,000 shares of Common
Stock registered with this prospectus and issuable upon the exercise of Common
Stock Warrants at $5.13 per shares. See "RISK FACTORS--The Sale of Underwriter's
Warrants, Other Warrants and Certain Options and Shares being Registered in this
Registration Statement May have an Adverse Affect on the Market Price of the
Company's Common Stock and Dilute the Percentage Ownership Interest of Holders
of Common Stock." Does not include options to purchase a total of 2,434,000
shares of Common Stock at
4
<PAGE> 16
prices ranging from $2.00 per share to $20.00 per share, some as granted under
the Company's 1993 Joint Incentive and Non-Qualified Stock Option Plan (the
"Plan"), and some granted under non-Plan employee stock option agreements. All
such options (other than options held by executive officers and directors of the
Company to acquire in the aggregate 250,000 shares of Common Stock) have been
included in registration statements on Form S-8 filed with the Commission.
(2) Includes a total of 507,926 shares of Common Stock which were issued on the
exercise of Public Redeemable Warrants at $4.67 per share, 65,000 shares of
Common Stock were issued on the exercise of options at $2.50 per share, 101,566
shares of Common Stock which were issued pursuant to the Underwriter's Warrants,
and 50,783 shares of Common Stock were issued upon the exercise of the
Redeemable Public Warrants that were issued upon exercise of the Underwriter's
Warrants. Assumes the issuance of 85,000 shares of Common Stock registered with
this prospectus and issuable upon the exercise of Common Stock Warrants at $5.13
per shares. Does not include options and warrants to purchase a total of
2,434,000 shares of Common Stock at prices ranging from $2.00 per share to
$20.00 per share, some as granted under the Company's 1993 Joint Incentive and
Non-Qualified Stock Option Plan (the "Plan"), and some granted under non-Plan
employee stock option agreements. All such options and warrants (other than
options to acquire an aggregate of 250,000 shares of Common Stock) have been
included in registration statements on Form S-8 filed with the Commission.
(3) The Common Stock offered hereunder has been or will be issued in connection
with the exercise of the outstanding Redeemable Public Warrants, outstanding
options, the Underwriter's Warrants, the Redeemable Public Warrants issuable on
exercise of Underwriter's Warrants and outstanding warrants.
(4) Exercised in connection with the Offering.
(5) The Redeemable Public Warrants registered hereunder were issuable upon the
exercise of the Underwriter's Warrants.
5
<PAGE> 17
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Common Stock should not be purchased by a person who cannot afford the
loss of his or her entire investment. The following risks are all of the
principal risk factors and should be considered carefully in evaluating the
Company and its business prior to purchasing any of the securities offered
hereby.
1. The High Expense and Initial Non-Profitability of Opening New Offices
Each Year Could Result In Losses. 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 income may be reduced in any year that the
Company opens a number of new offices that is significant in relation to the
number of its existing older offices. The Company opened 15 new offices in
January 1994, and during its 1994 fiscal year, the Company earned $687,159 from
operations. In January 1995 the Company opened 22 new offices, and in its 1995
fiscal year, the Company earned $583,164 from operations, a decrease of 15% as
compared to 1994. In addition, the Company believes that income from offices
opened in 1994 had begun to contribute to the Company's earnings in 1995. In
January 1996, the Company opened 44 new offices and closed five by the end of
the year, and the Company generated for the 1996 fiscal year $594,529 in
operating income. In January 1997, the Company opened 8 new offices and
generated for the 1997 fiscal year $875,994 operating income, an increase of
67.9% as compared to 1996. In January 1998, the Company opened seven new offices
and generated for the 1998 fiscal year $[3,403,000] in operating income, an
increase of [388]% as compared to 1997. In January 1999, the Company opened [4]
new offices.
A rapid expansion of offices may, therefore, reduce the Company's
short-term net income or result in losses. No assurance, however, can be given
that new offices will ultimately operate profitably and increase the Company's
net income in the long term.
If the Company continues to open new offices and if such offices do not
become profitable, losses at such offices could depress future earnings or
result in charges of expenses to close such offices.
2. The Acquisition of Small Tax Preparation Practices Could Result in
Losses. In 1998, the Company acquired [7] tax preparation practices. As part of
its plan of operations, the Company plans to continue to acquire small tax
preparation practices. The success of the Company will in part be dependent upon
the successful operation of the practices acquired. No assurance can be given
that the Company will be able to successfully operate the practices that it
acquires.
6
<PAGE> 18
If the Company continues to acquire tax preparation practices, and if such
practices do not operate profitably, losses at such practices could depress
future earnings or result in charges of expenses to close such offices.
3. The Seasonality of the Company's Business Requires Additional
Financing. The Company will require approximately $2,000,000 of financing each
year to fund its operations during tax season, particularly because, in the
past, the Company experiences quarterly losses from July 1st to December 31st
each year. No assurance can be given that such financing will be available to
the Company, or, if it is available, that it will be on terms favorable to the
Company.
If the Company cannot secure sufficient seasonal financing, the Company
may be required to curtail its operations.
4. Strong Competition from Other Companies Offering Tax Preparation and
Financial Planning Services Could Adversely Affect Company's Growth. 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, which include H+R Block, Inc., H.D. Vest, Inc., Jackson Hewitt Tax
Service, Inc. and Triple Check Income Tax Service, Inc. in the tax preparation
field, and many well-known brokerage and other firms in the financial services
field, have significantly greater financial and other resources than the
Company. No assurance can be given that the Company will be able to compete
successfully with other older, more established companies. See
"BUSINESS--Competition." If the Company cannot effectively compete with other
companies, the Company will not be able to maintain its rate of growth of new
clients, which will adversely affect the Company.
5. Potential Competition from Departing Employees and Affiliated Financial
Planners May Divert Business from Company's Clients. The Company may suffer from
competition from departing employees and affiliated 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 the past, departing employees and
affiliated financial planners have competed with the Company. They have the
advantage of knowing the Company's methods and, in some cases, having access to
the Company's clients. No assurance can be given that the Company will be able
to retain its most important employees and financial planners or that the
Company will be able to prevent competition from them or successfully compete
against them.
7
<PAGE> 19
Departing employees may attract clients away from the Company, which will
result in a reduction of revenues and will adversely affect the Company.
6. 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 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.
7. 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.
8
<PAGE> 20
8. 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.
North Ridge is subject to periodic examination by the SEC, SROs and
various state authorities. North Ridge's 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 a letter to North
Ridge noting perceived deficiencies and requesting North Ridge 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 North Ridge and/or its 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. See "BUSINESS Regulation."
9. 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 North Ridge 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. North Ridge may be liable for the unauthorized acts of its
retail brokers and independent contractors if it fails to adequately supervise
their
9
<PAGE> 21
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, results of operations or
cash flows.
10
<PAGE> 22
10. Constraints Imposed by Net Capital Requirements. The SEC, the NYSE,
and various other securities exchanges and other regulatory bodies in the United
States have rules with respect to net capital requirements that affect North
Ridge as a broker-dealer. These Net Capital Requirement Rules are designed to
ensure that broker-dealers maintain adequate regulatory capital in relation to
their liabilities and their business activities. These Net Capital Requirement
Rules have the effect of requiring that a substantial portion of a
broker-dealer's assets be kept in cash or highly liquid investments. Failure to
maintain the required net capital may subject a firm to suspension or revocation
of its registration by the SEC and suspension or expulsion by the NASD and other
regulatory bodies, and ultimately may require its liquidation. Compliance by
North Ridge with such Net Capital Requirement Rules could limit certain
operations that require intensive use of capital, such as underwriting or
trading activities. A significant operating loss or any unusually large charge
against net capital could curtail the Company's ability to expand or even
continue its existing level of business. The Net Capital Requirement Rules could
also restrict the ability of the Company to withdraw capital, even in
circumstances where North Ridge has more than the minimum amount of required
capital, which, in turn, could limit the ability of the Company to pay
dividends, implement its strategies, pay interest on and repay the principal of
its debt and redeem or repurchase shares of outstanding capital stock. In
addition, a change in such Net Capital Requirement Rules or the imposition of
new rules affecting the scope, coverage, calculation or amount of such net
capital requirements, or a significant operating loss or any large charge
against net capital, could have similar adverse effects.
11. The Company's Dependence Upon its Three Executive Officers Makes It
Vulnerable to the Loss of any such Officers. The Company is dependent upon the
services of James Ciocia, its President, Thomas Povinelli, its Executive Vice
President, and Kathryn Travis, its Secretary. The loss or interruption of the
services of any of these individuals, would result in a material loss of
efficiency and productivity and would have a material adverse affect on the
Company.
12. Potential Civil and Criminal Liabilities under the Internal Revenue
Code because of the Company's Business of Preparing Tax Returns May Result in
Material Liabilities. The Company's business of preparing tax returns subjects
it to potential civil liabilities under the Internal Revenue Code and the
regulations promulgated thereunder. Civil penalties, ranging from $50 to $10,000
per violation, could be assessed against the Company for failure to observe
certain ministerial requirements, failure to keep required records, improper
disclosure of taxpayer records, or failure to maintain required ethical
standards with respect to the accuracy of the returns and the positions taken
therein regarding taxpayer
11
<PAGE> 23
liability for taxes. Although the Company has not been assessed with material
civil penalties or fines, and although the Company intends to comply with all
applicable laws and regulations, no assurance can be given that the Company will
never incur any material fines or penalties. The Company does not maintain any
professional liability or `malpractice' insurance policy. The Company has never
been the subject of a malpractice claim, but if such claims were made, they
would require significant expenses for legal fees and other costs in defense and
could result in significant liability and could adversely affect the Company by
damaging its reputation.
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 set forth above, 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.
13. Inability of the Company to Provide Services of a Certified Public
Accountant may Hamper Company's Marketing and/or Increase Risk of Liability. The
Company earns almost $10 million in revenues related to tax preparation
services, however, the Company employs only two full-time certified public
accountants, who do not work as tax preparers, and the Company does not employ
any full-time tax attorneys to provide advice to tax preparers in connection
with the proper preparation of returns.
[Ninety three] percent of the tax preparation services are conducted by
seasonal employees who are not certified public accountants or tax attorneys.
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 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 as discussed in "RISK FACTORS -- Potential Civil and
12
<PAGE> 24
Criminal Liabilities under the Internal Revenue Code because of the Company's
Business of Preparing Tax Returns May Result in Material Liabilities."
14. Trademark Infringements and Loss of Trademark Could Damage the
Company's Marketing. The Company has registered its "Gilman + CiociaR" trademark
with the U.S. Patent and Trademark Office. No assurance can be given that the
Company would be able successfully to defend its trademark if forced to litigate
its enforceability. The Company believes that its trademark "Gilman + CiociaR"
constitutes a valuable marketing factor. If the Company were to lose the use of
such trademark, its sales could be adversely affected.
If another entity utilizes the Company's trademark and the Company cannot
enforce its trademark against such entity, then the Company may lose clients to
the infringing entity, which would adversely affect the Company revenues and
profitability.
15. Continued Expansion into Financial Planning and the Dependance on
Individual Financial Planners Makes the Company Vulnerable to Lack of Success of
Financial Planners. The Company plans to continue to expand into the area of
financial planning and recruit financial planners. The success of the Company
will in large part be dependent upon the successful operation of the financial
planners who are recruited. No assurance can be given that such financial
planners will be successful in their ventures. 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.
16. Control of the Company by Current Management which Owns or Could
Acquire 35.9% of the Outstanding Common Stock of the Company. The current
management of the Company owns or could acquire approximately 35.9% of the
outstanding Common Stock of the Company. No cumulative voting is in effect for
the election of directors of the Company, and no such arrangement is currently
contemplated. The current management will, therefore, be able to elect all of
the directors and thereby effectively continue to control the Company. Current
management, therefore, through its share ownership of the Company could pose an
obstacle to a purchase of the Company that might be desirable to other
shareholders and/or to a change in management if the Company is not operating
profitably in the future. See "DESCRIPTION OF SECURITIES."
17. The Issuance of Preferred Stock that does not Require Approval of the
Shareholders May Inhibit Change of Control. The Company has authorized 100,000
shares of Preferred Stock (see "DESCRIPTION OF SECURITIES"), which may be
issued, without approval by the shareholders of the Company, by the Board of
Directors of the Company in such classes, with such designations, rights and
preferences and at such prices as the Board of Directors determines
13
<PAGE> 25
to be in the best interest of the Company. Holders of such Preferred Stock so
issued could have preferential rights over the holders of Common Stock in a
liquidation of the Company. In addition, although management of the Company does
or could control approximately 35.9% of the outstanding Common Stock, if at any
time in the future management does not control a majority of the outstanding
Common Stock, then Preferred Stock with special voting or other rights could be
issued that could entrench current management and adversely affect any proposed
change of control of the Company.
Current management, therefore, through the issuance of Preferred Stock of
the Company could pose an obstacle to a purchase of the Company that might be
desirable to other shareholders and/or to a change in management if the Company
is not operating profitably in the future.
18. Management's Broad Discretion over the Allocation of the Company's
Proceeds Means that Proceeds Could be Used for Risky Ventures Not Approved by
Shareholders. The proceeds of the Offering will be utilized predominately for
the opening of new offices, recruiting financial planners, acquiring existing
tax preparation practices, marketing and sales, general and administrative
expenses and working capital requirements. However, management will have broad
discretion over the application and allocation of the use of the net proceeds.
See "USE OF PROCEEDS." The Company's management is not restricted in the use of
the proceeds, which may be utilized for risky ventures and in ways that may not
be productive for the Company.
19. Immediate Substantial Dilution of the Company's Common Stock Means
that the Net Book Value of a Share of Common Stock Is Far Less than its Market
Price. Assuming that all outstanding warrants and options registered hereby are
exercised and shares of Common Stock are sold, purchasers of Common Stock would
likely experience a substantial dilution and may have an adverse affect on the
market price for the Common Stock and reduce the marketability of the Company's
Common Stock.
20. Dividends have not been distributed by the Company. Since its initial
public offering of securities in 1994, the Company has paid no 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 no dividends will be distributed in the near future, which may
reduce the marketability of the Company's Common Stock.
21. Contingent Tax Liability May Be Imposed in respect of Past
Compensation Paid to Financial Planners Affiliated with the Company. Of the
financial planners affiliated with the Company, approximately 66% also perform
tax preparation, managerial or other services for the Company and receive
compensation as employees of the Company for such services
("Employee/Planners"). Three Employee/Planners also
14
<PAGE> 26
received compensation from the Company for tax preparation, managerial and/or
other services as independent contractors. If the Internal Revenue Service were
to consider these three Employee/Planners as employees, then the Company may
have tax liabilities in connection with past compensation paid to such three
Employee/Planners. The Company believes that it is unlikely that such contingent
tax liabilities, if any, would have a material effect on the financial position,
results of operations or cash flows of the Company.
The financial planners affiliated with the Company receive their share of
commissions directly from Royal Alliance as independent contractors and
registered representatives of Royal Alliance. The Company's opinion is that this
tax reporting method is appropriate. No assurance can be given that the U.S.
Internal Revenue Service or State authorities will not attempt to assert payroll
tax claims in respect of such commissions, and if such claims were ultimately
decided against the Company, the payment of such tax liabilities could have a
material adverse affect on the Company's financial condition.
22. Potential Future Sales of Restricted Stock pursuant to Rule 144 May
Have an Adverse Affect on the Market Price of the Company's Common Stock. Of the
6,640,531 shares of Common Stock currently issued and outstanding approximately
2,370,223 shares are "restricted securities" as that term is defined under the
Securities Act of 1933, as amended (the "Act"). In general, under Rule 144
promulgated under the Act, 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 does not exceed the greater of one
percent of the then outstanding shares of Common Stock or the average weekly
trading volume of such shares during the four calendar weeks prior to such sale.
Rule 144 also permits, under certain circumstances, the sale of shares of Common
Stock by a person who is not an "affiliate" of the Company (as defined in Rule
144) and who has satisfied a two-year holding period, without any volume or
other limitation. All of the shares of Common Stock that are "restricted" shares
are held by "affiliates" of the Company and almost all have already been held
for the two-year holding period mentioned above.
The Company has granted 2,131,000 options to purchase shares of the
Company's Common Stock to 32 individuals in addition to the 303,000 options
granted to employees in conjunction with its 1993 Joint Incentive and
Non-qualified Stock Option Plan. 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
and certain shares are registered in the Company's registration statement of
which this prospectus is a part.
15
<PAGE> 27
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.
23. The Sale of Underwriter's Warrants, Other Warrants and Certain Options
and Shares Being Registered in this Registration Statement May Have an Adverse
Affect on the Market Price of the Company's Common Stock and Dilute the
Percentage Ownership Interest of Holders of Common Stock. The Company is
registering for sale up 72,250 shares of Common Stock issuable upon the exercise
of Common Stock Warrants at $5.13 per shares, 12,750 shares of Common Stock
issuable upon the exercise of Common Stock Warrants at $5.13 per share, In
addition, the offering for sale of some or all of such underlying Common Stock,
or even the possibility of such sale, may have an adverse affect on the market
price for the Common Stock and reduce the marketability of the Company's Common
Stock. See "DESCRIPTION OF SECURITIES" and "PLAN OF DISTRIBUTION."
This prospectus does not include options to purchase a total of 2,434,000
shares of Common Stock at prices ranging from $2.00 per share to $20.00 per
share, some as granted under the Company's 1993 Joint Incentive and
Non-Qualified Stock Option Plan (the "Plan"), and some granted under non-Plan
employee stock option agreements. All such options (other than options held by
executive officers and directors of the Company to acquire in the aggregate
250,000 shares of Common Stock) have been included in registration statements on
Form S-8 filed with the Commission.
A sale of such securities, or even the possibility of such sale, may have
an adverse affect on the market price for the Common Stock and reduce the
marketability of the Company's Common Stock.
24. The Imposition of Additional Rules Limiting Broker/Dealer Sales of
Shares of Common Stock May Adversely Affect the Company's Ability to Sell its
Securities and Discourage Broker/Dealers from Effecting Transactions in the
Company's Common Stock. The Company's Common Stock is not currently covered by,
but it is possible that the Company's Common Stock, if its market price were to
fall substantially, in the future might come to be covered by a
16
<PAGE> 28
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 net worth in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 jointly with their spouse). For
transactions covered by the rule, the broker/dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale.
In addition, it is possible that an underwriter's participation in the
trading market of the Common Stock and the Redeemable Public Warrants will be
covered by a Commission rule that imposes additional disclosure requirements on
broker/dealers in "penny stock" transactions. Although the Common Stock is
currently outside the definition of a "penny stock" under the applicable rules,
in the event the Common Stock were subsequently to become characterized as a
"penny stock," as a result of being delisted from The Nasdaq SmallCap Stock
Market or otherwise, broker/dealers effecting transactions for clients in the
Common Stock will be required to make extensive disclosures to such clients in
certain circumstances regarding the Common Stock, including bid, offer and other
pricing information relating to the Common Stock, such broker/dealer's
compensation and the compensation of associated persons in connection with the
transaction, and such client's specific account information. Such additional
burdens imposed upon broker/dealers may discourage broker/dealers from effecting
transactions 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.
25. Directors of the Company are Generally Not Individually Liable for
Monetary Damages to the Company or to its Stockholders for Decisions Made by the
Board with Limited Exceptions under Delaware Law. Pursuant to the Company's
Certificate of Incorporation and under Delaware law, directors of the Company
are not liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit. See "MANAGEMENT." Because of
the lack of individual liability of the Directors, the Directors have broad
discretion over what actions shall be made on behalf of the Company, which
actions may by ill-advised and may adversely affect the Company without
resulting in any liability on the part of Directors to compensate the Company
for such adverse results.
17
<PAGE> 29
MARKET INFORMATION
The principal market on which the Company's Common Stock trades is The
NASDAQ Stock Market under the symbol "GTAX." Prior to August 28, 1998, the
Company's Common Stock traded on the Nasdaq SmallCap Stock Market. Prior to
December 1994 no public market existed for the Company's securities.
The following table sets forth the high and low sales prices for the
Common Stock during the period indicated:
<TABLE>
<CAPTION>
Sales Prices
------------
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
December 31, 1994 $ 3 3/4 $ 3 1/2
March 31, 1995 $ 4 $ 2 1/4
June 30, 1995 $ 4 1/8 $ 2 1/4
September 30, 1995 $ 5 5/8 $ 3 1/8
December 31, 1995 $ 7 1/2 $ 5 1/4
March 31, 1996 $ 7 7/16 $ 5 1/2
June 30, 1996 $ 7 1/4 $ 5 3/8
September 30, 1996 $ 6 1/2 $ 5 1/4
December 31, 1996 $ 3 1/2 $ 2
March 31, 1997 $ 2 3/16 $ 2 1/16
June 30, 1997 $ 2 1/16 $ 1 15/16
September 30, 1997 $ 5 1/8 $ 4 1/8
December 31, 1997 $ 8 3/8 $ 4 3/8
March 31, 1998 $14 7/8 $ 7
June 30, 1998 $24 1/2 $13 3/4
September 30, 1998 $17 13/16 $8 15/16
December 31, 1998 $9 13/16 $6 3/4
March 31, 1999 $19 1/8 $9 1/2
</TABLE>
Since December 1997, the market price of the Common Stock of the Company
has tripled and fallen to approximately its December 1997 range and subsequently
increased to approximately twice its
18
<PAGE> 30
value in December 1997. The Company, however, has no basis for knowing the cause
of such volatility or how long it will continue, and no assurance can be given
that the Company's performance during recent periods is predictive of its future
performance.
As of April 16, 1999, the approximate number of holders of record of the
Common Stock was [249].
The Company has not paid dividends to its shareholders since its initial
public offering and 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.
The Company's NASDAQ symbols are:
<TABLE>
<S> <C>
Common Stock........................... GTAX
Redeemable Warrants.................... GTAX-W
</TABLE>
19
<PAGE> 31
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of shares
of Common Stock by the Selling Security holders; all proceeds will be paid
directly to the Selling Security Holders. See "SELLING SECURITY HOLDERS." The
Company received approximately $3,100,000 of gross proceeds from the exercise of
all of the Redeemable Public Warrants, 65,000 options for the purchase of Common
Stock, the Underwriter's Warrants, and the Redeemable Public Warrants issued
upon exercise of the Underwriter's Warrants and could receive up to $436,050
from the exercise of all currently outstanding Common Stock Warrants held by
Woodward, Hall & Primm and Harbor Financial, Inc. However, such exercise of any
of the outstanding options and warrants is not assured.
The Company estimates that it has incurred approximately $395,000 in
expenses relating to this offering and intends to use the net proceeds for
working capital purposes. Such funds have not been kept separate from other
funds of the Company and collectively will be used to pay all obligations of the
Company including compensation to the officers. No proceeds are allocated
specifically to any other payment, directly or indirectly, to directors,
officers or their affiliates. The officers of the Company have broad discretion
over the use of proceeds. See "Risk Factors -- Management's Broad Discretion
Over the Allocation of the Company's Proceeds Means that Proceeds Could Be Used
for Risky Ventures Not Approved by Shareholders."
The sale and issuance of securities upon the exercise of Redeemable
Public Warrants resulted in proceeds directly to the Company as follows:
<TABLE>
<CAPTION>
================================================================================
Underwriting
PRICE TO Discounts and Proceeds to
PUBLIC(1) Commissions(2) Issuer(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of
Common Stock
[507,926 Shares] $4.67(4) $-0- [$2,372,014]
- --------------------------------------------------------------------------------
TOTAL......... [$2,372,014]
================================================================================
</TABLE>
(1) The 507,926 shares of Common Stock issued at $4.67 per share consist of
the shares issued upon the exercise of 491,550 of the 507,926 Redeemable
Public Warrants.
(2) The securities registered hereunder were not and will not be sold
through an underwriter, however, the Company paid to First Colonial
Securities, Inc. as advisor in connection with this offering a $35,000
advance fee, although such engagement has expired.
20
<PAGE> 32
(3) All expenses of this registration other than commissions and concessions
are payable by the Company, and are estimated at $395,000, which is
cross-referenced at footnote number 2 for the following chart. The
Selling Security Holders are not paying any of the costs associated with
this registration. The expenses payable by the Company in connection
with the issuance and distribution of the securities being registered
are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Fees............ [$1,915]
NASDAQ Stock Market listing fees................... -0-
Transfer/Warrant Agent's Fee and Expenses.......... 1,000
Accounting Fees and Expenses....................... 260,000
Blue Sky Fees and Expenses......................... 5,000
Printing Expenses ................................. 15,000
First Colonial Securities Group, Inc............... 35,000
Legal Fees......................................... 75,000
Miscellaneous...................................... [2,085]
-------
TOTAL...................................... $395,000
========
</TABLE>
(4) The price received by the Company is the price at which warrantholders
bought Common Stock upon the exercise of Redeemable Public Warrants.
The sale of securities by Security Holders will not result in any
proceeds to the Company. However, it presumes exercise of outstanding warrants
and options, and proceeds to the issuer as follows:
<TABLE>
<CAPTION>
================================================================================
Underwriting
PRICE PAID TO Discounts and Proceeds to
ISSUER Commissions(1) Issuer(2)
<S> <C> <C> <C>
</TABLE>
21
<PAGE> 33
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Per Share of
Common Stock
65,000
Shares $ 2.50 (3) $-0- $ 162,500
101,566
Shares $ 4.20 (4) $-0- $ 426,577
50,783 $ 4.67 (5) $-0- $ 237,157
Shares
72,250 $ 5.13 (6) $-0- $370,642
Shares
12,750 $ 5.13 (7) $-0- $ 65,407
Shares
Per Redeemable
Public Warrant
$ -0- (8) $-0- $ -0-
50,783
Warrants
- --------------------------------------------------------------------------------
$-0- $911,234
Total.........
================================================================================
</TABLE>
(1) The securities registered hereunder will not be sold through an
underwriter.
(2) All expenses of this registration other than commissions and concessions
are payable by the Company, and are estimated at $395,000
(cross-referenced in the previous chart footnote 3 which also provides
detail of such expenses). The Selling Security Holders are not paying
any of the expenses associated with this registration.
(3) Shares of Common Stock which were issued upon the exercise of
outstanding options.
(4) The 101,566 shares of Common Stock issuable at $4.20 per share are the
shares of Common Stock which were issued upon the exercise of the
Underwriter's Warrants.
(5) The 50,783 Shares of Common Stock issuable at $4.67 per share are the
shares which were issued upon exercise of those Redeemable Public
Warrants that were issued on the exercise of the Underwriter's Warrants.
22
<PAGE> 34
(6) The 72,250 Shares of Common Stock issuable at $5.13 per share are
issuable upon exercise of Common Stock Warrants owned by Harbor
Financial, Inc.
(7) The 12,750 Shares of Common Stock issuable at $5.13 per share are
issuable upon exercise of Common Stock Warrants owned by Texas Capital
Securities, Inc.
(8) The 50,783 Redeemable Public Warrants were issued upon the exercise of
the Underwriter's Warrants. For the purposes of this chart, the entire
exercise price of the Underwriter's Warrants has been allocated to the
Common Stock issuable thereon.
23
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's financial statements and related notes thereto of this Annual Report.
Except for the historical information contained herein, this and other sections
of this Annual Report contain certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Annual Report, the words
"anticipate," "believe," "estimate," "expect", and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. The Company's actual results, performance, or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements.
OVERVIEW
During Fiscal 1998, approximately 36% of the Company's revenues were
earned from tax preparation services, 58% were earned from financial planning
and related services and 6% were earned from direct mail and related services.
In addition, the Company acquired a securities broker/dealer subsidiary in
November 1998 whose operations have not been included in any fiscal year-end
financial statements
Direct mail services historically have not materially contributed to the
Company's net income. The Company's tax return preparation business and the
financial planning services provided to the Company's clients are closely linked
together. These lines of business generally use the same individuals, assets,
marketing and facilities. In addition, the financial planning customers
generally are introduced to the financial planners through the Company's tax
preparation services. The Company believes that its tax return preparation
business is inextricably intertwined with, and a necessary adjunct to, the
financial planning services provided to the Company's clients, that neither
segment would operate profitably by itself and that the two segments can be
viewed meaningfully only as a whole.
The Company opened fifteen new offices in January 1994, twenty-two new
offices in January 1995, forty-three new offices in January 1996, eight new
offices in January 1997, seven new offices in January 1998 and four new offices
in January 1999. From time to time the Company merges offices in similar
geographic areas in order to take advantage of economies of scale. During Fiscal
1998 the Company closed its two offices in California.
24
<PAGE> 36
PLAN OF OPERATION
Tax Preparation and Financial Planning
During the Company's fiscal year ended June 30, 1996 ("Fiscal
1996"), Fiscal 1997 and Fiscal 1998, the Company opened 58 new offices, which
represents approximately 46% of all offices at June 30, 1998. New offices have
historically attracted more tax preparation clients, which have resulted in
increased revenues and have contributed to the Company's growth. In addition,
each of the new tax preparation clients are potential new financial planning
clients. The Company plans to continue to expand and open new offices during the
next year (although no specific target has been set), recruit successful
financial planners and acquire tax preparation practices. In addition, the
Company anticipates that it may acquire existing securities broker/dealers to
increase the number of financial planners who provide financial planning
services to clients of the Company. The Company anticipates funding this growth
through the proceeds of future offerings of equity securities, if any, operating
profits and use of its short-term line of credit.
During Fiscal 1996 and Fiscal 1997, the Company purchased two
buildings in connection with the acquisition of two tax preparation practices.
The Company may purchase other real estate in connection with future
acquisitions, but it has no plans to invest in real estate apart from its other
businesses.
The Company anticipates that opening new offices will increase its
revenues, but will involve a substantial increase in costs. The Company has no
basis to predict whether its new offices will have a material effect on its net
income. The Company believes that its new offices can ultimately be operated
profitably, but expansion may initially reduce the Company's profits or result
in an overall loss in future years. Although the Company anticipates opening new
offices, the Company will also focus on expanding its tax preparation base in
its current markets.
Direct Mail Division
During Fiscal 1998, the Company continued its operations of a direct
mail division in order to control the substantial costs of advertising its many
offices. This division was acquired to specifically reduce the costs of
advertising for the Company. The Company believes that the direct mail division
results in lower advertising costs on a per-office basis, as the Company takes
advantage of economies of scale. The Company's direct mail division operates as
an independent division and solicits its own customers for its direct mail
services. In Fiscal 1998, the direct mail division experienced an 18% decrease
in revenues from the prior fiscal year due primarily to the concentration of the
direct mail division services and resources for internal Company use, which
25
<PAGE> 37
resulted in a loss of certain client accounts outside the Company. In Fiscal
1998, 43% of the direct mail division's revenues were from unaffiliated parties
as compared to 49% in Fiscal 1997.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
items from the Company's statements of income expressed as a percentage of
revenue and the percentage change in such items for Fiscal 1997 and Fiscal 1998.
The trends illustrated in the following table are not necessarily indicative of
future results.
PERCENTAGE 0F REVENUE
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, % INCREASE
-------- ----------
1997 1998 1997 to 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax preparation fees 40% 36% (4%)
Financial planning commissions 51% 58% 7%
Direct mail services 9% 6% (3%)
Total revenue 100% 100%
Salaries and Commissions 53% 51% (2%)
General/administrative expense 15% 14% (1%)
Advertising 11% 10% (1%)
Direct Stall Costs 5% 3% (2%)
Rent 6% 7% (1%)
Depreciation and amortization 3% 3% 0%
Operating expenses 95% 88% (7%)
Other income (expense), net 0% 0% 0%
Income before taxes 5% 12% 7%
Provision for income TAXES 2% 5% 3%
Net income 3% 7% 4%
</TABLE>
Fiscal 1997 Compared to Fiscal 1998
The Company's revenues for Fiscal 1998 were $28,533,083 as compared
to $24,574,571 for Fiscal 1997, an increase of $3,958,512 or 16%. This increase
was attributable primarily to increased commissions from increased sales of
financial planning services and additional affiliated financial planners.
The Company's total revenues for Fiscal 1998 consisted of
$10,164,550 for tax preparation services, $16,578,032 for financial planning
services and Sl,790,501 for direct mailing services. Tax preparation services
consisted of 36%, financial planning services consisted of 58% and direct
mailing services consisted of 6% of the Company's total revenues for Fiscal
1998. The Company's total revenues for Fiscal 1997 consisted of $9,921,967 for
tax preparation services, $12,464,284 for financial planning services and
$2,188,320 for direct mailing services. Tax preparation services consisted of
40%, financial planning services consisted of 51% and direct mailing
26
<PAGE> 38
services consisted of 9% of the Company's total revenues for Fiscal 1997.
The growth in the tax preparation segment is primarily attributable
to the opening of seven new offices in January 1998. The growth in the financial
planning segment is primarily attributable to the addition of financial planners
who generated additional commissions from financial planning activities. The
remaining growth in financial planning revenues is a result of increased
securities and insurance transactions attributable to existing financial
planners. Any reduction in the rate of increase of equity securities' prices in
the marketplace could reduce the increase in investments that the Company's
clients make through the Company, and falling market prices of securities could
result in a reduction that would offset other sources of growth in the Company's
financial planning revenues. The Company has previously experienced a 6 to 12
month delay after the opening of a new office before such office generated
significant financial planning revenues, if ever.
The Company's operating expenses for Fiscal 1998 were $25,130,413,
as compared to operating expenses of $23,283,697 for Fiscal 1997. Operating
expenses as a percentage of total revenue for Fiscal 1998 were 88% compared to
95% for Fiscal 1997. The increase in operating expenses was attributable to
increases of $1,453,687 in salaries and commissions, $621,160 in general and
administrative expenses, $152,349 in rent and $72,469 in depreciation and
amortization, which were offset by decreases in direct mail costs of $365,875
and $87,074 in advertising. The increase in operating expenses was primarily
attributable to the costs associated with opening seven new offices in Fiscal
1998, an increase of financial planning services (including the number of
financial planners and the overall financial planning revenues) and, to a lesser
extent, increases in salaries.
The increase in salaries and commissions is primarily due to an
increase in commissions payable to financial planners as a result of the
increased sales of financial planning services and the addition of financial
planners.
The increase in general and administrative expenses from Fiscal 1997
to Fiscal 1998 resulted principally from the Company's expansion of operations
and the opening of seven new offices in Fiscal 1998. Such increase was
attributable to various factors, including the increase in office expenses at
the new offices and increased costs in connection with presenting additional
financial planning seminars in Fiscal 1998.
The increased rent expense was principally attributable to the addition
of the Company's seven new offices during Fiscal 1998 and the offices opened in
the second half of Fiscal 1997.
The increase in depreciation and amortization expense is due primarily
to additions to property, plant and equipment of approximately $773,000. These
additions include updates to the
27
<PAGE> 39
Company's computer systems, including software upgrades, hardware upgrades and
additional computer hardware for the seven new offices opened in Fiscal 1998.
The reduction of the Company's direct mail costs is related to the
decrease in revenue attributable to that segment of the Company's business.
The Company's income after provision for income taxes for Fiscal 1998
$2,011,345, as compared to $875,994 for Fiscal 1997. The increase of 130% is
primarily attributable to higher net operating income generated from financial
planning and tax preparation services. These increases were offset by the slight
decrease in income from direct mail services.
The Company suffered a net loss of $122,467 after income taxes for the
fiscal quarter ended September 30 ,1998 and a net loss of $75,456 for the fiscal
quarter ended December 31, 1998.
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/or bank borrowings to support operations finance
working capital requirements and complete acquisitions.
The Company's cash flows provided by operating activities were
$1,654,601 and $1,516,445 for Fiscal 1998 and Fiscal 1997, respectively. The
increase of approximately $138,156 is due primarily to increases in net income
from $875,994 in Fiscal 1997 to $2,011,345 in Fiscal 1998, which was offset by
an increase in accounts receivable from $174,375 in Fiscal 1997 to $1,141,576 in
fiscal 1998.
Net cash used in investing activities was $1,115,824 and 1,129,500 for
Fiscal 1998 and Fiscal 1997, respectively. The decrease of approximately $13,676
is primarily due to additional amounts utilized in the purchase of new equipment
and additional costs associated with acquisitions. This was offset by decreased
costs associated with the acquisition of intangible assets and fewer proceeds
from the sale of investments.
28
<PAGE> 40
Net cash used in financing activities was $1,753,435 in Fiscal 1998,
compared with net cash provided by financing activities of $311,749 in Fiscal
1997. The decrease of approximately $2,065,184 is primarily attributable to the
acquisition of approximately $180,000 of treasury stock in Fiscal 1998 as
compared to $730,000 in Fiscal 1997, the repayment of approximately $4,400,000
of outstanding bank loans in Fiscal 1998 as compared to approximately $2,900,000
in Fiscal 1997 and the incurrence of approximately $300,000 in Fiscal 1998 of
costs associated with the Registration Statement on Form SB-2 of which this
prospectus is a part as it related to the Company's outstanding publicly-traded
Common Stock purchase warrants.
The Company has two credit facilities with State Bank of Long Island
and European American Bank. One facility is a line of credit for $4,500,000.
Another facility is a revolving credit loan for $3,500,000. Borrowings under
this line are in the form of short-term notes with interest charged monthly at
the bank's prime lending rate plus 1 1/2%.
The Company believes that it could continue to operate without any
additional financing (other than its seasonal bank loans) during the next 12
months. The Company anticipates that it will not pay any dividends on its Common
Stock in the foreseeable future, but will apply any profits to fund the
Company's expansion.
RECENT DEVELOPMENTS
On September 28, 1998, the Company's Registration Statement on Form
SB-2 relating to the shares of Common Stock issuable upon exercise of the
Company's redeemable publicly traded warrants (the "Warrants") was declared
effective by the Commission. Almost all of the Warrants were exercised at $4.67
per share. The Company received an aggregate of approximately $2,300,000 from
such exercises.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, FASB issued Statement No. 128, "Earnings Per
Share," which is effective for periods ending after December 15, 1997. The
Company has adopted Statement No. 128 for its Fiscal 1998 and has restated
its weighted-average shares for all prior periods.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and display of comprehensive
income, its components and accumulated balances. SFAS No. 130 is effective for
periods beginning after December 15, 1997 and requires comparative information
for earlier years to be restated. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
29
<PAGE> 41
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 requires entities to
disclose financial and detailed information about their operating segments in a
canner consistent with internal segment reporting used by the Company to
allocate resources and assess financial performance. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997 and
requires comparative information for earlier years to be restated.
The Company has adopted SFAS No. 130 and 131 for the fiscal year ending
June 30, 1998. SFAS No.'s 130 and 131 expand and modify financial statement
disclosures and, accordingly, have no impact on the Company's results of
operations, earnings per share or financial position.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting Costs of Start-Up
Activities" ("SOP 98-5"), which establishes standards for the accounting of
start-up costs. SOP 98-5 states that costs of start-up activities, including
organization costs, should be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998,
although earlier application is encouraged. The Company has adopted SOP 98-5
during Fiscal 1998. The effects of this standard have no material impact on the
Company's results of operations earnings per share or financial position.
YEAR 2000 COMPLIANCE
The Company is currently finalizing the installation of the Great
Plains accounting system, which is year 2000 compliant. The Company does not
anticipate any material additional costs with regard to its year 2000
compliance. The year 2000 issue is not expected to affect the systems of various
entities with which the Company interacts. However, there can be no assurance
that the systems of other companies on which the Company relies will be timely
converted, or that a failure by another Company's systems to be year 2000
compliant would not have a material adverse effect on the Company.
30
<PAGE> 42
BUSINESS
GENERAL
Gilman & Ciocia, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on September 3, 1993, the successor in interest to
Gilman & Ciocia, Inc., a New York corporation organized on November 4, 1981, and
is a preparer of federal, state and local income tax returns for individuals
predominantly in middle and upper income brackets.
The preparation of a tax return by the Company usually involves a
personal meeting at the office between a client and an employee of the Company.
In addition, while preparing tax returns, clients often consider other aspects
of their financial needs, such as insurance, investments, pension and estate
planning. The Company capitalizes on this situation by providing financial
planning questionnaires to all of its tax preparation clients.
After review of such questionnaires by financial planners, if
appropriate, financial planners will recommend the tax preparer to introduce the
tax preparation client to a financial planner. Each of the financial planners to
which a client might be introduced is a registered representative of an
independent registered securities broker/dealer, Royal Alliance Associates, Inc.
("Royal Alliance"), and each has agreed to share commissions with the Company.
In approximately 22% of the cases, such financial planner is the tax preparer
himself.
If such clients do utilize the financial planners to assist them on
their other financial needs, the Company earns commissions (depending on what
service is provided) from the services that the financial planners provide to
the client. More than 99% of the financial planners are also authorized agents
of insurance underwriters, and approximately 2% of the financial planners are
also authorized to act as mortgage brokers, and thus, the Company also earns
revenues from commissions for acting as an insurance agent and a mortgage
broker.
Royal Alliance, unaffiliated with the Company, is a corporation
which is a registered securities broker/dealer and a member of the National
Association of Security Dealers, Inc. ("NASD").
North Ridge Securities Corp. ("North Ridge"), a wholly owned subsidiary
of the Company acquired in November 1998, provides securities brokerage
services, as well as on-going, full-time management and supervision of
asset-allocated portfolios containing stocks, bonds, mutual funds and/or
variable annuities. North Ridge also conducts a full-service insurance brokerage
business providing insurance expertise and products as well as advice to
customers as to their insurance needs.
31
<PAGE> 43
The Company also has a division operating as a direct mail service. It
assembles, packages and mails, but does not design, create or draft the test for
direct mail materials, however, it provides limited consulting services in these
areas.
Based on the Company's total revenues during its 1998 fiscal year,
approximately 36% of the Company's business is tax preparation services;
approximately 58% of the Company's business is commission sharing on financial
planning services; and approximately 6% of the Company's business is direct mail
and related services.
The Company has a total of [129] offices: [45] in New York, [15] in New
Jersey, [16] in Florida, [9] in Arizona, [6] in Ohio, [7] in Maryland, [7] in
Connecticut, [7] in Washington, [6] in Massachusetts, [5] in Nevada, [2] in
Pennsylvania, [1] in Virginia, [1] in Illinois, [1] in Georgia and [1] in Texas
and it maintains its principal executive office at 475 Northern Boulevard, Great
Neck, NY 11021, telephone (516) 482-4860.
Out of the total number of offices: [35] offices provide predominantly
tax preparation services and have no regular financial planner associated with
them (although financial planners from other offices do work with clients from
all of such [35] offices); and [94] offices provide both tax preparation and
regular financial planning services.
Out of the [94] offices that provide both tax preparation and financial
planning services: [21] of these offices have only one person who provides both
tax preparation and financial planning services; and [73] of these offices have
two or more persons who perform tax preparation and financial planning services.
No office has more than a total of ten tax preparers and financial planners.
The Company opened fifteen new offices in January 1994, twenty two new
offices in January 1995, forty four new offices in 1996 (closing four in the
first half of 1996), eight new offices in 1997, seven new offices in 1998 and
[4] in 1999.
HISTORY
Following its organization in 1981, most of the Company's expansion was
effected through separate corporations under common control with the Company. In
December 1992, the Company merged with 15 of such affiliated corporations
conducting the same business as the Company. Several of such affiliated
corporations, which did not participate in the merger, were liquidated prior to
such merger. Their clients and territories were absorbed by other nearby offices
of the Company. The Company opened 15 offices in January 1994, 22 offices in
January 1995, 44 offices in 1996 (closing 4 in the first half of 1996), 8 in
1997 and 7 in 1998 and 4 in 1999. The Company now has a total of [129] offices.
32
<PAGE> 44
In December 1994, the Company consummated its initial public offering
("IPO") of 507,926 units, including the underwriter's overallotment option, of
its securities to the public for $7.00 per unit. Each unit consisted of two
shares of the Company's common stock and a warrant to purchase another share of
common stock at $4.67 per share. Proceeds of the offering less underwriting
discounts of approximately $278,000 were approximately $3,277,000. Expenses for
the IPO totaled approximately $190,000, resulting in net proceeds to the Company
of approximately $3,087,000. In connection with the IPO, the Company issued
warrants to purchase 50,783 units to the underwriter at an exercise price of
$8.40.
On February 10, 1995, effective November 1, 1994, the Company acquired
all the outstanding stock of Gilbert Financial Services Inc. (a Florida
corporation) in exchange for 203,428 shares of the Company's common stock.
In May 1995, all of the Company's class a bridge loan warrants ("Class
A Bridge Loan Warrants"), which were registered under the Company's IPO, were
exercised at $2.08 per share, generating additional capital of $748,800 for the
Company.
On June 30, 1995, the Company acquired certain assets in order to
commence a direct mail service business under the name of "Progressive Mailing."
The Company uses direct mail as its main form of advertising and has expanded
its Progressive Mailing operations into an independent business.
In September and October 1998, almost all of the Company's Redeemable
Public Warrants, which were registered pursuant to the registration statement of
which this prospectus is a part, were exercised and the Company received
approximately $2,300,000 in gross proceeds.
On November 19, 1998, Gilman & Ciocia, Inc. acquired all the
outstanding stock of North Ridge Securities Corp. ("North Ridge"), a securities
broker/dealer, and North Shore Capital Management Corp., a company that supplies
management services to North Ridge (both are New York corporations) for
$5,250,000 in cash and notes.
MARKET AND STRATEGIC OVERVIEW
The Company believes that most middle and upper income Americans
require services for preparing income tax returns. Other financial services,
such as brokerage for mutual fund investment and the sale of insurance products,
have historically been supplied by segmented firms, but the Company believes
that the current trend to multiservice firms that provide clients with the
convenience of personalized, "one-stop" financial shopping will enable the
Company to extend the services that it delivers to its existing tax preparation
clients and to attract more clients for its full range of services.
33
<PAGE> 45
TAX RETURN PREPARATION
The Company prepares federal, state and local income tax returns for
individuals, predominantly in the middle and upper income brackets. The
preparation of a tax return by the Company usually involves a personal meeting
at the office between a prospective client and an employee of the Company. At
the meeting the Company's employee solicits from the client the information on
income and deductions and family status necessary to prepare the client's tax
return. After the meeting, drafts of the client's tax returns are prepared.
After review and final correction by the tax preparer, the returns are delivered
to the client for filing.
The Company employs only two full-time certified public accountants,
and only approximately 7% of the Company's seasonal tax preparers are certified
public accountants or tax attorneys. Most of the Company's tax preparers are,
therefore, limited in the representation that they can provide to clients of the
Company on an audit by the IRS. See "RISK FACTORS --Inability of the Company to
Provide Services of a Certified Public Accountant may Hamper Company's Marketing
and/or Increase Risk of Liability." Ninety-nine percent of the Company's
professional tax preparers have a college degree or its equivalent and two years
of tax preparation experience, and each one is specifically tested and trained
by the Company to meet the required level of expertise to properly prepare tax
returns.
In keeping with the trend toward increasingly automated filing of
income tax returns, the Company offers to clients the option of filing their
federal income tax returns electronically. Under this system, the final federal
income tax return is transmitted to the Internal Revenue Service ("IRS") through
a publicly available software package.
Refund Anticipation Loans are also available to the clients of the
Company through arrangements with approved banking institutions. Using this
service, a client is able to receive a check in the amount of his federal
refund, drawn on an approved bank, at the office where he or she had his or her
return prepared. The Company acts only as a facilitator between the client and
the bank in preparing and submitting the loan documentation and receives a fee
for these services payable upon consummation of the loan. The Company has no
liability in connection with these loans. The Company makes no loans, and its
funds are not disbursed in any fashion to reimburse customers.
The Company's business of preparing income tax returns subjects it to
potential civil liabilities under the Internal Revenue Code (the "Code").
Although the Company believes that it complies with all applicable laws and
regulations, no assurance
34
<PAGE> 46
can be given that the Company will never incur any material fines or penalties.
In addition, the Company does not maintain any professional liability
or malpractice insurance policy. Although the Company complies with all
applicable laws and regulations, no assurance can be given that the Company will
not be subject to professional liability or malpractice suits.
FINANCIAL PLANNING SERVICES
While preparing tax returns, clients often consider other aspects of
their financial needs, such as insurance, investments and pension and estate
planning. The Company attempts to capitalize on this situation by offering to
every client the opportunity to complete a questionnaire that requests
information on his/her financial situation. These questionnaires are
subsequently reviewed by financial planners (who are have entered into
commission sharing agreements with the Company and who are registered
representatives of Royal Alliance) to evaluate if the client may need financial
planning services. If the financial planners recommend that these clients be
referred to a financial planner and if the clients agree, the Company introduces
such clients of its tax preparation business to one of the financial planners
who are registered representatives of Royal Alliance, and/or authorized agents
of insurance carriers. In approximately 22% of the cases of tax preparation
clients referred to financial planners, the tax preparer and the financial
planner/registered representative are the same person. Of all of the financial
planners affiliated with the Company, approximately 66% also perform tax
preparation services as employees of the Company.
Most middle and upper income individuals require a variety of financial
planning services. If clients seek insurance products in connection with the
creation of a financial plan, they are referred to an employee or affiliated
financial planner of the Company (who may be the tax preparer himself) who is an
authorized agent of an insurance underwriter. If clients seek mutual fund
products or other securities for investment, they are referred to an affiliated
financial planner of the Company (who may be the tax preparer himself) who is a
registered representative of Royal Alliance, an independent securities
broker/dealer. The financial planners affiliated with the Company do not effect
transactions in securities of individual issuers, but rather deal only with
packaged products such as mutual funds and annuities. See "DESCRIPTION OF
BUSINESS--Relationship with Registered Representatives of Broker/Dealer;" and
"--Relationship with Authorized Agents of Insurance Underwriters."
Out of the total number of offices: [34] offices provide predominantly
tax preparation services and have no regular financial planner associated with
them (although financial
35
<PAGE> 47
planners from other offices do work with clients from all of such [34] offices);
and [94] offices provide both tax preparation and regular financial planning
services.
Out of the [94] offices that provide both tax preparation and financial
planning services: [21] of these offices have only one person who provides both
tax preparation and financial planning services; and [73] of these offices have
two or more persons who perform tax preparation and financial planning services.
No office has more than a total of ten tax preparers and financial planners.
The financial planners affiliated with the Company perform all
financial planning services as registered representatives of Royal Alliance.
(For an explanation of the role of registered representatives, see
"--Relationship With Registered Representatives of Broker/Dealer" below.)
Although Royal Alliance is not affiliated with the Company by contract,
ownership, common directors or officers, approximately [90], or [82]%, of the
Company's full-year tax-preparer employees are also registered representatives
of Royal Alliance. Such individuals, who have two separate roles, divide their
time based upon the needs of clients who come to the offices of the Company with
which they are affiliated. They are compensated by the Company based on the
hours they work preparing tax returns and on the number of returns prepared, and
they are compensated by Royal Alliance based on approximately 47% of the total
commissions earned on transactions effected for clients of the Company. Almost
all of the registered representatives of Royal Alliance who are affiliated with
the Company through commission sharing agreements work exclusively in connection
with the offices of the Company. For a detailed breakdown of the different
services by the number of employees see "BUSINESS -- Employees".
In order to maintain the financial planning services of Royal
Alliance's registered representatives separate from the Company, such registered
representatives orally explain to clients that their services as financial
planners are delivered on behalf of Royal Alliance. In addition, Royal Alliance
maintains a separate telephone number at each office and a separate nameplate or
sign on the door of each office, uses separate stationery and deposits all
revenues in separate bank accounts. For further information on the number of
employees and those employees that have entered into commission sharing
agreements with the Company see "BUSINESS --Employees."
RELATIONSHIP WITH REGISTERED REPRESENTATIVES OF BROKER/DEALER
The Company's affiliated financial planners are all registered
representatives ("Registered Representatives") of Royal
36
<PAGE> 48
Alliance Associates, Inc. ("Royal Alliance"), an unaffiliated corporation, which
is a registered securities broker/dealer and a member of the NASD. Registered
Representatives are the general employees of a securities brokerage firm that
are authorized to broker securities transactions for clients on behalf of the
firm. To become a registered representative, a person must pass one or more of a
series of qualifying exams administered by the NASD that test the person's
knowledge of securities and related regulations.
Registered Representatives who work with North Ridge and Royal Alliance
are supervised by North Ridge and Royal Alliance respectively with regard to all
regulatory matters. Royal Alliance and North Ridge are exclusively responsible
for all supervision and record keeping in connection with their respective
Registered Representatives and their activities.
If clients of the Company inquire about the acquisition or sale of
investment securities, they are directed to one of such Registered
Representatives. Such Registered Representatives are able, through Royal
Alliance, to effect transactions in such securities at the request of clients
and retain a certain percentage of the commissions earned on such transactions.
Royal Alliance has licensed principals in all areas of the securities business.
When a client of the Company requests to meet with a financial planner,
as part of the financial planner's discussion with such client, the financial
planner may initiate a discussion regarding the purchase of securities as part
of the client's overall financial investment plan, but not in regard to a
particular security of an issuer. Ninety-nine percent of the securities
transactions effected by Registered Representatives who are affiliated with the
Company, involve packaged products, including interests in mutual funds and
variable annuities, and do not involve corporate equities and bonds and other
securities of operating issuers. Registered Representatives do not provide
advice regarding particular securities nor do they transact any investments in
such particular securities except in very limited cases on the specific
initiative and request of a client.
All security transactions are introduced and cleared on a fully
disclosed basis through a correspondent broker that is a member of the New York
Stock Exchange.
For a securities transaction effected through Royal Alliance, Royal
Alliance retains approximately 6% of the total commission, and a majority of the
individual Registered Representatives and the Company each receives
approximately 47% of the total commission. Each of the Registered
Representatives except the officers of the Company has entered into an
commission sharing agreement with the Company, which generally provides that a
specified percentage of the commissions earned by the Registered Representative
(generally one-half, or 47% of the total commission) is paid by Royal Alliance
at the direction of such
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<PAGE> 49
financial planner 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. Each agreement with a
Registered Representative has a duration of no more than one year from the date
of the agreement.
The financial planners are paid their share of securities commissions
directly by Royal Alliance and therefore do not receive compensation either as
employees or independent contractors of the Company in regard to their receipt
of a share of securities commissions. Of the financial planners affiliated with
the Company, approximately 66% also perform tax preparation, managerial or other
services for the Company and receive compensation as employees of the Company
for such services ("Employee/Planners").
The Company has no written agreement with Royal Alliance, and either
the Company or Royal Alliance could terminate their relationship at any time.
The Company believes that other broker/dealers, including the Company, could be
found to affiliate with and supervise the Registered Representatives if the
Company's relationship with Royal Alliance were terminated.
RELATIONSHIP WITH AUTHORIZED AGENTS OF INSURANCE UNDERWRITERS
Certain of the Company's full-time employees and affiliated financial
planners are authorized agents of insurance underwriters. If clients of the
Company inquire about insurance products, then they are directed to one of such
authorized agents. Such agents are able, through several insurance underwriters,
to sell insurance products at the request of clients and retain a certain
percentage of the commissions earned on such sales. The Company is an authorized
insurance agent under New York and Florida law. In approximately 22% of the
cases where a tax preparation client of the Company is referred to an insurance
agent, such authorized agent is the same person as the tax preparer working with
such client.
Each of the insurance agents (except the Company's officers) has
entered into an commission sharing agreement with the Company. Each such
agreement generally provides that a specified percentage of the commissions
earned by the agent is paid to the Company. The agreements also contain
covenants requiring the agent to maintain strict confidentiality and to refrain
from certain competition with the Company. Each agreement with an insurance
agent has a duration of no greater than one year from the date of the agreement.
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<PAGE> 50
BROKER/DEALER SUBSIDIARY
North Ridge, a wholly owned subsidiary of the Company, conducts a
securities brokerage business providing expertise, products, and sales support
to its brokers and investment products and services to its customers. Ninety
percent of the securities transactions effected by its 47 Registered
Representatives involve packaged products, including interests in mutual funds
and variable annuities. The remaining ten percent of the securities transactions
effected by North Ridge's Registered Representatives involves 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. North Ridge clears its own mutual fund and variable annuity
transactions.
North Ridge receives commissions generated by financial planners
providing services at the North Ridge's offices. As of February 28, 1999, North
Ridge employed 47 Registered Representatives (for an explanation of the role of
licensed Representatives, see"-RELATIONSHIP WITH REGISTERED REPRESENTATIVES OF
BROKER/DEALER" above) in providing financial planning and brokerage services
directly to a limited number of clients of North Ridge.
The Company has been able to recruit and retain experienced and
productive brokers who seek to establish and maintain personal relationships
with high net worth individuals. The Company generally does 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, North Ridge provides 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 North Ridge's retail brokers exercise discretionary
authority over investment decisions in certain customer accounts.
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 York, North Carolina, New Jersey,
New York, Ohio, Pennsylvania, Rhode Island, Texas, and Virginia.
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<PAGE> 51
CREDIT CARDS
The Company recently entered into a Bankcard Agreement with First USA
Bank (the "Credit Card Bank") for the Credit Card Bank to issue MasterCard
and/or Visa credit cards denominated as "Gilman & Ciocia" credit cards. Pursuant
to such agreement, the Company will supply a list of the names and addresses of
its customers for the purpose of the Credit Card Bank's doing a direct mail
solicitation for applications for such credit cards, and the Company will
receive, among other consideration, $15.00 for each "Gilman & Ciocia" credit
card issued under a Credit Card Bank marketing plan, $30.00 for each "Gilman &
Ciocia" credit card issued under a Company marketing plan, plus 5% of all
finance charges collected by the Credit Card Bank from holders of such "Gilman &
Ciocia" credit cards. The Company bears no risk of loss from default on any of
the cards issued under this agreement. The Company earned an estimated $24,000
in gross revenues during the 1998 fiscal year from its credit card business.
MARKETING
Most of the Company's clients are repeat clients from prior years. The
majority of clients in each office return to the Company for tax preparation
services during the following years, and the retention rate is approximately
75%. In addition, the Company markets its services principally through direct
mail and promotions.
Direct Mail. Each year prior to the "tax season" when individuals file
federal, state and local income tax returns, the Company sends direct mail
advertisements. The direct mail advertising solicits business principally for
the Company's tax preparation services. A large majority of the Company's new
clients each year are first introduced to the Company through its direct mail
advertising.
Promotions. The Company offers a $50 U.S. Savings Bond to any
client that refers another two clients to the Company. The program has
resulted in approximately 300 new clients per year.
Online. The Company currently has a web site on the Internet:
http://www.gtax.com for income tax and financial planning advice, 10K/Q
information and the latest news releases.
Other Marketing. The Company also prints and distributes brochures
and flyers about its services.
The Company believes that its most promising market for expansion may
lie in areas where Americans and other nationals are migrating. Individuals
usually retain a local tax preparer in connection with their personal tax
returns. When people move, therefore, they usually seek to find a new income tax
preparer. At
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<PAGE> 52
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, which include H + R Block, Inc., HD Vest,
Inc., Jackson Hewitt Tax Service, Inc. and Triple Check Income Tax Service, Inc.
in the tax preparation field and many well-known brokerage firms in the
financial services field, have significantly greater financial and other
resources than the Company. The Company believes that the primary elements of
competition are convenience, quality of service and price. No assurance can be
given, however, that the Company will be able to compete successfully with
larger and more established companies.
In addition, the Company may suffer from competition from departing
employees and affiliated financial planners. Although the Company attempts to
restrict such competition contractually, as a practical matter, enforcement of
contractual provisions prohibiting small scale competition by individuals is
difficult.
TRADEMARKS
The Company has registered its "Gilman + Ciocia" trademark with the
U.S. Patent and Trademark Office. No assurance can be given that the Company
would be able successfully to defend its trademark if forced to litigate its
enforceability. The Company believes that its trademark "Gilman + Ciocia"
constitutes a valuable marketing factor. If the Company were to lose the use of
such trademark, its sales could be adversely affected.
DIRECT MAIL DIVISION
The Company commenced operations of a direct mail service division in
July 1995 under the name "Progressive Mailing". Progressive Mailing does not
design, create or draft the text for direct mail materials, but does provide
limited consulting services in these areas. The Progressive Mailing division
uses equipment acquired from a liquidated company and is operated by certain
personnel hired from that company.
The Company's principal marketing medium is direct mail solicitation,
and the Company's solicitations constitute the majority of Progressive Mailing's
services. Currently, Progressive Mailing is soliciting business solely through
word of
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mouth and referrals. The Company has hired a salesperson to help market its
services.
The direct mail business is highly competitive with many large and
small entities competing for business. The principal factors of competition are
timeliness, accurate service and price.
As of April 16, 1999, the Company employed [29] persons on a full-time
basis in its Progressive Mailing division: [one] executive person, [one]
clerical personnel, and [nineteen] staff personnel.
REGULATION
The Company, as a preparer of federal income tax returns, is subject to
the regulations of the Code and regulations promulgated thereunder. The Code
requires, for example, that tax preparers comply with certain ministerial
requirements with respect to the preparation and filing of tax returns and rules
on the maintenance of taxpayer records. The Code also imposes regulations
relating to the truthfulness of the contents of tax returns, the confidentiality
of taxpayer information, and the proper methods of negotiating taxpayer refund
checks. Penalties for violations are specified in the Code.
To represent a taxpayer before the IRS after the initial audit, an
individual must meet certain requirements. Only an attorney, a certified public
accountant or a person specifically enrolled to practice before the IRS can
represent a taxpayer in such circumstances. None of the full-year employees and
only several of the employees of the Company meet such requirements. Most of the
full-time employees of the Company, therefore, are limited in that they may
appear as a representative of a taxpayer only through the stage of an audit
examination at the office of a District Director, and then only upon complying
with applicable regulations.
Tax preparers are prohibited by regulations promulgated by the IRS from
using information on a taxpayer's tax return for certain purposes involved in
the solicitation of other business from such taxpayer without the consent of
such taxpayer. The Company believes that it complies with all applicable IRS
regulations.
Neither the employees of the Company nor its affiliated financial
planners generally give investment advice about particular investments to
clients. Instead, financial planning services involve making clients aware of
the types of vehicles available for savings, investment and planning for
retirement and death, disability and other contingencies. Furthermore, any
advice given by employees of the Company or affiliated financial planners is
incidental to their work in connection with the purchases and sales of mutual
fund shares and other securities.
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They are registered representatives of a broker/dealer and work under the
supervision of such broker/dealer.
The registered representatives themselves are strictly regulated in
their activities as registered representatives of a securities broker/dealer
under the Securities Act of 1934, as amended, and the rules and regulations
promulgated thereunder, state regulation, the rules of the NASD and by the rules
and regulations of the broker/dealer.
The Company has not registered as a broker/dealer in any state,
although the Company has offices in 13 other states. The Company does not
believe that it is currently required to so register. The State of Washington
made written inquiries in 1996 regarding possible requirements for the Company
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.
North Ridge is a registered broker/dealer under the Securities Exchange
Act of 1934, as amended, and a member of the NASD, is subject to detailed rules
and regulations, including extensive record keeping requirements, incumbent upon
registered broker/dealers.
North Ridge's 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. North
Ridge is registered as a broker-dealer with the SEC. Certain aspects of
broker-dealer regulation has 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 North Ridge's 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 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,
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<PAGE> 55
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, "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.
North Ridge also is 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 a registered broker-dealer, North Ridge is required to establish and
maintain a system to supervise the activities of its retail brokers, including
its 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 an SRO that
could limit North Ridge's ability to conduct its securities business. Moreover,
under federal law, and certain state securities laws,
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North Ridge may be held liable for damages resulting from the unauthorized
conduct of its account executives to the extent that North Ridge has failed to
establish and maintain an appropriate supervisory system.
EMPLOYEES
As of April 16, 1999, the Company employed [256] persons on a full-time
full-year basis, including the Company's four officers. See "DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS." The Company's full-time
employees include [50] professional tax preparers, [81] clerical and support
staff persons (which includes persons performing clerical work while in training
for other positions), and [23] administrative personnel (who include the
Company's executive officers), and [29] employees who are part of the Company's
direct mail services division, and 73 employees who work for North Ridge, the
Company's wholly owned broker/dealer subsidiary. During peak season the Company
employs approximately [500] full-time employees, of which approximately [300] of
these employees are seasonal and do only tax preparation. Approximately 75% of
the Company's seasonal employees return the following year, and the Company uses
advertisements in the local newspapers to meet the balance of its recruiting
needs. The minimum requirements for a tax preparer at the Company are generally
a college degree or its equivalent, two years of tax preparation experience and
a passing grade of an examination given by the Company. See
"BUSINESS--Seasonality."
The Company also is affiliated with approximately [138] financial
planners who have entered into commission sharing agreements with the Company
while serving as registered representatives of Royal Alliance and/or as
insurance agents. Of such [138] financial planners, [47] do only financial
planning, and the others serve separately as employees of the Company performing
tax preparation, managerial and other services for the Company. Of the total
number of financial planners who have entered into the commission sharing
agreements with the Company, 91 do tax preparation, management and other
services for the Company ("Employee/Planners").
The Company's offices are partially staffed by financial planners who
have entered into commission sharing agreements with the Company, particularly
during the off season. During a portion of the year, approximately ten of the
Company's offices are not staffed full-time by employees and/or full-time
financial planning affiliates of the Company. During such periods, such offices
are staffed part-time by affiliated financial planners and/or calls to such
offices when no personnel are present are forwarded automatically to an office
of the Company that is fully staffed.
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DESCRIPTION OF PROPERTY
As of April 16, 1999, the Company provides services to its clients at
[129] local offices in [15] states: [Forty-five] in New York, [15] in New
Jersey, [9] in Arizona, [16] in Florida, [9] in Ohio, [7] in Maryland, [7] in
Connecticut, [7] in Washington, [6] in Massachusetts, [5] in Nevada, [2] in
Pennsylvania, [1] in Virginia, [1] in Illinois, [1] in Georgia and [1] in Texas.
[Four] of such offices opened in January 1999. A majority of the offices are
leased in commercial office buildings. Most of the Company's offices are leased
pursuant to standard form office leases, although [ten ]offices are leased on an
oral month-to-month basis. The leases range in remaining terms from one to seven
years. The Company's rental expense during its fiscal year ended June 30, 1998
was [$]. The Company believes that any of its offices could be replaced with
comparable office space, however location and convenience is an important factor
in marketing the Company's services to its clients. Since the Company advertises
in the geographic area surrounding the office location, the loss of such a
office that is not replaced with a nearby office could adversely affect the
Company's business at that office.
The Company needs less than 1,000 square feet of usable floor space to
operate an office, and its needs can be flexibly met in a variety of real estate
environments. Therefore, the Company believes that its facilities are adequate
for its current needs.
The Company also owns two buildings housing two of its offices, one in
Babylon, New York and the other in Palmer, Massachusetts.
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
believes, among other defenses, that Texas Capital Securities, Inc. defaulted
under such agreement and provided no material services to the Company. The
Company entered into a settlement with Texas Capital and Harbor Financial
whereby the Company agreed to issue Warrants to purchase
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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 will 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.
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<PAGE> 60
MANAGEMENT
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Executive
Officer or
Director
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
James Ciocia 42 Chief Executive Officer, 11/81
President and Director
Thomas Povinelli 38 Chief Operating Officer, 11/84
and Director
Kathryn Travis 50 Secretary, Vice President
and Director 11/89
Stephen B. Sacher 39 Chief Financial Officer 1/98
Seth A. Akabas 42 Director 4/95
Louis P. Karol 40 Director 4/95
</TABLE>
James Ciocia, Chief Executive Officer, President and Director
Mr. Ciocia is a principal founder of the Company. He opened his
first office in 1981 and has served in his current capacity since that time.
In addition to serving the company as its Chief Executive Officer, he
prepares tax returns, serves as a life insurance agent and sells life and
other insurance products to clients of the Company. Mr. Ciocia is a
Registered Representative of JT Securities and is a Registered Representative
of Royal Alliance. A graduate of St. John's University with a B.S. degree in
accounting, he is a member of the International Association for Financial
Planners.
Thomas Povinelli, Chief Operating Officer, and Director
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<PAGE> 61
Mr. Povinelli began his tenure with the Company as an
accountant in 1983 and has served as an executive officer since November
1984. In addition to supervising the opening of all new offices, he prepares
tax returns, serves as a life insurance agent, selling life and other
insurance products to clients as well as effecting transactions in mutual
funds shares and other securities. Mr. Povinelli is a Registered
Representative of JT Securities and Royal Alliance. He graduated from Iona
College with a B.S. in accounting.
Kathryn Travis, Secretary, Vice President and Director
Ms. Travis began her career with the Company in 1986 as an
accountant and has served as Vice President and a director since November
1989. She prepares tax returns and manages the company's Great Neck office.
She also serves as President, a director and a Registered Representative of
JT Securities and is a Registered Representative of Royal Alliance. Ms.
Travis graduated from the College of New Rochelle with a B.A. in mathematics.
Stephen B. Sacher, Chief Financial Officer
Mr. Sacher joined the Company as its Chief Financial Officer in
January 1998. Mr. Sacher is a Certified Public Accountant and has been
practicing in the public accounting profession since 1981. He is a graduate
of Queens College of the City University of New York with a B.A. in
accounting. He is a member of the SEC Committee of the New York State
Society of Certified Public Accountants and a Member of the American
Institute of Certified Public Accountants.
Seth A. Akabas, Director
Since June 1991, Mr. Akabas has been a partner at the law firm
of Akabas & Cohen. Mr. Akabas is a graduate of Princeton University with a
BA degree in economics and a graduate of Columbia University Schools of Law
and Journalism.
Louis P. Karol, Director
Mr. Karol has been a partner of the law firm of Karol, Hausman &
Sosnick and its predecessors for more than the prior five years. Mr. Karol
is a graduate of George Washington University and a graduate of Cardozo Law
School and has received an LLM degree in Taxation from New York University
School of Law. Mr. Karol is a Certified Public Accountant. Mr. Karol is on
the Board of Directors of the Long Island Chapter of the International
Association of Financial Planning.
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<PAGE> 62
BOARD OF DIRECTORS
Each director is elected for a period of one year at the Company's
annual meeting of stockholders and serves until his or her successor is duly
elected by the stockholders. Officers are elected by and serve at the will of
the Board of Directors. The Company has a stock option plan committee and an
audit committee of its Board of Directors. The Company has no nominating,
compensation or other committees. The Stock Option Plan Committee administers
the Company's 1993 Joint Incentive and Non-Qualified Stock Option Plan and the
1997 Common Stock and Incentive and Non-Qualified Stock Option Plan of Gilman &
Ciocia, Inc. The audit committee is responsible for carrying out the functions
specified in Section 6 of Schedule E of the NASD by-laws. These functions
include: (i) review of the scope of each audit of the Company, (ii) review, with
the independent auditors, of the Company's accounting practices and policies,
(iii) review, with the independent auditors, of their final report, (iv) review
of the Company's overall accounting and financial controls with internal and
independent auditors, and (v) consultation, as needed, with the independent
auditors.
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REMUNERATION OF OFFICERS AND DIRECTORS
MANAGEMENT
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Fiscal Annual Other Options
Principal Position Year Salary Bonus* Compensation (Shares)
- ------------------ ---- ------ ------ ------------ --------
<S> <C> <C> <C> <C> <C>
James Ciocia 1996 $267,200 $240,000 $ 30,500(1) -0-
Chief Executive Officer, 1997 $151,300 $240,000 $ 9,580(2) 10,000
President and Director 1998 $190,000 -- $ 12,393(11) --
Thomas Povinelli, 1996 $339,300 $145,000 $ 78,600(3) -0-
Chief Operating Officer 1997 $ 99,951 $210,000 $ 9,951(4) 10,000
Director 1998 $190,000 -- $ -- --
Gary Besmer 1996 $168,800 $ 3,000 $ 19,000(5) -0-
Vice President 1997 $ 92,149 $ 1,000 $ 7,149(6) 10,000
Director 1998 $ 74,782 -- $ 5,908(11) --
Kathryn Travis 1996 $156,300 $ 49,000 $ 49,300 --
Secretary, Vice Pres. 1997 $ 92,149 $ 3,000 $ 7,149(8) 10,000
and Director 1998 $135,000 -- $ 10,758(11) --
Stephen B. Sacher 1998 $ 36,667 -- $125,717(10) 220,000
</TABLE>
- ----------
* Represents commission earned from non-affiliated entities. See Certain
Relationships and Related Transactions,
(1) Includes $11,000 for auto expense and $19,500 for forgiveness of loan.
(2) Auto expense.
(3) Includes $18,600 for auto expense and $60,000 for forgiveness of loan.
(4) Auto expense.
(5) Includes $7,000 for auto expense and $12,000 for forgiveness of loan.
(6) Auto expense.
(7) Includes $8,900 for auto expense, $32,300 for forgiveness of loan and
$8,100 for health insurance.
(8) Auto expense.
(9) On May 19, 1998 Mr. Besmer announced that he was retiring from the Company
effective immediately.
(10) Includes professional fees paid to Sacher & Co., PC, a company of which
Mr. Sacher is President. See "Certain Relationships and Related
Transactions."
(11) Auto expense.
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<PAGE> 64
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs
Fiscal Year-End(#) Fiscal Year-End($)
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ---- ------------------------- -----------------------------
<S> <C> <C>
James Ciocia 135,370 / - $0 / -
Thomas Povinelli 135,370 / - 0 / -
Kathryn Travis 104,039 / - 0 / -
Stephen Sacher 20,000 / 200,000 0 / 0
</TABLE>
(1) Based on a year-end fair market value of the underlying securities equal
to $2-1/16.
Messr. Ciocia, Povinelli and Besmer and Ms. Travis earned
commissions from the sale of securities and insurance products to clients of JT
Securities out of which commissions such individuals compensate JT Securities
for clerical and support services and client references. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
DIRECTORS
Directors of the Company receive no compensation for serving as a
director.
STOCK OPTION PLAN
On September 14, 1993, the Company adopted the Company's 1993 Joint
Incentive and Non-Qualified Stock Option Plan, as amended October 14, 1993 (the
"Plan"), pursuant to which the Company may grant options to purchase up to an
aggregate of 816,000 shares. Such options may be intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or they may be intended not to qualify under
such Section ("Non-Qualified Options").
The Plan is administered by the committee of two independent
directors of the Board of Directors of the Company, which has authority to
determine the persons to whom the options may be granted, the number of shares
of Common Stock to be covered by each option, the time or times at which the
options may be granted or exercised, whether the options will be Incentive
Options or Non-Qualified Options, and other terms and provisions of the options.
The exercise price of the Incentive Stock Options granted under the Plan may not
be less than the fair market value of a share of Common Stock on the date of
grant (110% of such value if granted to a person owning in excess of ten percent
of the Company's securities). Options granted under the Plan may not
52
<PAGE> 65
have a term longer than 10 years from the date of grant (five years if granted
to a person owning in excess of ten percent of the Company's securities) and may
not be granted more than ten years from the date of adoption of the Plan.
To the date of this Prospectus, Non-Qualified Options to purchase
83,604 shares, 83,604 shares, and 62,710 shares of Common Stock at the price of
$2.60 per share have been granted and have been exercised under the Plan by
James Ciocia, Thomas Povinelli, and Kathryn Travis, respectively; Non-Qualified
Options to purchase 41,766 shares, 41,766 shares, and 31,329 shares of Common
Stock at the price of $3.65 per share have been granted and have been exercised
under the Plan by James Ciocia, Thomas Povinelli, and Kathryn Travis,
respectively; Non-Qualified Options to purchase 18,850 shares, 18,850 shares,
and 14,170 shares of Common Stock at the price of $2.50 per share have been
granted and have been exercised under the Plan by James Ciocia, Thomas
Povinelli, and Kathryn Travis, respectively. The Company has also granted
Incentive Options to purchase 20,000 shares at $7.00, 20,000 shares at $7.50,
20,000 shares at $8.00, 20,000 shares at $8.50, 20,000 shares at $9.00, 20,000
shares at 9.50 and 100,000 shares at $20.00 to Stephen Sacher. Mr. Besmer's
options under the Plan totaling 75,223 shares expired subsequent to his
resignation as a director of the Company. In total, the Company has granted
options that are still outstanding to purchase 303,000 shares and options to
purchase 103,221 shares remain to be granted under the Plan.
On May 19, 1997, the Company adopted the Company's 1997 Common
Stock and Incentive and Non-Qualified Stock Option Plan of Gilman & Ciocia, Inc.
(the "1997 Plan"). Under the 1997 Plan, the Company may issue shares of Common
Stock and grant options to purchase up to an aggregate of 300,000 shares. Such
options may be intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Incentive Options"), or they may be intended not to qualify under such Section
("Non-Qualified Options"). No Incentive Options will be issued pursuant to the
1997 Plan until such 1997 Plan is approved by the shareholders of the Company.
The 1997 Plan is administered by the committee of two independent
directors of the Board of Directors of the Company, which has authority to
determine the persons to whom stock is issued, the persons to whom the options
may be granted, the number of shares of Common Stock to be covered by each
option, the time or times at which the options may be granted or exercised,
whether the options will be Incentive Options or Non-Qualified Options, and
other terms and provisions of the options. The exercise price of the Incentive
Stock Options granted under the Plan may not be less than the fair market value
of a share of Common Stock on the date of grant. Options granted under the Plan
may not have a term longer than 10 years from the date of grant and may not be
granted more than ten years from the date of adoption of the Plan.
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<PAGE> 66
The Company recently adopted a program under the 1997 Plan that
will entitle each employee and those affiliated financial planners who have
entered into commission sharing agreements with the Company, including officers
and directors, to be granted options to purchase 100 shares of Common Stock for
each whole $25,000 of revenues for tax preparation and commissions generated by
such individual for the Company in 1998, 1999 and 2000. Each option will be
exercisable for a period of five years to acquire one share of Common Stock at
the market price on the date of grant of the option. Options will be granted
following the end of each calendar year. The Company anticipates that it will
grant between 50,000 and 100,000 options per year under this program.
INDEMNIFICATION
The Company's Certificate of Incorporation includes a provision
that eliminates or limits the personal financial liability of the Company's
directors, except in situations where there has been a breach of the duty of
loyalty, failure to act in good faith, intentional misconduct or violation of
the law.
In addition, the Company's By-laws include provisions to indemnify
its officers and directors and other persons against expenses, judgments, fines
and amounts paid in settlement in connection with threatened, pending or
completed suits or proceedings against such persons by reason of serving or
having served as officers, directors or in other capacities, except in relation
to matters with respect to which persons shall be determined to have acted not
in good faith, unlawfully or not in the best interests of the Company. With
respect to matters as to which the Company's officers and directors and others
are determined to be liable for misconduct or negligence in the performance of
their duties, the Company's By-laws provide for indemnification only to the
extent that the Company determines that such person acted in good faith and in a
manner not opposed to the best interests of the Company.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS
CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS
BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION,
SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS
THEREFORE UNENFORCEABLE.
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<PAGE> 67
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 16, 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.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
------------------- -------------------- ----------
<S> <C> <C>
James Ciocia 974,686(1) 14.5%
17 Folgers Lane
Dix Hills, NY 11746
Thomas Povinelli 1,036,116(2) 15.3%
3427 Bayfront Place
Baldwin, NY 11510
Kathryn Travis 365,481(4) 5.4%
31 Wood Lane
Lattingtown, NY 11560
Seth Akabas 8,966(5) .1%
245 West 107th Street
New York, NY 10025
Louis Karol 780 .01%
28 Fairview Avenue
East Williston, NY 11596
Steven Gilbert 761,254(5) 11.3%
2420 Enterprise Road; Suite 100
Clearwater, FL 34623
Stephen Sacher 40,000(7) .6%
2677 Broadview Drive
Yorktown Heights, NY 10598
All directors and officers
as a group (6 persons) 2,426,029(1)(2)(4) 35.9%
(5)(7)
</TABLE>
(1) Includes 10,000 shares of Common Stock issuable upon the
exercise of options at prices of $2.75, respectively.
55
<PAGE> 68
(2) Includes 10,000 shares of Common Stock issuable upon the
exercise of options at prices of $2.75, respectively.
(3) 10,000 shares of Common Stock issuable upon the exercise of
options at prices of $2.75, respectively.
(4) Includes 8,081 shares owned by the law firm of Akabas & Cohen of
which Mr. Akabas is a partner.
(5) Includes 246,154 shares owned by the Gilbert Family Limited
Partnership of which Steven Gilbert is a 97% beneficiary. In addition, includes
340,000 shares issuable upon exercise of options at $3.50 per share, 100,000
shares issuable upon the exercise of options at $4.75 per share, and 75,000
shares issuable upon the exercise at $13.00 per shares.
(6) Includes 20,000, and 20,000 shares issuable upon exercise of
currently exercisable options at $7.00, $7.50, per share, respectively.
56
<PAGE> 69
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each of James Ciocia, Thomas Povinelli and Kathryn Travis, acts and
Gary Besmer while he was a director of the Company acted, as a Registered
Representative for Royal Alliance and as an authorized agent for insurance
carriers. See "Executive Compensation".
The four principal stockholders, Messrs. Ciocia, Povinelli and
Besmer and Ms. Travis, personally guaranteed the repayment of the Company's
long-term loan in the amount of $500,000 from State Bank of Long Island, as well
as the seasonal loans in the form of lines of credit as described in the
"Management's Discussion and Analysis" section. Such stockholders received no
consideration for such guarantees other than their salaries and other
compensation.
On July 1, 1995, the Company, Ralph Esposito, who was then its Chief
Financial Officer, Kathryn Travis, a executive officer of the Company, four
individuals who are relatives of the officers and an employee of the Company
formed ATM Partners, LP (the "Partnership"). Such individuals and their initial
investments are as follows: Madeline Esposito, the wife of the former Chief
Financial Officer - $196,000, Anna Saras, the wife of the present Chief
Operating Officer - $198,000, Thomas Povinelli, Sr., father of the present Chief
Operating Officer - $71,000, Tracy Ciocia, wife of the President - $150,000, and
Joseph Bonocore, an employee - $10,000. The Company's initial investment was
$348,000 and Kathryn Travis' initial investment was $6,000. At June 30, 1997,
the Company had a 41% interest in the Partnership and recognized income of
approximately $73,000 from the Partnership for Fiscal 1997. During Fiscal 1997
the Partnership began liquidating its investments and distributing its assets to
its partners. During Fiscal 1998, the Partnership was dissolved, and the Company
wrote-off a $100,000 loan to the Partnership.
The Company loaned the following individuals the following
amounts:$100,000 and $240,000 to James Ciocia, $100,000 and $240,000 to Thomas
Povinelli, $50,000 and $72,000 to Kathryn Travis, $50,000 to Gary Besmer and
$50,000 to Steven Gilbert. These loans are due in fully amortizing biweekly
installments (including interest at 7% per annum) through maturity on June 30,
2000, with the exception of the $240,000 loans to Messrs. Ciocia and Povinelli
and the $72,000 loan to Kathryn Travis, which have a maturity date of August 1,
2001.
In December 1997, the Company loaned $225,000 each to James Ciocia
and Thomas Povinelli. These loans were non-interest bearing loans and were
repaid by such officers/stockholders in March 1998.
57
<PAGE> 70
From time to time the Company employs the professional services of
Sacher & Co. P.C. The President of Sacher & Co. P.C. is the Chief Financial
Officer of the Company. The amounts paid to Mr. Sacher in this capacity are set
forth above in "Executive Compensation."
The Company has also made two loans to Steven Gilbert, a stockholder
of the Company. The first loan is for $150,000, due in bi-weekly installments
through June 15, 1999. Interest is charged at 9% per annum. The second loan is
for $100,000, due on October 9, 1999. Interest on this loan is charged at 9% per
annum.
In addition, the Company holds notes receivable from Dominic Ciocia,
the brother of the Company's Chief Executive Officer. The notes receivable are
for $50,319 and $106,000 and are due on June 3, 1999 and June 19, 2000
respectively. Interest is charged at 8.5% and 6% per annum, respectively.
In December 1998, the Company entered into a settlement with Texas
Capital Securities, Inc. and Harbor Financial, Inc. 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 Company's 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 will
reimburse Mr. Povinelli for such shares at the market value of the shares
transferred. (See "LEGAL PROCEEDINGS").
PLAN OF DISTRIBUTION
The 85,000 shares of Common Stock are issuable upon exercise of the
Common Stock Warrants and issued by the Company to Woodward, Hall & Primm and
Harbor Financial, Inc. in connection with a Settlement Agreement with Texas
Capital.
Upon exercise, the Common Stock issuable upon exercise of the Common
Stock Warrants will be held by such holders and any further distribution will
not be in the Company's control.
SELLING SECURITY HOLDERS
All of the shares of Common Stock (collectively, the "Shares")
offered herein for the accounts of the persons identified in the following table
(the "Selling Security Holders") are intended to be offered to the public
immediately upon effectiveness. The Selling Security Holders and the amount of
securities that may be acquired by each are set forth below.
58
<PAGE> 71
All of the Shares that will be offered by the Selling Security
Holders, may be acquired by them as follows: 72,250 shares at an exercise price
of $5.13 pursuant to Common Stock Warrants issued to Harbor Financial, Inc.,
12,750 shares at an exercise price of $5.13 pursuant Common Stock Warrants
issued to Woodward, Hall & Primm. As of the date of this Prospectus, no Selling
Security Holder has exercised any of the warrants or options described above.
<TABLE>
<CAPTION>
Selling Common Stock Amount of Common Stock
Security Holder Warrants Common Warrants owned
and Position owned before Stock after
to Company offering offered offering (>1%)
---------- -------- ------- --------------
<S> <C> <C> <C>
Woodward, Hall & 12,750 12,750 -0-
Primm
</TABLE>
<TABLE>
<CAPTION>
Selling Common Stock Amount of Common Stock
Security Holder Warrants Common Warrants owned
and Position owned before Stock after
to Company offering offered offering (>1%)
---------- -------- ------- --------------
<S> <C> <C> <C>
Harbor Financial 72,250 72,250 -0-
</TABLE>
<TABLE>
<CAPTION>
Selling Common Common Stock
Security Holder Stock owned
and Position owned before Stock after
to Company offering offered offering (>1%)
---------- -------- ------- --------------
<S> <C> <C> <C>
Edward Haas 64,286 16,072 -0-
(employee)
</TABLE>
PLAN OF DISTRIBUTION BY SELLING SECURITY HOLDERS
All of the shares of Common Stock (collectively, the "Shares")
offered herein for the accounts the Selling Security Holders are intended to be
offered to the public immediately upon effectiveness of the registration
statement of which this prospectus is a part. Currently, no underwriter is
involved in the distribution of the securities that may be owned by the Selling
Security Holders, but rather sales will be made by the Selling Security Holders
either directly or through one or more securities brokers or dealers in
over-the-counter transactions on The NASDAQ Stock Market, or in privately
negotiated transactions. At the time that a particular offer of any of the
Shares is made by or on behalf of a Selling Security Holder, to the extent
required, a Prospectus Supplement will be distributed that will set forth the
number of Shares being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for Shares purchased from the Selling Security Holder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers,
and the proposed selling price to the public.
59
<PAGE> 72
Shares sold in over-the-counter transactions will be sold at the
current market prices at the time of sale, and any Shares sold in private
transactions will be sold at prices acceptable to the buyer and seller.
Broker/dealers through which the Selling Security Holders effect sales of the
Shares may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders and/or the purchasers of the
Shares for whom such broker/dealers may act as agent or to whom they sell as
principal, or both (which compensation as to a particular broker/dealer may be
in excess of customary compensation). No Selling Security Holder has any plans
currently with any particular broker/dealer.
The Selling Security Holders and any broker/dealers who act in
connection with the sale of Shares hereunder may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act of 1933, as amended
(the "Securities Act"), and any commissions received by them and profit on any
resale of the Shares as principal might be deemed to be underwriting discounts
and commissions under the Securities Act.
Under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the regulations promulgated thereunder, any person engaged
in a distribution of Common Stock offered by this Prospectus may not
simultaneously engage in market-making activities with respect to the Common
Stock during the applicable "cooling off" period (9 days) prior to the
commencement of such distribution. In addition, and without limiting the
foregoing restriction, the Selling Security Holders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
promulgated thereunder, including, without limitation, Regulation M in
connection with transactions in the Shares, which provisions may limit the
timing of purchases and sales of shares of Common Stock by the Selling Security
Holders.
The Selling Security Holders will receive the entire proceeds from
the sale of their Shares, less any commissions paid to brokers or dealers for
executing such offers. Although the Company will not receive any funds from the
sale of the Selling Security Holders' shares, the Company will pay for all
expenses of the offering and will furnish current prospectuses to the Selling
Security Holders at their request.
DESCRIPTION OF SECURITIES
COMMON STOCK
60
<PAGE> 73
The Company, a Delaware corporation, is authorized to issue nine
million (9,000,000) shares of Common Stock, par value $.01 per share. At the
date of this Prospectus the Company has 6,731,875 shares of Common Stock
outstanding. Upon payment in full of the subscription price therefor, the shares
of Common Stock are not subject to further assessment or call.
The following summary description of the Common Stock is qualified
in its entirety by reference to the Company's Certificate of Incorporation, as
amended. The holders of the Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of Preferred Stock that may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor, and,
in the event of liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities. The outstanding Common Stock is,
and the Common Stock to be outstanding upon completion of this offering will be,
validly issued, fully paid and nonassessable.
COMMON STOCK WARRANTS
Each Common Stock Warrant issued to Woodward, Hall & Primm, and
Harbor Financial, Inc. entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $5.13 per share, subject to adjustment in
the event of certain occurrences, such as stock dividends, splits and
combinations. The Common Stock Warrants are exercisable until November 17, 2000,
by surrendering the certificate representing the Common Stock Warrant to the
Company, or its authorized transfer agent, with the subscription form attached
thereto properly completed and executed together with payment in full by
certified or bank teller's check of the aggregate exercise price of all the
Common Stock Warrants then exercised.
The Common Stock Warrants have been issued pursuant to a Settlement
Agreement between the Company and Texas Capital. The foregoing brief description
of the Common Stock Warrants is a summary of the rights and privileges of Common
Stock Warrantholders, does not purport to be complete and is qualified in its
entirety by reference to the Warrant Certificate reflecting such warrants.
61
<PAGE> 74
PREFERRED STOCK
The Company is authorized to issue 100,000 shares of Preferred
Stock, none of which is outstanding, and the Company has no current
understanding to issue any of such Preferred Stock. The Board of Directors of
the Company is vested with authority to divide the authorized shares of
Preferred Stock into one or more series of such shares and to fix and determine
the relative rights and preferences of any such series. A series of such shares
may, among other matters, establish (a) the number of shares of Preferred Stock
to constitute such series and the designations thereof; (b) the rate and
preference of dividends, if any, the time of payment of dividends, whether
dividends are cumulative and the date from which any dividend shall accrue; (c)
whether Preferred Stock may be redeemed, and, if so, the redemption price and
the terms and conditions of redemption; (d) the liquidation preferences payable
on Preferred Stock in the event of liquidation; (e) sinking fund or other
provisions, if any, for redemption or purchase of such shares; (f) the terms and
conditions by which Preferred Stock may be converted, if the series is issued
with the privilege of conversion; and (g) voting rights, if any. The Board of
Directors, without the approval of the Company's shareholders, has the power to
authorize the issuance of Preferred Stock with voting and conversion rights that
could adversely affect the voting power of the Common Stock. See "RISK
FACTORS--The Issuance of Preferred Stock that does not Require Approval of the
Shareholders."
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
BDO Seidman, LLP was dismissed as the independent accountants of the
Company as of September 16, 1997. Such former independent accountants' report on
the financial statements of the Company for the prior year did not contain an
adverse opinion or disclaimer of opinion, and was not modified as to
uncertainty, audit scope or accounting principles. The decision to replace the
Company's independent accountants was made by the Company's Board of Directors.
There was no disagreement with the former accountants, either that was resolved
or that remained unresolved, on any matter of accounting principles or
practices, financial statement
62
<PAGE> 75
disclosure or auditing scope or procedure. On September 16, 1997, the Company
engaged Arthur Andersen, LLP as its new independent certified public
accountants.
LEGAL MATTERS
The legality of the securities offered hereby has been passed on for
the Company by Akabas & Cohen, 488 Madison Avenue, 11th floor, New York, NY
10022. Akabas & Cohen is the beneficial and record owner of 8,081 shares, and
Seth Akabas is the beneficial and record owner of 885 shares, of the Company's
Common Stock. Seth Akabas, a partner in the law firm of Akabas & Cohen, is a
director of the Company.
In addition, in regard to questions as to whether the Company has
properly treated affiliated financial planners who serve the Company as common
law employees, the Company has relied in part on the authority of its counsel,
Akabas & Cohen, which has prepared an opinion to such effect, a copy of which is
filed as an exhibit to the registration statement of which this Prospectus is a
part.
EXPERTS
The financial statements included in this registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the office of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, its Registration
Statement on Form SB-2 (Registration No. 33-80627 under the Securities Act of
1933, with respect to the securities offered hereby (the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information, reference is hereby made to the Registration Statement.
Statements contained in the Prospectus as to the contents of any document are
not necessarily complete, and in each instance reference is made to the copy of
such document filed as an exhibit to the Registration Statement, each such
statement being qualified
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<PAGE> 76
in all respects by such reference. Copies of the Registration Statement and such
other reports filed by the Company may be inspected without charge at the Public
Reference Section of the Commission in Washington D.C. at the address set forth
above, at the Commission's regional office in the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60604, and at the Commission's office at
7 World Trade Center, New York, NY 10048, and copies of all or any part thereof
may be obtained from the Commission at prescribed rates. Copies of this filing,
reports, proxy and information statements and other information regarding the
Company are available on the Commission's website at http://www.sec.gov.
Any document or part thereof which is incorporated by reference
within this Prospectus and not delivered herewith, will be provided, without
charge, to each person, including any beneficial owner, to whom a Prospectus is
delivered, upon written or oral request of such person; however, exhibits to
documents that are incorporated by reference shall not be furnished unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates. Such information may be obtained by writing the
Company at 475 Northern Boulevard, Great Neck, NY 11021, telephone (516)
482-4860, Attn: Secretary.
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<PAGE> 77
No dealer, salesman or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus. If given or made, such other information or representation must not
be relied upon as having been authorized by the Company or the Underwriter.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof. This Prospectus does not
constitute an offer or solicitation by anyone in any jurisdiction in which such
offer or solicitation may not lawfully be made.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.......................................................
Risk Factors.............................................................
Market Information.......................................................
Use of Proceeds..........................................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................
Business.................................................................
Management...............................................................
Remuneration of Officers and Directors...................................
Principal Stockholders...................................................
Certain Relationships and Related Transactions...........................
Plan of Distribution.....................................................
Selling Securityholders..................................................
Description of Securities................................................
Legal Matters............................................................
Experts..................................................................
Additional information...................................................
</TABLE>
Dealers and selling securityholders must deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions and the Company must deliver a prospectus with respect to all
sales of the of the registered securities issued by the Company.
507,926 Shares of Common Stock
($.01 par value)
318,421 Shares of Common Stock
by Selling Security Holders
50,783 Redeemable Public Warrants
by Selling Security Holders
----------
PROSPECTUS
----------
GILMAN & CIOCIA, INC.
475 Northern Boulevard
Great Neck, NY 11021
May __, 1999
65
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article EIGHTH of the Corporation's Certificate of
Incorporation provides:
A director of this Corporation shall not be personally liable
to this Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to this Corporation or
its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or
(iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law
is hereafter amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then
the liability of a director of this Corporation shall be eliminated
or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Article NINTH of the Corporation's Certificate of
Incorporation provides:
This Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending
or complete action, suit or proceeding, whether civil, criminal,
administrative or investigative, or by or in the right of this
Corporation to procure judgment in its favor, by reason of the fact
that he is or was a director or officer, employee or agent of this
Corporation, or is or was serving at the request of this Corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed
to the best interests of this Corporation, in accordance with and to
the full extent permitted by statute. Expenses incurred in defending
a civil or criminal action, suit or proceeding may be paid
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<PAGE> 79
by this Corporation in advance of the final disposition of such
action, suit or proceeding as authorized by the Board of Directors
in the specific case upon receipt of an undertaking by or on behalf
of the director, officer, employee or agent to repay such amount
unless it shall ultimately be determined that he is entitled to be
indemnified by this Corporation as authorized in this section. The
indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking indemnification
may be entitled under these Articles or any agreement or vote of
stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure
to the benefit of the heirs, executors and administrators of such a
person.
Article TENTH of the Company's By-Laws provides as follows:
Any person made a party to any action or proceeding (whether
or not by or in the right of the Corporation to procure a judgment
in its favor or by or in the right of any other corporation) by
reason of the fact that he, his testator or intestate, is or was a
director, officer or employee of the Corporation, or of any
corporation which he served as such at the request of the
Corporation, shall be indemnified by the Corporation against
judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense of or as a result of
such action or proceeding, or in connection with any appeal therein,
to the full extent permitted under the laws of the State of Delaware
from time to time in effect. The Corporation shall have the power to
purchase and maintain insurance for the indemnification of such
directors, officers and employees to the full extent permitted under
the laws of the State of Delaware from time to time in effect. Such
right of indemnification shall not be deemed exclusive of any other
rights of indemnification to which such director, officer or
employee may be entitled.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by Registrant in connection with the issuance
and distribution of the securities being registered (other
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<PAGE> 80
than underwriting discounts and commissions, and non-accountable expenses of
$-0-) are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Fees . $[1,915]
NASDAQ Stock Market listing fees ........ -0-
Transfer/Warrant Agent's Fee and Expenses 1,000
Accounting Fees and Expenses ............ 260,000
Blue Sky Fees and Expenses .............. 5,000
Printing Expenses ....................... 15,000
First Colonial Securities Group, Inc. ... 35,000
Legal Fees .............................. 75,000
Miscellaneous ........................... [2,085]
--------
TOTAL .......................... $395,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In May 1995, the Company issued 203,428 restricted shares of Common
Stock in connection with the Company's acquisition of Gilbert Financial
Services, Inc. and granted options to purchase 400,000 restricted shares of
Common Stock in connection with an employment agreement with Mr. Steven Gilbert.
After the end of the 1995 fiscal year, 60,000 options granted to Mr. Gilbert
during such year were rescinded pursuant to a preexisting incentive compensation
agreement.
In June 1995, Judah Wernick, an employee of the underwriter in the
Company's initial public offering purchased all outstanding Class A Bridge Loan
Warrants, and upon exercise thereof, the Company issued 360,000 restricted
shares of Common Stock for an aggregate purchase price of $748,800.
In June 1995, the Company issued 64,286 restricted shares of Common
Stock at $3.50 per share to Edward Haas pursuant to an asset purchase agreement
in partial consideration for the acquisition of assets used in the direct mail
advertising business.
In August 1995, the Company sold 47,401 restricted shares of Common
Stock to the following employees and financial planners who had commission
sharing agreements with the Company at the following prices for an aggregate
purchase price of approximately $232,000: Ed Dooney - 7,987 shares of common
stock at $3.13 per share for cash and note receivable for the specific financing
of Ed Dooney's opening of a new office in Connecticut; Lee Povinelli - 7,987
shares of common stock at $3.13 per share for cash and a note receivable for the
specific financing of Lee Povinelli's opening of a new office in Connecticut;
Zoe Papathomas - 2,857 shares of common stock at $3.50 per share; Abraham
Dorfman - 2,857 shares of common
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<PAGE> 81
stock at $3.50 per share; John Osorio - 17,143 shares at $3.50 per share for
cash and a note payable for the specific funding of John Osorio's opening a new
office in new York; Alex Morrow - 4,286 shares at $3.50 per share for printing
services rendered; Herb Herzog - 2,571 shares of common stock at $3.50 per share
for phone equipment and services rendered; and Bob Kelley - 1,714 shares of
common stock at $3.50 per share.
During the same period, the Company also issued 10,100
restricted shares of Common Stock to the following employees and others as
performance bonuses: Scott Fisher - 2,000; Lenny Schrift - 200 shares; Patricia
White - 200 shares; Jill Hoenings - 300 shares; Sandy Valle - 200 shares;
Georget Czajkowski - 200 shares; Rosalie Maiorano - 200 shares; Vinka Pelaic -
200 shares; Abraham Dorfman -1,000 shares; John Brower - 200 shares; Serafino
Maiorano - 200 shares; Joseph Araneo - 200 shares; Dominick Ciocia - 300 shares;
Richard Fusari - 300 shares; Neil Hasset, Jr. - 300 shares; John Osorio - 200
shares; Lee Povinelli - 200 shares; Lorraine Buscareno-Smith - 200 shares;
Gerald Hoenings - 200 shares; John Lentini - 200 shares; Mario Romilio - 1,000
shares; Deborah O'Connell - 1,000 shares; Robby Gilman - 200 shares and Jennifer
Gilman - 200 shares.
In August 1995, the Company sold 11,380 restricted shares of Common
Stock to Ralph Esposito, a former officer of the Company and 11,379 restricted
shares of Common Stock to Kathryn Travis, an officer, (which shares had been
returned to the Company as a result of a default in the payment of a
subscription receivable) at $3.07 per share.
In addition, in August 1995, the Company issued 25,713 restricted
shares of Common Stock for an aggregate purchase price of $89,995.50 to the
following individuals in the following amounts: Dominick Riolo 8,571 shares;
Gregory Ferone 8,571 shares; and Armando Olivieri 8,571 shares, pursuant to a
contract for the opening of new offices in New City, New York, Mamaroneck, New
York and Scarsdale, New York between such individuals and the Company.
The Company, in August 1995, sold 1,429 restricted shares of Common
Stock to Joseph Jensen for an aggregate purchase price of $5,000.00 pursuant to
a severance compensation package agreement between such individual and the
Company.
In October 1995, the Company sold a total of 20,000 restricted
shares of Common Stock upon exercise of a stock option to Abraham Dorfman, a
financial planner affiliated with the Company, for an aggregate purchase price
of $40,650 pursuant to a previous contract between such individual and the
Company.
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<PAGE> 82
In October 1995, the Company issued 3,050 restricted shares of
Common Stock as performance bonuses to the following individuals in the
following amounts: Neil Hasset 300 shares; Jim Ptacek 100 shares; Carol Livolsi
100 shares; Karen Sheppard 50 shares; Joel Weinberger 50 shares; Jeffrey
Ambrosio 50 shares; Pat Ewing 50 shares; Kerry O'Keefe 50 shares; Richard Boehm
200 shares; Dominick Riolo 100 shares; Joe Jacoes 100 shares; Larry Brenner 100
shares; Dave Burgio 100 shares; Lorraine Buscareno-Smith 100 shares; Dave
Critelli 100 shares; Deborah E. O'Connell 1,200 shares; and Scott Fisher 300
shares.
In November 1995, the Company sold 100 restricted shares of Common
Stock to Gwendolyn Morgan at $4.625 per share for an aggregate purchase of
$462.50.
In November 1995, the Company issued 3,688 restricted shares of
Common Stock to Kerry O'Keefe as a performance bonus.
In November 1995, the Company sold 5,000 restricted shares of Common
Stock to Frank Daguanno at $6.00 per share for an aggregate purchase price of
$30,000.
In December 1995, the Company issued 1,600 restricted shares of
Common Stock as performance bonuses to the following individuals in the
following amounts: Thomas Mallis 100 shares; Carol Sanford 100 shares; Sandy
Valle 100 shares; Rosalie Maiorano 100 shares; Angelo Perna 100 shares; Georget
Czajkowski 100 shares; Leonard Shrift 100 shares; Patricia White 100 shares;
Vinka Pelaic 100 shares; Robert Gilman 100 shares; Jennifer Gilman 100 shares;
Debra Seeley 100 shares; Kerry O'Keefe 100 shares; Joel Weinberger 100 shares;
Pat Ewing 100 shares; and Tim Bodner 100 shares.
In February 1996, the Company issued 15,254 restricted shares of
Common Stock for an aggregate purchase price of $80,000 to the following
individuals in the following amounts: Howard Wilkin 5,405 shares; Alfred Schepis
5,405 shares; and Armando Olivieri 4,444 shares, pursuant to management
agreements as signing bonuses between such individuals and the Company.
In April 1996, the Company issued a total of 3,400 restricted shares
of Common Stock to an employee, Alex Morrow, for services rendered.
In October 1996, the Company sold a total of 10,000 restricted
shares of Common Stock upon exercise of a stock option to Abraham Dorfman, an
affiliated financial planner, for an aggregate purchase price of $23,200
pursuant to a previous contract between such individual and the Company.
In March 1997, the Company granted options to purchase restricted
shares of Common Stock at $2.75 per share to employees
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<PAGE> 83
and officers as follows: Serafino Maiorano 75,000; Dominick Ciocia 32,000;
Gerald Hoenings 16,000; John Brower 50,000; Lee Povinelli 40,000; James Ciocia
10,000; Thomas Povinelli 10,000; Gary Besmer 10,000; and Kathryn Travis 10,000.
In June 1997, the Company granted options to purchase 10,000
restricted shares of Common Stock at $2.50 per share to each of Lewis Pasquin
and George Dagher.
In October 1997, the Company sold a total of 10,000 restricted
shares of Common Stock upon exercise of a stock option to Abraham Dorfman, an
affiliated financial planner, for an aggregate purchase price of $18,100
pursuant to a previous contract between such individual and the Company.
In November 1997, the Company granted options to purchase a total of
623,000 restricted shares of Common Stock to the following affiliated financial
planners and employees in the following amounts: Steven Gilbert 100,000 shares
of Common Stock at $4.75 per share; Gerald Hoenings 21,000 shares of Common
Stock at $5.00; Serafino Maiorano 85,000 shares of Common Stock at $5.00 per
share; Dominick Ciocia 45,000 shares of Common Stock at $5.00 per share; John
Brower 75,000 shares of Common Stock at $5.00 per share; Greg Ferone 100,000
shares of Common Stock at $6.00 per share; Dominick Riolo 100,000 shares of
Common Stock at $6.00 per share; Walter Shair 15,000 shares of Common Stock at
$6.00 per share; George Dagher 15,000 shares of Common Stock at $6.00 per share;
Lewis Pasquin 5,000 shares of Common Stock at $6.00 per share; and Abraham
Dorfman 12,000 shares of Common Stock at $6.00 per share; and to the following
independent contractor in the following amount: Marc Cohen 50,000 shares of
Common Stock at $5.00 per share.
In December 1997, the Company granted options to purchase a total of
245,000 restricted shares of Common Stock to the following affiliated financial
planners and employees in the following amounts: Gerald Hoenings 21,000 shares
of Common Stock at $7.00 per share; Serafino Maiorano 105,000 shares of Common
Stock at $7.00 per share; Dominick Ciocia 44,000 shares of Common Stock at $7.00
per share; and John Brower 75,000 shares of Common Stock at $7.00 per share.
Also in December 1997, the Company issued 10,923 restricted shares
of Common Stock as performance bonuses to the following employees and affiliated
financial planners in the following amounts: Georget Czajkowski 400 shares;
Lenny Schrift 50 shares; Carol Dessuit 50 shares; Charles Bennett 50 shares;
Catherine Roma 100 shares; Linda Badzim 50 shares; Erin Kiley 50 shares; Cathy
Cunha 50 shares; Nicolina Montesano 50 shares; Marsha Dockery 50 shares; Richard
Trent 200 shares; Alex Weissman 100 shares; Dominick Ciocia 100 shares; Daniel
McCarthy 100 shares; Kelly Cortis 100 shares; Kenneth Spielman 100 shares;
Walter Shair
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<PAGE> 84
100 shares; Paul Weinberger 1,818 shares; Christopher Kirby 300 shares; Dave
Critelli 3,800 shares; Florence Barrest 25 shares; Theresa Camilleri 50 shares;
Susan Garcia 100 shares; Charlene Ladig 25 shares; Ethel Maleski 25 shares;
Cheryl Marengi 50 shares; Jane Shattuck 25 shares; Jeffrey Vest 25 shares; Kim
Young 50 shares; Diana Furman 40 shares; Nicole Summers 100 shares; Patricia
Brown 40 shares; Julie Grammatica 50 shares; Scott Fisher 250 shares; Thomas
Mallis 50 shares; Sandy Valle 400 shares; Karen Sheppard 50 shares; Thomas
Etheridge 100 shares; Robert Hayes 200 shares; Sean O'Keefe 100 shares; Angelo
Perna 50 shares; Aaron Seenarine 100 shares; Sandra Solarchik 50 shares; Lance
Howard 50 shares; Annemarie Mallin 50 shares; Christine Christofor 100 shares;
Sau-Miu Chan 50 shares; Mary Ann Ciaccia 100 shares; Louise Avery 50 shares;
Marjorie Kane 50 shares; David Bazemore 250 shares; Richard Locurto 200 shares;
Hector Ramos 200 shares; Maurice Smith 200 shares; and Lorraine Buscareno-Smith
50 shares.
In January 1998, the Company granted options to purchase a total of
345,000 restricted shares of Common Stock to the following affiliated financial
planners and employees in the following amounts: Jeff Altman 37,500 shares of
Common Stock at $7.50 per share; Jeff Altman 18,750 shares of Common Stock at
$9.50 per share; Jeff Altman 18,750 shares of Common Stock at $11.50 per share;
Vernon Lemmon 12,500 shares of Common Stock at $7.50 per share; Vernon Lemmon
6,250 shares of Common Stock at $9.50 per share; Vernon Lemmon 6,250 shares of
Common Stock at $11.50 per share; Steve Hand 125,000 shares of Common Stock at
$10.00 per share and Steve Sacher 20,000 shares of Common Stock at $7.00 per
share, 20,000 shares of Common Stock at $7.50 per share, 20,000 shares of Common
Stock at $8.00 per share, 20,000 shares of Common Stock at $8.50 per share,
20,000 shares of Common Stock at $9.00 per share, and 20,000 shares of Common
Stock at $9.50 per share.
In April 1998, the Company granted options to purchase a total of
795,000 restricted shares of Common Stock to the following affiliated financial
planners and employees in the following amounts: Tim Bodner 60,000 shares of
Common Stock at $13.75 per share; Dave Burgio 100,000 shares of Common Stock at
$13.75 per share; Daniel McCarthy 20,000 shares of Common Stock at $13.75 per
share; Abe Dorfman 25,000 shares of Common Stock at $13.75 per share; Neil
Hasset 60,000 shares of Common Stock at $13.75 per share; Al Shepis 175,000
shares of Common Stock at $13.75 per share; Howard Wilken 175,000 shares of
Common Stock at $13.75 per share; Steve Gilbert 75,000 shares of Common Stock at
$13.75 per share; and Steve Sacher 100,000 shares of Common Stock at $20.00 per
share.
In November 1998, the Company granted options to purchase 83,000
shares of Common Stock at $8-3/4 to Daniel Levy, President of North Ridge
Securities Corp. a wholly-owned subsidiary of the Company.
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<PAGE> 85
In December 1998, 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, Inc. and
12,750 shares of Company's Common Stock at $5-1/8 to Woodward, Hall & Primm.
All sales reported under this item were exempt from the registration
requirements of the Securities Act of 1933, as amended, by reason of Section
4(2) thereof and/or the rules and regulations promulgated thereunder as sale of
securities not involving a public offering.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
3.1 Registrant's Articles of Incorporation, as
amended, incorporated by reference to the like
numbered exhibit in the Registrant's Registration
Statement on Form SB-2 under the Securities Act of
1933, as amended, File No.
33-70640-NY
3.2 Registrant's By-Laws, incorporated by reference to
the like numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No.
33-70640-NY
4.1 Resolution of Designation, Powers, Preferences and
Right of Series A Preferred Stock, incorporated by
reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-70640-NY
4.2 Omitted.
4.3 Form of Warrant included in Units, incorporated by
reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-70640-NY
4.4 Form of Underwriter's Warrant, incorporated by
reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-70640-NY
</TABLE>
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<PAGE> 86
<TABLE>
<S> <C>
*5 Opinion of Akabas & Cohen
10.1 Restated and Amended Agreement and Plan of Merger
dated December 23, 1992 among the Registrant and
15 participating corporations, incorporated by
reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.2 Asset Sale Agreement dated December 31, 1992,
incorporated by reference to the like numbered
exhibit in the Registrant's Registration Statement
on Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
10.3 Escrow letter regarding certain shares of Common
Stock of the Registrant, incorporated by reference
to the like numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No.
33-70640-NY
10.4 Omitted.
10.5 Warrant Agreement dated December 12, 1994 between
the Registrant and the Warrant Agent, incorporated
by reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.6 Omitted.
10.7 1993 Joint Incentive and NonQualified Stock Option
Plan of the Registrant, incorporated by
reference to the like numbered exhibit in the
Registrant's Registration Statement on Form
SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY
10.8 Documents involved in the repurchase of shares and
settlement with Frank Pasatieri, a former
shareholder of the Registrant, incorporated by
reference to the like numbered exhibit in the
Registrant's
</TABLE>
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<PAGE> 87
<TABLE>
<S> <C>
Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No.
33-70640-NY
10.9 Documents involved in the repurchase of shares and
settlement with Alan Grad, a former shareholder of
the Registrant, incorporated by reference to the
like numbered exhibit in the Registrant's
Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No.
33-70640-NY
10.10 Omitted.
10.11 Omitted.
10.12 Documents involved in the repurchase of shares and
settlement with Bernard McGee and Jay Cruice,
former shareholder of the Registrant, incorporated
by reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.13 Omitted.
10.14 Omitted.
10.15 Agreement among Registrant and James Ciocia,
Thomas Povinelli, Gary Besmer and Kathryn Travis
regarding the repayment of advances, incorporated
by reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-70640-NY
10.16 Underwriting Agreement between the Registrant and
Patterson Travis, Inc., incorporated by reference
to exhibit number 1.1 in the Registrant's
Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No.
33-70640-NY
10.17 Stock Purchase Agreement dated February 10, 1995
between Registrant and Steven Gilbert,
incorporated by reference to exhibit 99.1 to the
Company's Current
</TABLE>
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<PAGE> 88
<TABLE>
<S> <C>
Report on Form 8-K, dated February 10, 1995
10.18 Noncompetition Agreement dated February 10, 1995
between Registrant and Steven Gilbert,
incorporated by reference to exhibit 99.2 to the
Company's Current Report on Form 8-K, dated
February 10, 1995
10.19 Employment Agreement dated February 10, 1995
between Steven Gilbert Financial Corp. and Steven
Gilbert, incorporated by reference to exhibit 99.3
to the Company's Current Report on Form 8-K, dated
February 10, 1995
10.20 Registration Rights Agreement dated February 10,
1995 between Registrant and Steven Gilbert,
incorporated by reference to exhibit 99.4 to the
Company's Current Report on Form 8-K, dated
February 10, 1995
10.21 Letter Agreement dated April 26, 1995 between and
Steven Gilbert, incorporated by reference to
exhibit 10.20 in the Company's quarterly report on
Form 10-Q for the fiscal quarter ended March 31,
1995
10.22 Joint Venture Agreement dated December 28, 1994
between Midwood Tax Service, Inc. and Registrant,
incorporated by reference to the like number
exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No.
33-80627
10.23 Promissory notes delivered by James Ciocia, Thomas
Povinelli, Gary Besmer and Kathryn Travis in
payment for cash value of life insurance policies
held by Registrant on the lives of such officers,
incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No.
33-80627
10.24 Omitted.
</TABLE>
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<PAGE> 89
<TABLE>
<S> <C>
10.25 Omitted.
10.26 Agreements dated November , 1995 among Rummco,
Ltd., five executive officers Registrant, and
Registrant in connection with the sale of stock
options, incorporated by reference to the like
numbered exhibit in the Company's Registration
Statement on Form SB-2 under the Securities Act of
1933, as amended, File No. 33-80627
10.27 Omitted.
10.28 Employment Agreement dated April 10, 1995 between
Dominick Riolo and Registrant in connection with
the opening of a new office, incorporated by
reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-80627
10.29 Employment Agreement dated April 10, 1995 between
Gregory Ferone and Registrant in connection with
the opening of a new office, incorporated by
reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-80627
10.30 Employment Agreement dated April 10, 1995 between
Armando Olivieri and Registrant in connection with
the opening of a new office, incorporated by
reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-80627
10.31 Independent Employment Contract dated December
1993 between Abraham Dorfman and Registrant,
incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.32 Form of Subscription Letter representing stock
issuances to individuals,
</TABLE>
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<PAGE> 90
<TABLE>
<S> <C>
incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.33 Independent Contractor's Agreement dated September
6, 1995 between Howard Wilkin and the Registrant,
incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.34 Independent Contractor's Agreement dated September
6, 1995 between Alfred Schepis and the Registrant,
incorporated by reference to the like numbered
exhibit in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-80627
10.35 Independent Contractor's Agreement dated September
6, 1995 between Armando Olivieri and the
Registrant, incorporated by reference to the like
numbered exhibit in the Company's Registration
Statement on Form SB-2 under the Securities Act of
1933, as amended, File No.
33-80627
10.36 Letter of Agreement between dated October 31, 1997
by and between First Colonial Securities Group
Inc. and the Registrant
10.37 Stock Purchase Agreement dated November 19, 1998
among North Ridge Securities Corp., North Shore
Capital Management Corp. and Registrant
incorporated by reference to Exhibit 1 in the
Company's Form 8-K dated November 19, 1998.
11.01 Calculation of Net Income Per Share, incorporated
by reference to the like numbered exhibit in the
Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, File
No. 33-80627
21 List of Subsidiaries, incorporated by reference
to Exhibit 21 in the Company's
</TABLE>
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<PAGE> 91
<TABLE>
<S> <C>
Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1995
*23.1 Consent of Akabas & Cohen (Included in Exhibit 5)
*23.2 Consent of Arthur Andersen, LLP
</TABLE>
- ----------
*To be filed by amendment.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to:
(a)(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering;
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering; and
(e) If the Registrant requests acceleration of the effective date of
the Registration Statement under Rule 461 under the Securities Act, the
Registrant acknowledges that:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling person of the small business issuer pursuant to the
foregoing provisions, or
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<PAGE> 92
otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person
of the small business issuer in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
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<PAGE> 93
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorized this
Post-Effective Amendment No. 5 to the Registration Statement to be signed on its
behalf by the undersigned, in the City of Great Neck, State of New York, on May
3, 1999.
GILMAN & CIOCIA, INC.
By: /s/James Ciocia
--------------------------------
James Ciocia,President and Chief
Executive Officer
In accordance with the requirements of the Securities Act of 1933,
as amended, this post-effective amendment to the registration statement was
signed by the following persons in the capacities and on the dates stated.
<TABLE>
<S> <C> <C>
/s/James Ciocia Director May 3, 1999
-------------------
James Ciocia
/s/Thomas Povinelli Chief Operating May 3, 1999
------------------- Officer,
Thomas Povinelli and Director
/s/Stephen Sacher Chief Financial May 3, 1999
------------------- Officer
Stephen Sacher
/s/Kathryn Travis Vice President, May 3, 1999
------------------- Secretary and Director
Kathryn Travis
/s/Robert Hayes Controller May 3, 1999
-------------------
Robert Hayes
/s/Louis Karol Director May 3, 1999
-------------------
Louis Karol
/s/Seth Akabas Director May 3, 1999
-------------------
Seth Akabas
</TABLE>
II-16
<PAGE> 94
INDEX
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
<PAGE> 95
GILMAN & CIOCIA, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,705,831
Marketable securities 114,359
Accounts receivable, net of allowance
for doubtful accounts of $87,500 2,251,111
Receivables from related parties, current portion 389,230
Prepaid expenses and other current assets, net of allowance
for doubtful collections of $100,000 1,138,721
Deferred tax assets, current portion 85,000
------------
Total current assets 5,684,252
Property and equipment, net 1,948,371
Intangible assets, net of accumulated amortization of $820,898 937,823
Receivables from related parties, net of current portion 789,030
Deferred tax assets 66,899
Other assets 324,812
------------
Total assets $ 9,751,187
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 50,000
Accounts payable and accrued expenses 520,711
Income taxes payable 162,889
------------
Total current liabilities 733,600
------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value - shares authorized
100,000; none issued and outstanding Common stock - $.01 par value -
shares authorized
9,000,000; issued and outstanding 5,606,913 shares 56,069
Paid-in capital 6,377,334
Retained earnings 3,604,714
------------
10,038,117
Less- Treasury Stock, at cost; 211,315 shares (784,782)
Stock subscriptions and accrued interest receivable (148,845)
Unrealized loss on marketable securities, net of income taxes (86,903)
------------
Total stockholders' equity 9,017,587
------------
Total liabilities and stockholders' equity $ 9,751,187
============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-3
<PAGE> 96
GILMAN & CIOCIA, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Tax preparation fees $ 10,164,550 $ 9,921,967
Financial planning commissions 16,578,032 12,464,284
Direct mail services 1,790,501 2,188,320
------------ ------------
Total revenues 28,533,083 24,574,571
------------ ------------
OPERATING EXPENSES:
Salaries and commissions 14,537,505 13,083,818
General and administrative expenses 4,194,061 3,572,901
Advertising 2,732,867 2,819,941
Direct mail costs 770,472 1,136,347
Rent 2,037,117 1,884,768
Depreciation and amortization 858,391 785,922
------------ ------------
Total operating expenses 25,130,413 23,283,697
------------ ------------
Operating income 3,402,670 1,290,874
------------ ------------
OTHER INCOME (EXPENSES):
Interest and investment income 107,953 163,697
Interest expense (175,536) (201,534)
Other income 83,068 16,557
------------ ------------
Total other income (expense) 15,485 (21,280)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,418,155 1,269,594
PROVISION FOR INCOME TAXES 1,406,810 393,600
------------ ------------
Net income $ 2,011,345 $ 875,994
============ ============
NET INCOME PER SHARE:
Basic $ 0.37 $ 0.16
Diluted 0.32 0.16
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES:
Basic 5,383,093 5,479,611
Diluted 6,315,345 5,572,854
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 97
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,011,345 $ 875,994
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensation expense recognized in connection
with the reissuance of treasury stock and the issuance
of stock options 61,831 41,551
Depreciation and amortization 858,391 785,922
Income from investment in partnership (25,051) (73,127)
Deferred tax provision (benefit) (124,000) 105,686
Gain (loss) on sale of marketable securities 16,213 (6,580)
Deferred compensation expense 162,477 235,013
Provisions for doubtful collections 100,000 41,526
Interest on stock subscriptions (13,546) (27,108)
Unrealized gain on marketable securities (105,172) (6,828)
Income tax benefit on exercise of stock options 63,000 --
Proceeds from sale of marketable securities 22,323 32,580
(Increase) decrease in:
Accounts receivable (1,141,576) (174,375)
Prepaid expenses and other current assets (243,974) (115,009)
Advances to affiliated financial planners (87,500) (78,214)
Security deposits (28,732) (16,872)
Accounts payable and accrued expenses 33,883 (109,312)
Income taxes payable 94,689 5,598
----------- -----------
Net cash provided by operating activities 1,654,601 1,516,445
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (772,930) (592,362)
Acquisition of intangible assets (145,176) (487,442)
Investments -- (150,000)
Deferred acquisition costs (54,955) --
Proceeds from sales of investments 214,652 378,009
Loan repayments from related parties 273,813 398,545
Loans to related parties (631,228) (676,250)
----------- -----------
Net cash used in investing activities (1,115,824) (1,129,500)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 98
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock $ (179,123) $ (733,200)
Proceeds from bank and other loans 3,000,000 3,602,000
Payments of bank and other loans (4,401,487) (2,859,262)
Proceeds from sale of common stock
and exercise of stock options 54,125 100,857
Proceeds from stock subscriptions 87,869 261,954
Incurrence of deferred registration costs (314,819) (60,600)
----------- -----------
Net cash (used in) provided by financing activities (1,753,435) 311,749
----------- -----------
Net (decrease) increase in cash (1,214,658) 698,694
CASH, beginning of year 2,920,489 2,221,795
----------- -----------
CASH, end of year $ 1,705,831 $ 2,920,489
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for-
Interest $ 188,592 $ 196,405
Income taxes 1,297,320 439,724
Noncash transactions-
Liquidation of investment in partnership into
marketable securities 110,793 68,830
Reissuance of treasury stock at fair value 32,897 94,644
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 99
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN RETAINED TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996 $5,550,582 $55,505 $6,184,075 717,375 - -
PAYMENTS RECEIVED ON STOCK
PURCHASE OF TREASURY STOCK 175,900 (733,200)
REISSUANCE OF TREASURY STOCK (53,093) (18,467) 94,644
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 28,331 284 100,573
ACCRUED INTEREST INCOME (27,108)
NET INCOME 875,994
----------
BALANCE AT JUNE 30, 1997 $5,578,913 $55,789 $6,231,555 $1,593,369 $157,433 $ (638,556)
========== ======= ========== ========== ======== ==========
BALANCE AT JULY 1, 1997 $5,578,913 $55,789 $6,231,555 $1,593,369 $157,433 $ (638,556)
PAYMENTS RECEIVED ON STOCK
PURCHASE OF TREASURY STOCK 60,700 (179,123)
UNREALIZED LOSS ON MARKETABLE SECURITIES
REISSUANCE OF TREASURY STOCK 28,934 (6,818) 32,897
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 28,000 280 53,845
ACCRUED INTEREST INCOME
INCOME TAX BENEFIT ON EXERCISE OF
STOCK OPTIONS 63,000
NET INCOME 2,011,345
----------
BALANCE AT JUNE 30, 1998 $5,606,913 $56,069 $6,377,334 $3,604,714 $211,315 $ (784,782)
========== ======= ========== ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS UNREALIZED
AND ACCRUED LOSS ON TOTAL
INTEREST MARKETABLE STOCKHOLDER'S
RECEIVABLE SECURITIES EQUITY
----------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1996 (458,014) $ - $6,498,941
PAYMENTS RECEIVED ON STOCK 261,954 261,954
PURCHASE OF TREASURY STOCK (733,200)
REISSUANCE OF TREASURY STOCK 41,551
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 100,857
ACCRUED INTEREST INCOME (27,108)
NET INCOME 875,994
----------
BALANCE AT JUNE 30, 1997 $ (223,168) $ - $7,018,989
========== ========== ==========
BALANCE AT JULY 1, 1997 $ (223,168) $ - $7,018,989
PAYMENTS RECEIVED ON STOCK 87,869 87,869
PURCHASE OF TREASURY STOCK (179,123)
UNREALIZED LOSS ON MARKETABLE SECURITIES (86,903) (86,903)
REISSUANCE OF TREASURY STOCK 61,831
ISSUANCE OF COMMON STOCK ON EXERCISE
OF STOCK OPTIONS 54,125
ACCRUED INTEREST INCOME (13,546) (13,546)
INCOME TAX BENEFIT ON EXERCISE OF
STOCK OPTIONS 63,000
NET INCOME 2,011,345
----------
BALANCE AT JUNE 30, 1998 $ (148,845) $ (86,903) $9,017,587
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 100
GILMAN & CIOCIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. ORGANIZATION AND NATURE OF BUSINESS
Business
Gilman & Ciocia, Inc. and subsidiaries (the "Company"), which is incorporated in
Delaware, provides income tax preparation and financial planning services
primarily to individuals, as well as direct mail services through its
Progressive Mailing Services ("Progressive") division. The Company has three
wholly owned subsidiaries, two of which are inactive. The active subsidiary,
Gilman & Ciocia Securities, Inc. d/b/a JT Securities, Inc. ("JT"), was a
registered broker-dealer pursuant to the provisions of the Securities Exchange
Act of 1934 until October 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly-owned
subsidiaries. All significant intercompany transactions have been eliminated.
The Company has several insignificant investments in 20% to 50% owned companies
which are accounted for on the equity method. Accordingly, the Company's share
of the earnings of these companies is included in consolidated net income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include
investments in money market funds and are stated at cost, which approximates
market value.
Marketable Securities
F-8
<PAGE> 101
The Company has classified its short-term investments in debt instruments as
either trading securities or available for sale securities that are reported at
fair value with unrealized gains and losses included in earnings or
stockholders' equity, respectively.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization are
determined using straight-line or accelerated methods over the estimated useful
lives of the assets or, for leasehold improvements, over the lease terms which
range from one to seven years.
Intangible Assets
Intangible assets represent the costs of $1,759,610 for June 30, 1998 to acquire
income tax businesses, lists of customer accounts and related covenants not to
compete. Amortization expense is computed on a straight-line basis over a period
of five years, and amounted to $354,649 and $274,613 for the years ended June
30, 1998 and 1997, respectively.
The Company's operational policy for the assessment and measurement of any
impairment in the value of the intangible assets acquired which is other than
temporary is to evaluate the recoverability and remaining life of the intangible
assets and determine whether the intangible assets should be completely or
partially written-off or the amortization period accelerated. The Company will
recognize impairment in the value of the intangible assets if the undiscounted
estimated future operating cash flows of the relevant assets acquired are
determined to be less than their carrying amount. If the Company determines that
impairment has occurred, the measurement of the impairment will be equal to the
excess of the carrying amount of the intangible assets over the amount of the
discounted estimated operating cash flows.
During fiscal 1998 and 1997, the Company acquired intangible assets for
approximately $145,000 and $487,000, respectively.
Impairment of Long-Lived Assets
The Company follows the Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that full recoverability is questionable. Management
evaluates the recoverability of its intangible assets and other long-lived
assets and several factors are used in the valuation including, but not limited
to, management's plans for future operations, recent operating results and
projected cash flows.
Deferred Rent
Certain of the Company's lease agreements provide for scheduled rent increases
during the lease term or for rental payments commencing at a date other than
initial occupancy. Provision has been made for the excess of operating lease
rental expense, computed on a straight-line basis over the lease term, over cash
rentals paid.
Revenue Recognition
The Company recognizes all revenues associated with income tax preparation and
direct mail services upon completion of the services. Securities transactions
and related commission revenue and expenses are
F-9
<PAGE> 102
recognized on a trade date basis. Commission revenue and expenses on sales of
life insurance policies are recognized when the policies are effective.
The consolidated statements of income includes as commission revenue from
financial planning services, commissions received from financial planning
services and insurance underwriters, received directly by the Company as well as
the commissions paid by Royal Alliance, Inc. ("Royal") to affiliated financial
planners representing the financial planners' share of commissions. Accordingly,
the payments made directly to the affiliated financial planners are also
included in salaries and commission expense.
Advertising
Costs to develop advertising are accumulated and expensed upon the first mailing
of such advertising in accordance with SOP 93-7. Costs to develop tax season
programs and associated printing and paper costs are deferred in the first and
second fiscal quarters and expensed in the third fiscal quarter upon the first
use of such advertisement in the advertising programs.
Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS No. 109 "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
estimated tax rates and laws to taxable years in which such differences are
expected to reverse.
Stock-based Compensation
SFAS No. 123, "Accounting for Stock Based Compensation," encourages, but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation awards to employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options awarded to employees and
directors is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee or director
must pay to acquire the stock.
As required, the Company follows SFAS No. 123 to account for stock-based
compensation awards to outside consultants. Accordingly, compensation costs for
stock option awards granted to outside consultants and non-employee financial
planners is measured at the date of grant based on the fair value of the award
using the Black-Scholes option pricing model (Note 6).
Net Income Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128 , "Earnings Per Share." This statement establishes new standards for
computing and presenting earnings per share (EPS), replacing the presentation of
primary EPS with a presentation of basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both basic EPS and
diluted EPS on the face of the statement of operations. Under this new standard,
basic EPS is computed based on weighted average shares outstanding and excludes
any potential dilution. Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other contracts
to issue common stock. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, and earlier application is not
permitted. The Company has adopted Statement No. 128 for the year ended June 30,
1998 and has restated its weighted-average shares for all prior periods
presented. ( Note 7)
F-10
<PAGE> 103
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash, marketable
securities, accounts receivable, notes receivable, accounts payable and
borrowings, approximated fair value as of June 30, 1998 because of the
relatively short-term maturity of these instruments and their market interest
rates.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 is effective for financial statements for periods beginning after December
15, 1997 and requires comparative information for earlier years to be restated.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires entities to disclose
financial and detailed information about their operating segments in a manner
consistent with internal segment reporting used by the Company to allocate
resources and assess financial performance. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated (Note 9).
The Company has adopted SFAS No. 130 and 131 for the fiscal year ended June 30,
1998. SFAS No. 130 and 131 expand and modify financial statement disclosures
and, accordingly, have no impact on the Company's results of operations,
earnings per share or financial position.
In April 1998, the AICPA issued Statement of Position (SOP) 98-5 "Reporting
Costs of Start-Up Activities," which establishes standards for the accounting of
start-up costs. Costs of start-up activities, including organization costs,
should be expensed as incurred. SOP 98-5 is effective for financial statements
for fiscal years beginning after December 15, 1998, although earlier application
is encouraged. The Company has adopted SOP 98-5 during fiscal year 1998,
however, the effects of this standard have no material impact on the Company's
results of operations, earnings per share or financial position.
3. RECEIVABLES FROM RELATED PARTIES
<TABLE>
<CAPTION>
<S> <C>
Notes receivable from officers/stockholders of the Company that are
due in aggregate bi-weekly installments of $2,295 (including interest
at 7% per annum) through June 30,2000 $ 202,447
Notes receivable from officers/stockholders of the Company that are
due in aggregate monthly payments of $9,634 (including interest at 7%
per annum) commencing September 1, 1998 through August 1, 2001 552,000
Notes receivable of $50,319 and $106,000 from independent
contractors/stockholders of the Company due
</TABLE>
F-11
<PAGE> 104
<TABLE>
<CAPTION>
<S> <C>
on June 3, 1999 and June 19, 2000 respectively. Interest is charged at
8.5% and 6% per annum, respectively 156,319
Receivable from employee/stockholder of the Company, due in bi-weekly
installments of $3,156 through June 15, 1999. Interest is charged at
9% per annum 78,360
Note receivable from employee/stockholder of the Company due on
October 9, 1999. Interest is charged at 9% per annum 121,989
Other
67,145
----------
1,178,260
Less- Current portion 389,230
----------
$ 789,030
==========
</TABLE>
Interest income from these related party receivables was approximately $21,000
and $10,000, for the years ended June 30, 1998 and 1997, respectively.
4. PROPERTY AND EQUIPMENT, NET
Major classes of property and equipment, net consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Buildings $ 405,866
Equipment 2,752,135
Furniture and fixtures 402,432
Leasehold improvements 204,000
----------
3,764,433
Less- Accumulated depreciation and amortization 1,816,062
----------
$1,948,371
==========
</TABLE>
For the years ended June 30, 1998 and 1997 depreciation and amortization expense
from property and equipment was approximately $504,000 and $394,000,
respectively.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under various noncancelable lease agreements for the
rental of office space through 2003. The lease agreements for office space
contain escalation clauses based principally upon real estate taxes, building
maintenance and utility costs. The following is a schedule by fiscal year of
future minimum rental payments required under operating leases as of June 30,
1998.
F-12
<PAGE> 105
<TABLE>
<CAPTION>
<S> <C>
1999 $1,501,617
2000 1,101,162
2001 657,848
2002 304,009
2003 85,325
</TABLE>
Professional Liability or Malpractice Insurance
The Company does not maintain any professional liability or malpractice
insurance policy. Although the Company believes it complies with all applicable
laws and regulations, no assurance can be given that the Company will not be
subject to professional liability or malpractice suits.
Clearing Agreements
The Company is party to a clearing agreement with an unaffiliated correspondent
broker which states that JT will assume customer obligations should a customer
of JT default. At June 30, 1998, approximately $25,000 of cash is held as a
deposit requirement by the broker.
Net Capital Requirements
JT is subject to the SEC's Uniform Net Capital Rule 15c 3-1, which requires the
maintenance of minimum regulatory net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. At June 30, 1998, JT had net capital of $142,320 , which was $117,320 in
excess of its required net capital of $25,000.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, JT executes, as an agent, transactions on
behalf of customers. If the agency transactions do not settle because of failure
to perform by either the customer or the counterparties, JT may be obligated to
discharge the obligation of the nonperforming party and, as a result, may incur
a loss if the market value of the security is different from the contract amount
of the transactions.
JT does not anticipate nonperformance by customers or counterparties in the
above situation. JT's policy is to monitor its market exposure and counterparty
risk. In addition, JT has a policy of reviewing, as considered necessary, the
credit standing of each counterparty and customer with which it conducts
business.
Litigation
In April 1998, an investment banker and its assignee, instituted a suit in the
U.S. District Court in Austin Texas, demanding issuance, collectively, of
100,000 warrants to purchase the Company's common stock at $5.13 per share
(alleged to have been issuable under an investment banking agreement pursuant to
which the investment banker was to have provided investment banking services to
the Company), as well as attorney's fees and exemplary damages. The Company
believes, among other defenses, that the investment banker defaulted under such
agreement and provided no material services to the Company. The Company is
defending such suit vigorously. In addition, the Company has received a demand
letter from a consultant (an entity believed to be affiliated with the
investment banker) demanding the issuance of 150,000 warrants to purchase the
Company's common stock at $5.13 per share, alleged to have been issuable under a
consulting agreement pursuant to which the consultant was to have provided
consulting services to the Company. The
F-13
<PAGE> 106
Company believes that the consultant defaulted under such agreement and provided
no material services to the Company. The Company has denied such demand.
Subsequent to June 30, 1998, a legal action was instituted against the Company
pertaining to a wrongful death matter allegedly sustained in a Company
automobile more than nine years ago. The complaint seeks indemnification in the
amount of up to $3.5 million. The allegations in the complaint are based upon a
$1.7 million payment made by the plaintiffs plus an additional $1.8 million
payment for which plaintiffs ultimately may be held liable. An additional action
is currently pending to determine the liability allocation. The Company answered
the complaint by asserting numerous defenses which it believes are meritorious.
The case is currently entering the discovery phase, and, therefore, the Company
is unable to determine at this time the ultimate success of any asserted
allegation or defense.
Payroll Taxes
The Company annually provides its employees with Form W-2 and its outside
consultants with Form 1099 and Royal provides the financial planners with Form
1099 all of which are in accordance with tax law and industry practices. While
the Company has not experienced any federal or state payroll tax audits, should
a taxing authority assert that an outside consultant is an employee, the Company
believes that it is unlikely that any such audit would have a material effect on
its consolidated financial position, results of operations or cash flows.
6. STOCKHOLDERS' EQUITY
Warrants
At June 30, 1998 the Company had 507,926 and 50,783 warrants outstanding
pertaining to those issued to the public and the underwriter, respectively, in
connection with the Initial Public Offering in 1994. Each warrant issued to the
public grants the holder the right to purchase one share of common stock at an
exercise price of $4.67 and expires October 30, 1998. For an exercise price of
$8.40 per warrant, each of the warrants issued to the underwriter gives the
holder two shares of common stock and a warrant to purchase another share of
common stock at an exercise price of $4.67 and expire in September 1999.
Stock Option Agreements
and Stock Option Plan
The Company has granted stock options to employees, directors and consultants
pursuant to individual agreements or to its incentive and non-qualified stock
option plan.
In September 1993, the Company's Board of Directors and Stockholders adopted the
Company's Joint Incentive and NonQualified Stock Option Plan (the "Option
Plan"). The Option Plan provides for the granting, at the discretion of the
Board of Directors, of: (i) options that are intended to qualify as incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to employees and (ii) options not intended to so qualify to
employees, officers and directors. The total number of shares of common stock
for which options may be granted under the Option Plan is 816,000 shares. The
number of shares granted, prices, terms of exercise, and expiration dates are
determined by the Board of Directors. The Plan will terminate in September 2003.
At June 30, 1998, 420,002 options have been granted under the Option Plan.
F-14
<PAGE> 107
The Company charged earnings for compensation expense of $134,823 for the year
ended June 30, 1998, in connection with the issuance of stock options to an
outside consultant. There were no compensatory stock options issued during
fiscal 1997.
The table below summarizes plan and nonplan stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise Price
---------------- --------------
<S> <C> <C>
Outstanding, July 1, 1996 1,392,002 3.89
Granted 273,000 2.70
Canceled (299,000) 4.21
---------
Outstanding, June 30, 1997 1,366,002 3.59
Granted 1,748,000 9.18
Exercised (28,000) 1.93
Cancelled (250,000) 5.13
---------
Outstanding, June 30, 1998 2,836,002 6.92
=========
Exercisable, June 30, 1997 1,093,002 3.81
=========
Exercisable, June 30, 1998 845,002 3.54
=========
</TABLE>
The weighted average grant date fair value of options granted during the years
ended June 30, 1998 and 1997 is $ 5.41 and $1.00 per option, respectively.
Options outstanding and exercisable at June 30, 1998 and related weighted
average exercise price and life information follows:
<TABLE>
<CAPTION>
Fiscal Year Options Outstanding Options Exercisable Remaining
Grant Date Shares Price Shares Price Life (Years)
---------- ------ ----- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
1994 420,002 $2.95 420,002 $2.95 1/4
1995 405,000 3.34 405,000 3.34 5
1996 -
1997 273,000 2.70 -- -- 4
1998 1,738,000 9.23 20,000 $7.00 8
</TABLE>
The Company has adopted the disclosure-only provision of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the employee stock
options. Had compensation cost for the Company's employee stock options been
determined based on the fair value at the grant date for options granted since
July 1, 1995 consistent with the provisions of SFAS No. 123, the Company's net
income or loss and earnings or loss per share would have been reduced to the pro
forma amounts indicated below:
F-15
<PAGE> 108
<TABLE>
<CAPTION>
Years ended June 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Net income, as reported $ 2,011,345 $ 875,994
Net income (loss), pro forma (46,191) 832,418
Earnings per share, as reported 0.32 0.16
Earnings (loss) per share, pro forma (0.01) 0.15
</TABLE>
The pro forma effect on net income or loss for fiscal years 1998 and 1997 does
not take into consideration pro forma compensation expense related to grants
made prior to fiscal year 1996.
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
<S> <C>
Expected life (years) 3
Interest rate 7.00%
Volatility:
June 30, 1998 73.6%
June 30, 1997 61.9%
Dividend yield 0%
</TABLE>
During fiscal 1998, the Company granted a total of 1,176,000 non-compensatory
options to thirteen financial planners who also serve the Company in various
employment capacities. Six of these thirteen individuals receiving a total of
362,000 options earn much of their total compensation directly from Royal for
security transactions.
On May 19, 1997, the Company adopted the Company's 1997 Common Stock and
Incentive and Non-Qualified Stock Option Plan of Gilman & Ciocia, Inc. (the
"1997 Plan"), pursuant to which the Company may grant options to purchase up to
an aggregate of 300,000 shares. Such options may be intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Options"), or they may be intended
not to qualify under such Section ("Non-Qualified Options"). No Incentive
Options will be issued pursuant to the 1997 Plan until such 1997 Plan is
approved by the shareholders of the Company.
Treasury Stock
During fiscal 1998, the Company acquired 60,700 shares of its common stock for
an aggregate cost of $179,123 and reissued 6,818 of these shares to employees
and consultants. The reissuance gave rise to the recognition of compensation
expense in the amount of $61,831 representing the excess of the fair value of
these shares at reissuance over their cost.
During fiscal 1997, the Company acquired 175,900 shares of its common stock for
an aggregate cost of $733,200 and reissued 18,467 of these shares to employees
and consultants. The reissuance gave rise to the recognition of compensation
expense in the amount of $41,551 representing the excess of the fair value of
these shares at reissuance over their cost.
F-16
<PAGE> 109
Stock Subscriptions and
Accrued Interest Receivable
Stock subscriptions receivable of $148,845 at June 30, 1998, bear interest at a
rate of 9% per annum. For the years ended June 30, 1998 and 1997, the Company
recognized interest income of $13,546 and $27,108, respectively. At June 30,
1998 accrued interest receivable was $22,860.
The Company is holding in escrow all of the shares of its common stock related
to the stock subscription receivable. The shares will be released when the stock
subscription receivables are collected.
The following is a schedule by year of principal payments to be received:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1999 $ 80,735
2000 45,250
--------------
$ 125,985
==============
</TABLE>
7. EARNINGS PER SHARE
In accordance with SFAS No. 128, a reconciliation between the numerators and
denominators of the basic and diluted EPS computations for net earnings is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
------------------------ ------------------------
Per Share Per Share
--------- ---------
Net Income Shares Amounts Net Income Shares Amounts
---------- ------ ------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $2,011,345 5,383,093 $ 0.37 $ 875,994 5,479,611 $ 0.16
Dilutive Stock options
& warrants 932,252 93,243
--------- ---------
Dilutive EPS $2,011,345 6,315,345 $ 0.32 $ 875,994 5,572,854 $ 0.16
</TABLE>
The potentially dilutive shares that were not included in the computation of
diluted earnings per share because to do so would be antidilutive consist of
stock options and warrants as follows:
<TABLE>
<CAPTION>
Options/Warrants
----------------
<S> <C>
Year Ended June 30, 1998 675,000
Year Ended June 30, 1997 2,026,277
</TABLE>
8. RELATED PARTY TRANSACTIONS
Investment in ATM Partners, L.P.
F-17
<PAGE> 110
In July 1995, the Company, together with one of its former officers and five
individuals who are relatives of the officers of the Company formed ATM
Partners, LP former (the "Partnership"), an Investment Partnership. All
investment transactions were executed through JT. At June 30, 1997, the Company
had approximately a 41%, interest in the Partnership. The Company recognized
income of approximately, $73,000 from the Partnership for the year ended June
30, 1997. Such partnership began liquidating its investments and distributing
its assets to its partners in the Company's 1997 fiscal year, and fully
liquidated its remaining investment in fiscal 1998. During fiscal 1998, the
Company wrote-off a $100,000 receivable due from the Partnership.
Professional Fees
During fiscal 1998 and 1997, professional firms related to officers and
directors of the Company charged the Company fees totaling approximately
$200,000 and $75,000, respectively.
9. SEGMENTS OF BUSINESS
The Company is a provider of income tax preparation and financial planning
services to individuals and businesses in various states across the country.
Direct mail services are provided primarily to businesses and individuals in the
New York metropolitan area.
The following presents financial information by segment for the years ended June
30, 1998 and 1997:
<TABLE>
<CAPTION>
Tax Financial
Preparation Planning Direct Mail Eliminations Consolidation
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998:
Revenues from unaffiliated customers $10,164,550 $16,578,032 $ 1,790,501 $ -- $28,533,083
Intersegment revenues -- -- 2,369,447 (2,369,447) --
----------- ----------- ----------- ----------- -----------
Total revenues 10,164,550 16,578,032 4,159,948 (2,369,447) 28,533,083
Direct costs 6,608,421 9,868,394 3,553,154 (2,369,447) 17,660,522
Depreciation and amortization 311,418 508,102 38,871 -- 858,391
General corporate expenses 2,427,443 3,960,564 223,493 -- 6,611,500
----------- ----------- ----------- ----------- -----------
Operating income $ 817,268 $ 2,240,972 $ 344,430 $ -- $ 3,402,670
=========== =========== =========== =========== ===========
Interest expense $ 89,207 $ 86,329 $ -- $ -- $ 175,536
=========== =========== =========== =========== ===========
Identifiable assets $ 6,245,447 $ 6,043,903 $ 593,101 $(3,131,264) $ 9,751,187
=========== =========== =========== =========== ===========
Capital expenditures $ 772,930 $ -- $ 79,867 $ -- $ 852,797
=========== =========== =========== =========== ===========
Direct costs consist of the following:
Direct mail costs $ -- $ -- $ 770,472 $ -- $ 770,472
Advertising 1,376,457 1,332,030 2,393,827 (2,369,447) 2,732,867
Rent 746,906 1,218,636 71,575 -- 2,037,117
Salaries and commissions 4,485,058 7,317,728 317,280 -- 12,120,066
----------- ----------- ----------- ----------- -----------
Total direct costs $ 6,608,421 $ 9,868,394 $ 3,553,154 $(2,369,447) $17,660,522
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Tax Financial
Preparation Planning Direct Mail Eliminations Consolidation
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Revenues from unaffiliated customers $ 9,921,967 $12,464,284 $ 2,188,320 $ -- $24,574,571
Intersegment revenues -- -- 2,275,000 (2,275,000) --
----------- ----------- ----------- ----------- -----------
Total revenues 9,921,967 12,464,284 4,463,320 (2,275,000) 24,574,571
Direct costs 6,025,407 9,729,797 4,162,670 (2,275,000) 17,642,874
Depreciation and amortization 450,091 315,761 20,070 -- 785,922
General corporate expenses 2,647,426 1,857,300 350,175 -- 4,854,901
----------- ----------- ----------- ----------- -----------
Operating income $ 799,042 $ 561,428 $ (69,595) $ -- $ 1,290,874
=========== =========== =========== =========== ===========
</TABLE>
F-18
<PAGE> 111
<TABLE>
<S> <C> <C> <C> <C> <C>
Interest expense $ 118,442 $ 83,092 $ -- $ -- $ 201,534
=========== =========== =========== =========== ===========
Identifiable assets $ 7,135,360 $ 5,005,800 $ 329,938 $(3,376,844) $ 9,094,254
=========== =========== =========== =========== ===========
Capital expenditures $ 553,446 $ -- $ 38,916 $ -- $ 592,362
=========== =========== =========== =========== ===========
Direct costs consist of the following:
Direct mail costs $ -- $ -- $ 1,136,347 $ -- $ 1,136,347
Advertising 1,642,630 1,152,386 2,299,925 (2,275,000) 2,819,941
Rent- 1,044,261 732,599 107,908 -- 1,884,768
Salaries and commissions 3,338,516 7,844,812 618,490 -- 11,801,818
----------- ----------- ----------- ----------- -----------
Total direct costs $ 6,025,407 $ 9,729,797 $ 4,162,670 $(2,275,000) $17,642,874
=========== =========== =========== =========== ===========
</TABLE>
Intersegment sales are recognized upon the completion of the services associated
with direct mail services.
10. TAXES ON INCOME
Provisions for income taxes in the consolidated financial statements consist of
the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Current:
Federal $ 1,247,828 $ 211,903
State and local 282,982 76,011
----------- -----------
Total current 1,530,810 287,914
----------- -----------
Deferred:
Federal (90,304) 82,025
State and local (33,696) 23,661
----------- -----------
Total deferred tax (benefit) (124,000) 105,686
----------- -----------
$ 1,406,810 $ 393,600
=========== ===========
</TABLE>
Deferred tax assets as of June 30, 1998 consist of the following:
<TABLE>
<S> <C>
Compensation expense recognized for financial reporting purposes in $ 114,400
connection with common
stock option grants issued at below market value
Book amortization of intangibles in excess of tax
144,400
Provision for bad debts
75,200
Provision for deferred rent liability
27,600
Book depreciation in excess of tax (146,717)
Investments accounted for under the equity method (62,984)
---------
$ 151,899
=========
</TABLE>
F-19
<PAGE> 112
No valuation allowance has been established against the deferred tax assets
because management believes that all of the deferred tax assets will be
realized.
A reconciliation of the federal statutory rate to the income taxes is as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------- --------------------
<S> <C> <C> <C> <C>
Year ended June 30:
Federal income taxes computed at statutory rates $1,162,173 34.0% $ 431,662 34.0%
State and local taxes, net of federal tax benefit 205,089 6.0 76,176 6.0
Reversal of under/(over) accruals 22,810 0.7 (156,000) (12.3)
Other 16,738 0.5 41,762 3.3
---------- ---- ---------- ----
$1,406,810 41.2% $ 393,600 31.0%
========== ==== ========== ====
</TABLE>
F-20
