U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the Fiscal Year Ended June 30, 2000.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission File Number 000-22996
GILMAN + CIOCIA, INC.
(Exact name of registrant
as specified in its charter)
Delaware 11-2587324
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1311 Mamaroneck Ave. Suite 160, White 10605
Plains, NY (Zip Code)
(address of principal executive offices)
(914) 397-4829
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
Securities registered under Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Check whether the issuer: (1) filed reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State issuer's revenues for its most recent fiscal year. [$89,578,494]
The aggregate market value of the voting stock held by non-affiliates as of
[September 29, 2000] was $16,940,204 based on a sale price of $4.06.
State the number of shares outstanding of each class of the issuer's classes of
common equity, as of the latest practicable date. As of September 29, 2000,
7,838,227 shares of the issuer's common equity were outstanding.
Transitional Small Business Disclosure Format (check one): Yes[ ] No [X]
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PART I
Item 1. DESCRIPTION OF BUSINESS
General
Gilman + Ciocia, Inc. is a corporation that was organized in 1981 under
the laws of the State of New York (together with its wholly owned subsidiaries,
the "Company" or "Gilman + Ciocia(R)" or "GTAX"). The Company was reorganized
under the laws of the State of Delaware in 1993. The Company provides federal,
state and local tax preparation and financial planning services to individuals
predominantly in the middle and upper income brackets. The Company currently has
145 offices operating in 17 states. To complement its tax preparation services,
the Company also provides financial planning services to its tax preparation
clients and others. These financial planning services include securities
brokerage services, insurance and mortgage agency services.
In Fiscal 2000, the Company had total revenues of $89,578,494,
representing an increase of $39,135,088, or 78%, over $50,443,406 in Fiscal
1999. This growth was primarily attributed to the significant growth in
commissions from financial planning service provided to its clients, which
increased 97% to $71,267,262 in Fiscal 2000 from $36,137,862 in Fiscal 1999. In
addition, revenues from tax preparation increased by 22% to $18,311,232 in
Fiscal 2000 from $14,305,544 in Fiscal 1999. In Fiscal 2000, 80% of the
Company's revenues were attributed to commissions on financial planning
services, and 20% were attributed to tax preparation, including $1,156,640
associated with e1040.com, the Company's new on-line tax preparation business
unit launched in Fiscal 1999. During Fiscal 2000, the Company prepared 150,000
federal and state tax return.
While preparing tax returns, clients often consider other aspects of
their financial needs, such as insurance, investments, pension and estate
planning. The Company capitalizes on this situation by introducing its tax
clients, if appropriate, to financial planners. The Company provides tax clients
with questionnaires about their financial goals, and the tax clients then have
the opportunity to request the Company's assistance with their financial
planning needs.
In February 1999, the Company began preparing individual income taxes
online when it formed its subsidiary e1040.com, Inc. and completed the
acquisition of all the assets of an existing online tax preparation business.
Since its organization, e1040.com has generated 75 million web page hits,
representing 1,992,638 visitors to the e1040.com web site, and has prepared
36,131 Federal and State tax returns and 9,193 tax extensions.
In Fiscal 1999, the Company purchased all of the issued and
outstanding capital stock of Prime Capital Services, Inc. ("Prime") and of North
Ridge Securities Corp. ("North Ridge"), each a registered securities
broker/dealer (the "B/D Subsidiaries"). The Company terminated its relationship
with Royal Alliance Associates, Inc. ("Royal Alliance"), an independent
registered broker/dealer, to which previously the Company had referred its
clients for financial planning services. Royal Alliance had retained
approximately six percent (6%) of the total securities commissions generated by
its employee financial planners to whom the Company had referred clients. Today,
each of the employee financial planners to whom a client might be introduced is
a registered representative ("Registered Representative") of one of the B/D
Subsidiaries. Each Registered Representative is also either an employee of the
Company, with an employment agreement calling for a specified payout on
commissions to be made by a B/D Subsidiary, or an independent contractor with a
contractual agreement to share commissions with the B/D Subsidiary. The Company
and its subsidiaries therefore retain six percent (6%) more of the securities
commissions generated through its referrals than it had in previous years, for
all employee Registered Representatives associated with one of the B/D
Subsidiaries. The percent of commission earned by the Company depends on the
financial planning services that are sold. Almost all of the financial planners
are also authorized agents of insurance underwriters, and the Company earns
revenues from these insurance services as well. Each of the B/D Subsidiaries has
its own clients independent of referrals from Gilman + Ciocia.
In July 1999, the Company formed a joint venture corporation,
GTAX/Career Brokerage, Inc. ("GTAX/CB"), with Fiengold & Scott, Inc., a company
engaged in the wholesaling of insurance and annuity products. The Company is the
owner of 50% of the stock of GTAX/CB; Fiengold & Scott, Inc. is the owner of the
remaining 50%. GTAX/CB was formed to become a licensed insurance agent in all
states in which the Company markets insurance and annuity products and to act as
a licensed entity for the sale, by the Company, of life insurance, long-term
health care insurance, and fixed-annuity products.
Industry Overview
The United States Internal Revenue Service (the "IRS") reported that
approximately 120 million individual 1999 federal income tax returns were filed
in the United States through June 30, 2000. According to the IRS, approximately
one-half of the tax returns filed in the United States each year are completed
by a paid preparer. Among paid preparers, H&R Block, Inc. ("H&R Block")
dominates the low-cost tax preparation business with approximately 9,000 offices
located throughout the United States. According to information released by H&R
Block, H&R Block prepared an aggregate of approximately 16 million United States
tax returns during the 2000 tax season, which represented approximately 14% of
all tax returns filed in the United States. Other than H&R Block, the tax
preparation industry is highly fragmented and includes regional tax preparation
services, accountants, attorneys, small independently owned companies, and
financial service institutions that prepare tax returns as ancillary parts of
their businesses. The ability to compete in this market depends in large part on
the geographical area, specific location of the tax preparation office, local
economic conditions, quality of on-site office management and the ability to
file tax returns electronically with the IRS.
According to data from the National Association of Securities Dealers,
Inc. (the "NASD"), approximately 600,000 registered securities broker/dealers
are registered in the United States, some of which provide financial planning
services similar to those offered by the Company. A large number of these
professionals are affiliated with larger financial industry firms. The remaining
portion of the financial planning industry is highly fragmented with services
provided by certified financial planners, stockbrokers and accountants. The
Company believes that no other large, national tax preparation firm has combined
tax preparation and financial planning services to the same extent as the
Company.
Tax Return Preparation
Clients. The Company prepares federal, state and local income tax
returns for individuals, predominantly in the middle and upper income brackets.
The Company believes that clients are attracted to the Company's tax preparation
services because they prefer not to file their own tax returns and are unwilling
to pay the fees charged by most accountants and tax attorneys.
Tax Preparation Services. The preparation of a tax return by the
Company generally begins with a personal meeting at a Company office between a
client and an employee of the Company. At the meeting, the Company's employee
solicits from the client the information concerning income, deductions, family
status and personal financial information necessary to prepare the client's tax
return. After the meeting, the employee prepares drafts of the client's tax
returns. After review and final correction by the tax preparer, the returns are
delivered to the client for filing.
The Company believes that it offers clients a cost effective tax
preparation service compared to services provided by accountants, attorneys and
independent tax preparers. The Company's volume allows it to provide uniform
service at competitive prices. In addition, as compared to certain of its
competitors that are open only during tax season, all of the Company's offices
are open year round due to the demand for financial planning services. As a
result, the Company has avoided opening offices specifically for tax season and
closing them after the peak period.
e1040.com is an online tax preparation service whereby clients submit
information concerning their income, deductions, family status and financial
information over the Internet to e1040.com's website. The client can elect one
of two preparation options. The first option is completely automated without any
human intervention by a tax professional. In other words, the return is
electronically filed with the IRS. The second option allows clients to submit
their electronic return to the Gilman + Ciocia e1040.com tax preparation center
for review by a tax professional, before it is filed on-line. The Company
believes that it is the only on-line tax preparation software to provide this
level of service.
Since 1990, the IRS has made electronic filing available throughout the
United States. The IRS has announced its intention to increase the number of tax
returns filed electronically and is currently reviewing various proposals to
encourage the growth of its electronic filing program. The Company has qualified
to participate in the electronic filing program with the IRS and offers clients
the option of filing their federal income tax returns electronically. Under this
system, the final federal income tax return is transmitted to the IRS through a
publicly available software package. As part of its electronic filing program,
Refund Anticipation Loans ("RALs") are also available to the clients of the
Company through arrangements with approved banking institutions. Using this
service, a client is able to receive a check in the amount of his federal refund
(less fees charged by the Company and banking institutions) drawn on an approved
bank, at the office where he or she had his or her return prepared. RALs are
recourse loans secured by the taxpayer's refund. The Company acts only as a
facilitator between the client and the bank in preparing and submitting the loan
documentation and receives a fee for these services payable upon consummation of
the loan. None of the Company's funds are used to finance these loans, and the
Company has no liability for repayment of these loans.
Tax Preparers. The Company's tax preparation business is conducted
predominantly in the months of February, March and April when most individuals
prepare their federal, state and local income tax returns. During the tax
season, the number of Company employees increases by approximately 300. Almost
all 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. A majority of the Company's seasonal
employees return in the next year. The Company generally utilizes advertisements
in local newspapers to recruit the remainder of its seasonal work force.
The Company's tax preparers are generally not certified public
accountants. Therefore, they are limited in the representation that they can
provide to clients of the Company on an audit by the IRS. The Company's tax
preparation business subjects it to potential civil liabilities under the
Internal Revenue Code. Although the Company believes that it complies with all
applicable laws and regulations, no assurance can be given that the Company will
never incur any material fines or penalties. In addition, the Company does not
maintain professional liability or malpractice insurance policies. Although the
Company complies with all applicable laws and regulations, no assurance can be
given that the Company will not be subject to professional liability or
malpractice suits.
Financial Planning
Financial Planning Services. While preparing tax returns, clients often
consider other aspects of their financial needs, such as insurance, investments,
retirement and estate planning. To capitalize on this situation, the Company
offers every client the opportunity to complete a questionnaire that discloses
information on his financial situation. These questionnaires are subsequently
reviewed by financial planners to evaluate whether the client may benefit from
financial planning services. Upon request, the client is then introduced to the
financial planner.
Most middle and upper income individuals require a variety of financial
planning services. If the client seeks insurance products in connection with the
creation of a financial plan, he is referred to a financial planner (who may
also be a tax preparer) who is an authorized agent of an insurance underwriter.
If the client seeks mutual fund products or other securities for investment, he
is referred to a financial planner of the Company (who may also be a tax
preparer) who is a Registered Representative of one of the B/D Subsidiaries of
the Company. See "--Relationship with Registered Representatives of Securities
Broker/Dealer" and "--Relationship with Authorized Agents of Insurance
Underwriters."
The Company does not have financial planners at all of its offices.
Approximately 90% of the Company's offices provide both tax preparation and
regular financial planning services. The remaining Company offices provide
predominantly tax preparation services and have no regular financial planner
associated with them, although financial planners from other offices work with
clients from all of these offices.
Relationship with Registered Representatives of Securities
Broker/Dealer. The Gilman + Ciocia financial planners that provide financial
planning services to the Company's clients are Registered Representatives of the
B/D Subsidiaries, which are registered securities broker/dealers and members of
the NASD. To become a Registered Representative, a person must pass one or more
of a series of qualifying exams administered by the NASD that test the person's
knowledge of securities and related regulations.
The B/D Subsidiaries supervise the Registered Representatives with
regard to all regulatory matters. In addition to certain mandatory background
checks required by the NASD, the Company also requires that each Registered
Representative respond in writing to a background questionnaire.
If clients of the Company inquire about the acquisition or sale of
investment securities, they are directed to a Registered Representative. The
Registered Representatives are able to effect transactions in such securities at
the request of clients and retain a certain percentage of the commissions earned
on such transactions. All security transactions are introduced and cleared on a
fully disclosed basis through a correspondent broker that is a member of the New
York Stock Exchange.
About 90% of the securities transactions effected by Registered
Representatives of the B/D Subsidiaries involve mutual funds, variable
annuities, managed money products and variable life insurance. The balance of
the firms' business includes stocks, bonds, and other securities. Typically,
these transactions are unsolicited and executed at discounted commission rates.
Each of the Gilman + Ciocia Registered Representatives licensed with
the B/D Subsidiaries, except the officers of the Company, has entered into a
commission sharing agreement with the Company. The agreement generally provides
that a specified percentage of the commissions earned by the Company (generally
43% to 47% of the total commission) is paid to the Registered Representative.
The Company maintains agreements with its registered representatives that
contain covenants requiring them to maintain strict confidentiality and to
refrain from certain competition with the Company.
A majority of the Company's full-year tax-preparers are also Registered
Representatives, which enables them to prepare tax returns and provide financial
planning services to their clients. They are compensated by the Company on a
commission basis, based on the number of returns prepared, but not to fall below
minimum wage. In addition, they are compensated based on the overall commissions
paid to the Company on financial products they sell to their clients.
Relationship with Authorized Agents of Insurance Underwriters. Certain
of the Company's full-time employees and financial planners are authorized
agents of insurance underwriters. If clients of the Company inquire about
insurance products, they are directed to one of these authorized agents. These
agents are able, through several insurance underwriters, to sell insurance
products to clients and are paid a certain percentage of the commissions earned
on such sales. The Company is an authorized insurance agent under both New York
and Florida law. The Company's 50% owned equity company, GTAX/CB Brokerage is
an authorized agent under New York State law.
Each of the insurance agents (except the Company's officers) has
entered into a commission sharing agreement with the Company. Each such
agreement generally provides that a specified percentage of the commissions
earned by the Company are paid to the Agent. In the commission sharing
agreements, the agents also agree to maintain certain Company information as
confidential and not to compete with the Company.
Broker/Dealer Subsidiaries
Prime and North Ridge are each a wholly owned subsidiary of the
Company. Each conducts a securities brokerage business providing regulatory
oversight and products/sales support to its brokers, who provide investment
products and services to their clients.
The B/D Subsidiaries have been able to recruit and retain experienced
and productive brokers who seek to establish and maintain personal relationships
with high net worth individuals. The B/D Subsidiaries generally do not hire
inexperienced brokers or trainees to work as retail brokers. The Company
believes that its performance-based equity incentive compensation has been a key
component in its ability to recruit new brokers. The Company believes that
continuing to add experienced, highly productive brokers is an integral part of
its growth strategy.
The B/D Subsidiaries business and the securities industry in general
are subject to extensive regulation in the United States at both the federal and
state levels, as well as by self-regulatory organizations ("SROs").
In the United States, the SEC is the federal agency primarily
responsible for the regulation of broker-dealers and investment advisers doing
business in the United States, and the Board of Governors of the Federal Reserve
System promulgates regulations applicable to securities credit transactions
involving broker-dealers and certain other United States institutions. Each of
the B/D Subsidiaries is registered as a broker-dealer with the SEC. Certain
aspects of broker-dealer regulation have been delegated to securities-industry
SROs, principally the NASD and also the New York Stock Exchange ("NYSE"). These
SROs adopt rules (subject to SEC approval) that govern the industry, and, along
with the SEC, conduct periodic examinations of the B/D Subsidiaries' operations.
Securities firms are also subject to regulation by state securities
administrators in those states in which they conduct business.
Broker-dealers are subject to regulations covering all aspects of the
securities industry, including sales practices, trade practices among
broker-dealers, capital requirements, the use and safekeeping of clients funds
and securities, record-keeping and reporting requirements, supervisory and
organizational procedures intended to ensure compliance with securities laws and
to prevent unlawful trading on material nonpublic information, employee-related
matters, including qualification and licensing of supervisory and sales
personnel, limitations on extensions of credit in securities transactions,
clearance and settlement procedures, requirements for the registration,
underwriting, sale and distribution of securities and rules of the SROs designed
to promote high standards of commercial honor and just and equitable principles
of trade. A particular focus of the applicable regulations concerns the
relationship between broker-dealers and their clients. As a result, many aspects
of the relationship between broker-dealers and clients are subject to
regulation, including, in some instances, requirements that brokers make
"suitability" determinations as to certain customer transactions, limitations on
the amounts that may be charged to clients, timing of proprietary trading in
relation to client's trades, and disclosures to clients.
Additional legislation, changes in rules promulgated by the SEC, state
regulatory authorities or SROs, or changes in the interpretation or enforcement
of existing laws and rules may directly affect the mode of operation and
profitability of broker-dealers. The SEC, SROs and state securities commissions
may conduct administrative proceedings, which can result in censure, fines, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulating
and disciplining broker-dealers is the protection of customers and the
securities markets, rather than the protection of creditors and shareholders of
broker-dealers.
As registered broker-dealers, the B/D Subsidiaries are required to
establish and maintain a system to supervise the activities of their retail
brokers, including their independent contractor offices, and other securities
professionals. The supervisory system must be reasonably designed to achieve
compliance with applicable securities laws and regulations, as well as SRO
rules. The SROs have established minimum requirements for such supervisory
systems; however, each broker-dealer must establish procedures that are
appropriate for the nature of its business operations. Failure to establish and
maintain an adequate supervisory system may result in sanctions imposed by the
SEC or a SRO that could limit the B/D Subsidiaries abilities to conduct their
securities business. Moreover, under federal law, and certain state securities
laws, the B/D Subsidiaries may be held liable for damages resulting from the
unauthorized conduct of their account executives to the extent that the B/D
Subsidiaries have failed to establish and maintain an appropriate supervisory
system.
Prime. Approximately 90% of the securities transactions effected by
Prime's Registered Representatives involve mutual funds, variable annuities,
managed money products and variable life insurance. The balance of the firms
business includes stocks, bonds, and other securities. Typically, these
transactions are unsolicited and executed at discounted commission rates.
Individual stock and bond transactions are processed through National Financial
Services, Corp., a wholly owned subsidiary of Fidelity Investments, where all
accounts are insured for up to $100 million.
Prime receives commissions generated by financial planners who are
Registered Representatives of Prime. As of June 30, 2000, Prime had
approximately 569 Registered Representatives, 259 of which are G+C employees,
and the remaining 310 are independent (for an explanation of the role of
licensed Representatives, see "-Relationship with Registered Representatives of
Broker/Dealer " above).
Prime is registered as a securities broker/dealer under the Securities
Exchange Act of 1934, as amended, and has been a member of the National
Association of Securities Dealers, Inc. ("NASD") since 1986. In addition, Prime
has effected all filings under state law to register as a broker/dealer in every
state.
North Ridge. Approximately 90% of the securities transactions effected
by North Ridge's Registered Representatives involve mutual funds, variable
annuities, managed money products and variable life insurance. The balance of
the firms business includes stocks, bonds, and other securities. Typically,
these transactions are unsolicited and executed at discounted commission rates.
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 receives commissions generated by financial planners. As of
June 30, 2000 North Ridge had approximately 82 Registered Representatives, 12 of
which are G+C employees and the remaining 70 are independent (for an explanation
of the role of licensed Representatives, see "-Relationship with Registered
Representatives of Broker/Dealer" above).
North Ridge is registered as a securities broker/dealer under the
Securities Exchange Act of 1934, as amended, and has been a member of the
National Association of Securities Dealers, Inc. ("NASD") since July 1990. In
addition, North Ridge has effected all of the required filings under state law
to register as a broker/dealer in the states in which it is required to
register.
Insurance Brokerage Joint Venture
GTAX/CB is a joint venture of the Company and Fiengold & Scott, Inc., a
company engaged in the wholesaling of insurance and annuity products in every
state. The Company is the owner of 50% of the stock of GTAX/CB; Fiengold &
Scott, Inc. owns the remaining 50%. GTAX/CB was formed to become a licensed
insurance agent in all states in which the Company markets insurance and annuity
products.
GTAX/CB acts as the Company's licensed entity for the sale of life
insurance and long-term health care insurance in all the states in which GTAX/CB
is licensed and for the sale of fixed annuity products in the state of New York.
The Company and Feingold & Scott, Inc jointly manage GTAX/CB. The Company and
its licensed insurance agents receive commissions on the sale of such insurance
products comparable to commission that the Company would receive on sales that
the Company could place through third-party insurance brokers. In addition, the
Company as 50% owner of GTAX/CB will receive 50% of the dividends paid by
GTAX/CB from its net revenues. Such dividends represent additional income to the
Company that it would not receive if it utilized third-party insurance brokers.
GTAX/CB's business and the insurance industry in general are subject to
extensive regulation at the state level in the United States. Insurance agents
are subject to regulations covering all aspects of the insurance industry,
including sales practices, record-keeping requirements, qualification and
licensing.
Marketing
The Company markets its services principally through direct mail,
promotions, and seminars. The majority of clients in each office return to the
Company for tax preparation services during the following year.
Direct Mail. Each year prior to and during the "tax season" when
individuals file federal, state and local income tax returns, the Company sends
direct mail advertisements to each residence in the area surrounding the
Company's offices. The direct mail advertising solicits business principally for
the Company's tax preparation services. A large majority of the Company's new
clients each year are first introduced to the Company through its direct mail
advertising.
Promotions. The Company offers a $50 U.S. Savings Bond to any client
that refers another two clients to the Company. In Fiscal 1999 and Fiscal 2000,
the program resulted in approximately 500 new clients per year.
Seminars. The Company supports its Registered Representatives by
advertising their local financial planning seminar. At these seminars,
prospective new clients can learn about a wide variety of investment products
and tax planning opportunities.
Online. The Company currently has a web site on the Internet at
http://www.e1040.com for income tax and financial planning advice and Company
information, including financial information and the latest news releases. For
the 2000 tax season, the Company advertised e1040.com with various media
outlets, direct mail campaigns, and with paid links, banner advertisements and
small buttons in the following web sites: www.irs.com; www.sidewalk.com;
www.lycos.com; www.yahoo.com; www.snap.com; www.infoseek.com; www.excite.com;
www.goto.com; www.irs.gov; www.about.com; www.altavista.com; www.usatoday.com;
www.cbsmarketwatch.com; www.planetdirect.com; and www.freeinternet.com.
Other Marketing. The Company also prints and distributes brochures,
flyers and newsletters about its services.
The Company believes that its most promising market for in-office tax
preparation expansion may lie in areas of high/above average population growth.
Individuals usually retain a local tax preparer in connection with their
individual tax returns. When people move, therefore, they usually seek to find a
new income tax preparer. At or shortly after the time that they move, therefore,
individuals are most susceptible to the direct mail advertising of the Company's
tax preparation services.
Acquisitions
The Company has developed a dedicated acquisition function, which
targets tax, financial planning and/or broker/dealer businesses that
strategically expand the Company's distribution capacity to sell financial
products. The Company generally acquires small practices, which have client
lists of 500 to 1,500 per practice. The Company only targets practices where the
principal(s) have a long-standing client base and where these principal(s) plan
to become active employees of the Company, and Registered Representatives to
sell financial products. In addition, the principal(s) of these practices must
be willing to sign a multiple year employment contract. The Company structures
the terms of the acquisition to minimize the up-front purchase price, by
establishing post-closing performance targets that must be met before additional
purchase price consideration is paid. In Fiscal 2000, the Company acquired 17
tax practices and 6 financial planning practices with total annual revenues on
the date of acquisition in excess of $6,000,000.
Recruiting
In Fiscal 2000, the Company established a centralized recruiting
function dedicated to hiring Registered Representatives to place in existing and
acquired offices. In Fiscal year 2000, the Company hired 55 employee Registered
Representatives, of which two-thirds were hired in the last few months of the
year. These registered representatives had collectively annual gross commission
production of approximately $7 million, prior to acquisition.
Competition
The income tax preparation and financial planning services industry is
highly competitive. The Company's competitors include companies specializing in
income tax preparation as well as companies that provide general financial
services. Many of these competitors, including H&R Block in the tax preparation
field and many well-known brokerage firms in the financial services field have
significantly greater financial and other resources than the Company. The
Company's online tax preparation competitors during the 2000-tax season were
primarily Intuit and HR Block.com. The Company believes that the primary
elements of competition are convenience, location, local economic conditions,
quality of on-site management, quality of service, price, and with respect to
online operations, effective advertising campaigns and ease of service. There is
no assurance that the Company will be able to compete successfully with larger
and more established companies.
In addition, the Company may suffer from competition from departing
employees and financial planners. Although the Company attempts to restrict such
competition contractually, as a practical matter, enforcement of contractual
provisions prohibiting small-scale competition by individuals is difficult. In
addition, the Company depends on the availability of employees willing to work
for a period of approximately three months for relatively low hourly wages, and
minimal benefits. The Company's success in managing the expansion of its
business depends in large part upon its ability to hire, train, and supervise
seasonal personnel. If this labor pool is reduced or if the Company is required
to provide its employees higher wages or more extensive and costly benefits, due
to competitive reasons, the expenses associated with the Company's operations
could be substantially increased without the Company's receiving offsetting
increases in revenues.
Trademarks
The Company has registered its "Gilman + Ciocia" trademark and has
applied for registration of its "e1040.com" and "G+C TaxPlan" trademarks, with
the U.S. Patent and Trademark Office. There is no assurance that the Company
would be able successfully to defend its trademarks if forced to litigate their
enforceability. The Company believes that its trademarks "Gilman + Ciocia" and
"e1040.com" constitute valuable marketing factors. If the Company were to lose
the use of such trademarks, its sales could be adversely affected.
Regulation
The Company, as a preparer of federal income tax returns, is subject to
civil liabilities for violations of the Internal Revenue Code or other
regulations of the IRS. The Internal Revenue Code requires, for example, that
tax preparers comply with certain ministerial requirements with respect to the
preparation and filing of tax returns and rules on the maintenance of taxpayer
records. The Internal Revenue Code also imposes regulations relating to the
truthfulness of the contents of tax returns, the confidentiality of taxpayer
information, and the proper methods of negotiating taxpayer refund checks.
To represent a taxpayer before the IRS after the initial audit, an
individual must meet certain requirements. Only an attorney, a certified public
accountant or a person specifically enrolled to practice before the IRS can
represent a taxpayer in such circumstances. Sixty-five of the full-year
employees and many of the seasonal employees of the Company meet such
requirements. Most of the Company employees are limited to representing a
taxpayer only through the stage of an audit examination at the office of a
District Director, and then only upon complying with applicable regulations.
The IRS prohibits tax preparers from using information on a taxpayer's
tax return for certain purposes involved in the solicitation of other business
from such taxpayer without the consent of such taxpayer. The Company believes
that it complies with all applicable IRS regulations.
The Registered Representatives themselves are strictly regulated in
their activities as Registered Representatives of a broker/dealer under the
Federal Securities Exchange Act of 1934, state regulation, the rules of the NASD
and by the rules and regulations of the broker/dealer.
Prime and North Ridge are registered broker/dealers: Prime is
registered in every state and North Ridge is registered in every state it does
business. Gilman + Ciocia has not registered as a broker/dealer in any state and
does not believe that it is currently required to so register.
Gilman + Ciocia registered with the Securities and Exchange Commission
as an investment advisor in October 1999.
Employees
As of June 30, 2000, the Company employed 628 persons on a full-time
full-year basis, including the Company's four officers. The Company's full-time
employees include 75 professional tax preparers, 271 employee Registered
Representatives, 137 clerical and support staff persons (which include persons
performing clerical work while in training for other positions), 40
administrative personnel (who include the Company's executive officers), 5
employees who are part of e1040.com and 100 individuals who are employed by the
Company's Broker/Dealer subsidiaries. During peak season the Company employs
approximately 900 full-time employees, of which approximately 300 of these
employees are seasonal and do only tax preparation. Approximately 75% of the
Company's seasonal employees return the following year, and the Company uses
advertisements in the local newspapers to meet the balance of its recruiting
needs. The minimum requirements for a tax preparer at the Company are generally
a college degree or its equivalent, two years of tax preparation experience and
a passing grade on an examination given by the Company.
The Company also is affiliated with approximately 380 independent
Registered Representatives, in addition to the G + C employee Registered
Representatives, who have entered into commission sharing agreements with one of
the Company's B/D subsidiaries.
Risk Factors
This Form 10-K contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Form 10-K, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below.
If the Broker/Dealers and Financial Planners that the Company acquires
or recruits do not perform successfully the Company's growth rate and earnings
may decrease. The Company plans to continue to expand into the area of financial
planning, both through the acquisition of independent securities broker/dealers
and by recruiting financial planners. The Company's continued revenue growth
will in large part depend upon successful integration and continued
profitability of the broker/dealers acquired. The Company's growth will also
depend on the successful operation of independent financial planners who are
recruited to join the Company. The financial planning segment of the Company's
business has generated an increasing portion of the Company's revenues during
the past few years, and if such segment does not continue to be successful, the
Company's rate of growth may decrease.
If the Tax Preparation Practices that the Company acquires do not
perform successfully the Company's growth and earnings may decrease. As part of
its strategy, the Company intends to pursue the acquisition of tax preparation
practices. The success of the Company will in part depend upon the successful
operation of the practices acquired and the integration of the acquired
businesses into the Company. A rapid acquisition of offices that do not remain
profitable would reduce the Company's net income and could depress future
operating results. If the acquired companies do not perform as expected or the
Company can not effectively integrate the operations of the acquired companies,
the Company's operating results could be materially, adversely affected.
If the Company opens a number of new offices that do not perform
successfully the Company's growth and earnings may decrease. In order to open
new offices, the Company incurs significant expenses to purchase furniture,
equipment and supplies. The Company has found that a new office usually suffers
a loss in its first year of operation, shows no material profit or loss in its
second year of operation and does not attain profitability, if ever, until its
third year of operation. Therefore, the Company's operating results could be
materially adversely affected in any year that the Company opens a significant
number of new offices. However, the Company's current strategy does not
contemplate opening many new offices. Instead the Company expects to grow its
network of offices through acquiring tax preparation and financial planning
practices which are accretive to earnings in the first year after the
acquisition.
If the growth in the financial markets slows or reverses the Company's
financial planning segment will suffer decreased revenues. 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.
If the Company is unable to secure adequate working capital financing
during the "off-season" the Company's operating results may be materially
affected. The tax season occurs predominantly during the third Fiscal quarter,
and, therefore, that quarter is generally the Company's most profitable. The
Company has historically experienced significantly reduced earnings during the
remainder of the year. From July 1st to December 31st each year, the Company
generally requires significant working capital financing to fund operations
until cash flows from the upcoming tax season materialize. If the Company was
not able to secure such financing or if such financing was not available on
terms favorable to the Company, the Company's operating results could be
materially adversely affected, and the Company would have to curtail its
operations.
If competitors in the industry began to encroach upon the Company's
market share the Company's revenues may decrease. The income tax preparation and
financial planning services industries are highly competitive. The Company's
competitors include companies specializing in income tax preparation as well as
companies that provide general financial services. The Company's principal
competitor is H+R Block, Inc. in the tax preparation field and many well-known
national brokerage and insurance firms in the financial services field. Many of
these competitors have larger market shares and significantly greater financial
and other resources than the Company. The Company may not be able to compete
successfully with such competitors. Competition could cause the Company to lose
existing clients, slow the growth rate of new clients and increase advertising
expenditures, all of which could have a material adverse effect on the Company's
business or operating results.
If a large number of the Company's departing employees and financial
planners were to enter into competition with the Company, the Company may suffer
a decline in revenues. Departing employees and financial planners may compete
with the Company. Although the Company attempts to restrict such competition
contractually, as a practical matter, enforcement of contractual provisions
prohibiting small-scale competition by individuals is difficult. In the past,
departing employees and financial planners have competed with the Company. They
have the advantage of knowing the Company's methods and, in some cases, having
access to the Company's clients. No assurance can be given that the Company will
be able to retain its most important employees and financial planners or that
the Company will be able to prevent competition from them or successfully
compete against them. If a substantial amount of such competition occurs, the
corresponding reduction of revenue may materially adversely affect the Company's
operating results.
If any of the Company's key personnel were to leave its employ, the
Company may suffer a decline in revenues and profitability. The Company believes
that its ability to successfully implement its business strategy and operate
profitably depends on the continued employment of James Ciocia, its President
and Chief Executive Officer, Thomas Povinelli, its Chief Operating Officer,
David D. Puyear, its Chief Financial Officer, Kathryn Travis, its Secretary,
Michael Ryan, the President of its Prime subsidiary, and Daniel Levy, the
President of its North Ridge subsidiary. If any of these individuals become
unable or unwilling to continue in his or her present position, the Company's
business and financial results could be materially adversely affected.
If the IRS were to impose a material fine under the Internal Revenue
Code the Company may suffer a decline in operating results. The Company's
business of preparing tax returns subjects it to potential civil liabilities for
violations of the Internal Revenue Code or other regulations of the IRS.
Penalties could range from $25 to $25,000 per violation. The Company has never
been assessed with material civil penalties or fines. However, if a Company
violation resulted in a material fine or penalty, the Company's operating
results could be materially adversely affected. In addition, the Company does
not maintain any professional liability or malpractice insurance policies. The
Company has never been the subject of a malpractice claim. However, the
significant uninsured liability and legal and other costs relating to such
claims could materially adversely affect the Company's business and operating
results.
In addition, making fraudulent statements on a tax return, willfully
delivering fraudulent documents to the IRS and unauthorized disclosure of
taxpayer information can constitute criminal offenses. Criminal penalties for
such offenses range from $1,000 and/or one year of imprisonment to $500,000
and/or three years of imprisonment per violation. The Company has never been
charged with a criminal offense. If the Company were to be charged with a
criminal offense and found guilty or if any of its employees or executives were
convicted of a criminal offense, in addition to the costs of defense and
possible fines, the Company would likely experience an adverse affect to its
reputation, which could directly lead to a decrease in revenues from the loss of
clients.
The Company's inability to hire a large number of CPA's could affect
the Company's ability to provide adequate tax-preparation services to the
marketplace. The Company utilizes a significant number of seasonal employees who
are not certified public accountants or tax attorneys to provide tax preparation
services. The Company employs fewer than 10 full-time certified public
accountants, two of which do not work as tax preparers. Under state law, the
Company is not allowed to provide legal tax advice, and the Company does not
employ nor does it retain any tax attorneys on a full-time basis. Because most
of the Company's employees who prepare tax returns are not certified public
accountants, tax attorneys or otherwise enrolled to practice before the IRS,
such employees of the Company are strictly limited as to the roles they may take
in assisting a client in an audit with the IRS. These limitations on services
that the Company may provide could hinder the Company's ability to market its
services.
Furthermore, the small percentage of certified public accountants or
tax attorneys available to provide assistance and guidance to the Company's tax
preparers may increase the risk of the improper preparation of tax returns by
the Company. The improper preparation of tax returns could result in significant
defense expenses and civil liability.
If the Company were to lose its Trademark or other proprietary rights,
the Company could suffer decreased revenues. The Company believes that its
trademarks and other proprietary rights are important to its success and its
competitive position. The Company has registered its "Gilman + Ciocia" trademark
and has applied for registration of its "e1040.com" trademark with the U.S.
Patent and Trademark Office and devotes substantial resources to the
establishment and protection of its trademarks and proprietary rights. However,
the actions taken by the Company to establish and protect its trademarks and
other proprietary rights may be inadequate to prevent imitation of its services
and products by others or to prevent others from claiming violations of their
trademarks and proprietary rights by the Company. In addition, others may assert
rights in the Company's trademarks and other proprietary rights. If the Company
were to lose the exclusive right to its trademarks, its revenues and
profitability could decrease.
If the decisions of the Company's current management were to conflict
with the interest of the Company's stockholders, the Company could suffer a
decline in profitability. The Company's Chief Executive Officer, Chief Operating
Officer, Secretary and President of Prime own approximately 35% of the
outstanding Company common stock, par value $.01 per share (the "Common Stock").
Accordingly, in practical effect these officers control the Company and have the
power to elect a majority of the directors, appoint management and approve
certain actions requiring the approval of a majority of the Company's
stockholders. The interests of these officers could conflict with the interests
of the other stockholders of the Company. In addition, their ownership could
pose an obstacle to a purchase of the Company that might be desirable to other
stockholders and/or to a change in management if the Company is not operating
profitably in the future.
The Company's decision not to pay dividends could negatively impact the
marketability of the Company's stock. Since its initial public offering of
securities in 1994, the Company has not paid dividends, and it does not plan to
pay dividends in the foreseeable future. The Company currently intends to retain
any earnings to finance the growth of the Company. It is very likely that
dividends will not be distributed in the near future, which may reduce the
marketability of the Company's Common Stock.
The Company may be unable to increase the revenues of e1040.com to make
it profitable if e1040.com is unable to achieve wide market recognition of its
website, to establish a high client retention rate and to continuously enhance
its services to meet technology changes; or if changes to government regulations
impair the profitability of internet commerce. The Company has increased its
operating expenses in order to expand the e1040.com business, but was not able
to generate sufficient revenue to achieve profitability in the 2000 fiscal year
and may be unable to produce profits in the future. Wide name recognition and
acceptance may be necessary to direct users to e1040.com and the Company may not
have the resources to achieve such recognition. In addition, the Company can not
predict how many of its e1040.com clients will return next year. Low client
retention may make revenue growth too expensive for the Company to support. The
Company also does not know how future government regulation may affect the
profitability of its internet business. New taxes or other regulations may
impair the development of this portion of the Company's business. Moreover,
internet technology and consequently web site standards are improving rapidly so
that if the Company is unable to efficiently incorporate technological advances
in e1040.com, its internet revenues may not grow and may decrease. If the
Company is not able to turn its e1040.com subsidiary to profitability, it will
continue to be a drain on the Company's financial resources.
If a third party wanted to acquire control of the Company it could be
prevented by the Company's classified board and its ability to issue preferred
stock without shareholder approval and the marketability of the Company's stock
could be affected. Certain provisions of the Certificate of Incorporation could
make it more difficult for a third party to acquire control of the Company, even
if such change in control would be beneficial to stockholders. The Certificate
of Incorporation allows the Company to issue preferred stock without stockholder
approval. Such issuances could make it more difficult for a third party to
acquire the Company. The Certificate of Incorporation also provides for a
classified board of directors, which would prevent a third party acquiring a
majority of the Common Stock from immediately electing a new board of directors.
Low trading volume of the Company's stock increases volatility, which
could result in the impairment of the Company's ability to obtain equity
financing. Since December 1997, the market price of the Common Stock has almost
quadrupled and fallen to below its December 1997 range. During that period, the
average daily trading volume of the Common Stock has varied significantly. In
addition, prior to August 28, 1998, the Common Stock traded on the Nasdaq
SmallCap Market. As a result, historical market prices may not be indicative of
market prices in the future. There is no assurance that an active trading market
for the Common Stock will be sustained in the future. In addition, the stock
market has recently experienced extreme stock price and volume fluctuation.
These fluctuations have often been unrelated to the operating performance of
particular companies. The Company's market price may be impacted by changes in
earnings estimates by analysts, economic and other external factors and the
seasonality of the Company's business. Fluctuations or decreases in the trading
price of the Common Stock may adversely affect the stockholders' ability to buy
and sell the Common Stock and the Company's ability to raise money in a future
offering of Common Stock. See "Market for Common Equity and Related Stockholder
Matters".
If restrictions that are in place on the future sale of the Common
Stock of the Company were released the market price of the stock may decline.
Various restrictions on the possible future sale of Common Stock may have an
adverse affect on the market price of the Common Stock. Approximately 3,500,000
shares of Common Stock outstanding are "restricted securities" under Rule 144 of
the Securities Act of 1933, as amended (the "Act"). In general, under Rule 144,
a person who has satisfied a one-year holding period may, under certain
circumstances, sell, within any three-month period, a number of shares of
"restricted securities" that do not exceed the greater of one percent of the
then outstanding shares of Common Stock or the average weekly trading volume of
such shares during the four calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of shares of Common Stock by a
person who is not an "affiliate" of the Company (as defined in Rule 144) and who
has satisfied a one-year holding period, without any volume or other limitation.
The Company has granted 3,493,872 options to purchase shares of Common
Stock to 285 individuals. The shares issuable upon exercise of such options
would be eligible for resale under Rule 144 after one year following the
exercise of such options or earlier if the underlying Common Stock were
registered by the Company. Certain shares are registered in the Company's
registration statements on Form S-8 filed on October 28, 1996 and April 13,
1998.
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.
If directors of the Company make mistakes or poor business judgment the
profitability of the Company could be adversely affected. With limited
exceptions, under Delaware law directors of the Company are not liable
individually to the Company or to its stockholders for corporate decisions.
Specifically, Directors of the Company are not liable to the Company or its
stockholders for monetary damages for mistakes or poor business judgment unless
such actions were a breach of the duty of loyalty, acts or omissions not in good
faith or which involved intentional misconduct or a knowing violation of law,
for dividend payments or stock repurchases illegal under Delaware law, or in any
transaction in which a director derived an improper personal benefit. Therefore,
the Directors have broad discretion over actions made on behalf of the Company.
If a material risk inherent to the securities industry were to be
realized the value of the Company's stock may decline. 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 clients or
reduction in commission income. These trends or future changes could have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows.
If new regulations are imposed on the securities industry the operating
results of the Company may be adversely affected. The SEC, the NYSE and various
other regulatory agencies have stringent rules with respect to the protection of
customers and maintenance of specified levels of net capital by broker-dealers.
The regulatory environment in which the Company operates is subject to change.
The Company may be adversely affected as a result of new or revised legislation
or regulations imposed by the SEC, other U.S. governmental regulators or Self
Regulating Organizations ("SROs"). The Company also may be adversely affected by
changes in the interpretation or enforcement of existing laws and rules by the
SEC, other federal and state governmental authorities and SROs.
The B/D Subsidiaries are subject to periodic examination by the SEC,
SROs and various state authorities. The B/D Subsidiaries' sales practice
operations, record-keeping, supervisory procedures and financial position may be
reviewed during such examinations to determine if they comply with the rules and
regulations designed to protect customers and protect the solvency of
broker-dealers. Examinations may result in the issuance of letters to the B/D
Subsidiaries noting perceived deficiencies and requesting the B/D Subsidiaries
to take corrective action. Deficiencies could lead to further investigation and
the possible institution of administrative proceedings, which may result in the
issuance of an order imposing sanctions upon the B/D Subsidiaries and/or their
personnel.
The Company's business may be materially affected not only by
regulations applicable to it as a financial market intermediary, but also by
regulations of general application. For example, the volume and profitability of
the Company's or its clients' 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.
If the Company were to be found liable to clients for misconduct
alleged in several civil proceedings the Company's profitability may decline and
its financial condition may be adversely affected. Many aspects of the Company's
business involve substantial risks of liability. There has been an increase in
litigation and arbitration within the securities industry in recent years,
including class action suits seeking substantial damages. Broker-dealers such as
the B/D Subsidiaries are subject to claims by dissatisfied clients, including
claims alleging they were damaged by improper sales practices such as
unauthorized trading, churning, sale of unsuitable securities, use of false or
misleading statements in the sale of securities, mismanagement and breach of
fiduciary duty. The B/D Subsidiaries may be liable for the unauthorized acts of
their retail brokers and independent contractors if they fail to adequately
supervise their conduct. The B/D Subsidiaries are currently
defendants/respondents in several such proceedings. If all such proceedings were
to be resolved unfavorably to the Company, the Company's financial condition
could be adversely affected. From time to time, in connection with hiring retail
brokers, the Company is subject to litigation by a broker's former employer. The
adverse resolution of any legal proceedings involving the Company could have a
material adverse effect on its business, financial condition, and results of
operations or cash flows.
Item 2. DESCRIPTION OF PROPERTY
The Company provides services to its clients at 145 local offices in
seventeen states: forty-six in New York, sixteen in New Jersey, ten in Arizona,
twenty six in Florida, five in Ohio, seven in Maryland, six in Connecticut,
seven in Washington, six in Massachusetts, five in Nevada, three in Illinois,
two in Texas, one in Pennsylvania, one in Virginia, one in Colorado, two in
Michigan and one in Kentucky. A majority of the offices are leased in commercial
office buildings. Most of the Company's offices are leased pursuant to standard
form office leases, although five offices are leased on an oral month-to-month
basis. The leases range in terms remaining from one to seven years. The
Company's rental expense during Fiscal 2000 was $3,613,146. The Company believes
that any of its offices could be replaced with comparable office space, however
location and convenience is an important factor in marketing the Company's
services to its clients. Since the Company advertises in the geographic area
surrounding the office location, the loss of such an office that is not replaced
with a nearby office could adversely affect the Company's business at that
office. The Company generally needs between 1,000 - 2,000 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.
In Fiscal 2000, the Company entered into a ten-year lease for corporate
office space. The lease commenced on December 15, 1999 and calls for annual
minimum rental payments of approximately $265,000 per fiscal year.
The Company also owns two buildings housing two of its offices, one in
Babylon, New York and the other in Palmer, Massachusetts.
Item 3. LEGAL PROCEEDINGS
On August 21, 1998, Mercedes-Benz Credit Corporation, Allianz Insurance
Company, and Allianz Underwriters, Inc. filed a complaint against the Company in
New York Supreme Court, Nassau County. The complaint seeks indemnification in
the amount of up to approximately $3.5 million from Gilman + Ciocia, Inc. The
allegations in the complaint are based upon a $1.7 million payment made by the
complainants in a settlement reached on October 3, 1996 with the estate of
Thomas Gilman in a wrongful death action, plus an additional approximately $1.8
million payment made to the estate in the settlement for which complainants
ultimately may be held liable (for payments made by another insurance company).
On January 29, 1999, the complainants filed a motion for summary judgment and on
February 19, 1999, Gilman + Ciocia, Inc. filed a cross-motion for summary
judgment. The court has not yet made a ruling on either of the motions. However,
in October 2000, in an action in New York Supreme Court Nassau County to
determine the liability allocation between the two insurance company's that
settled with the estate, the other insurance company was ordered to pay the
complainant's $857,000. This payment should reduce the complainant's total
indemnification claim against the Company to an amount less than $900,000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held an annual meeting of shareholders on May 5, 2000. At
the meeting Seth Akabas and Michael Ryan were reelected to the board of
directors of the Company. A proposal to amend the Company's Certificate of
Incorporation in order to change the Company's name from "Gilman + Ciocia, Inc."
to "G+C, Inc." was approved by a vote of 5,210,091 for and 135,983 against with
22,740 abstaining. A proposal to approve the Company's 2000 Employee Stock
Purchase Plan was approved by a vote of 2,436,317 for and 369,765 against, with
39,450 abstaining. A proposal to ratify the reappointment of Arthur Andersen LLP
as the Company's auditors was approved by a vote of 5,323,524 for and 24,030
against, with 21,260 abstaining. The voting for the election of directors was as
follows:
Director For Withholding
- -------- --- -----------
Michael Ryan 5,280,486 500
Seth Akabas 5,280,886 100
As a result of the election the current members of the board of
directors are James Ciocia, Thomas Povinelli, Katherine Travis, Louis Karol,
Michael Ryan and Seth Akabas.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market on which the Company's Common Stock trades is The
Nasdaq National Stock Market under the symbol "GTAX." Prior to August 28, 1998,
the principal market on which the Company's Common Stock traded was The Nasdaq
SmallCap Stock Market. Prior to December 1994, no public market existed for the
Company's securities.
The following table sets forth the high and low sales prices for the
Common Stock during the period indicated:
Sales Prices
Quarter Ended High Low
September 30, 1997 $ 5 1/8 $ 4 1/8
December 31, 1997 $ 8 3/8 $ 4 3/8
March 31, 1998 $ 14 7/8 $ 7
June 30, 1998 $ 26 3/8 $ 13 3/4
September 30, 1998 $ 18 1/4 $ 7 1/2
December 31, 1998 $ 10 1/8 $ 5 1/4
March 31, 1999 $ 19 1/8 $ 9 1/2
June 30, 1999 $ 15 7/16 $ 7 3/4
September 30, 1999 $ 12 3/4 $ 10 1/4
December 31, 1999 $ 11 28/64 $ 7 3/4
March 31, 2000 $ 9 3/4 $ 5 3/4
June 30, 2000 $ 6 7/8 $ 4 33/64
The Company has no basis for knowing the cause of the volatility of
its stock or how long it will continue, and no assurance can be given that the
Company's performance during recent periods is predictive of its future
performance.
Since its initial public offering of securities in 1994, the Company
has not paid dividends, and it does not plan to pay dividends in the foreseeable
future. The Company currently intends to retain any earnings to finance the
growth of the Company.
As of September 29, 2000 there were approximately 241 registered
holders of Common Stock. On September 29, 2000 the closing price of the Common
Stock was $4.06 per share.
Item 6. SELECTED FINANCIAL DATA
For the Years Ended June 30,
2000 1999 1998 1997 1996
----------- ------------ ------------- ------------ ------------
Total Revenues $89,578,494 $50,443,406 $28,533,083 $24,574,571 $20,990,482
Net Income (Loss) (4,013,092) 2,181,143 2,011,345 875,994 534,726
Net Income (Loss)
Per Share
Basic (0.53) 0.35 0.37 0.16 0.10
Diluted (0.53) 0.32 0.32 0.16 0.10
As of June 30,
2000 1999 1998 1997 1996
------------ ------------- ------------ ------------ ----------
Working Capital $(1,611,436) $ 5,249,516 $ 4,950,652 $ 3,450,102 $2,335,332
(Deficit)
Total Assets 43,905,178 32,998,980 9,751,187 9,025,576 7,866,501
Total Liabilities 846,476 2,738,124 - 552,000 2,267
- -Long Term
Total Liabilities 19,192,337 8,039,039 733,600 2,006,587 1,367,560
Total Shareholders' 24,712,841 24,959,941 9,017,587 7,018,989 6,498,941
Equity
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Company's financial statements and related notes thereto set forth in Item 7 of
this Annual Report. Except for the historical information contained herein, this
and other sections of this Annual Report contain certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
Annual Report, the words "anticipate," "believe," "estimate," "expect", and
similar expressions, as they relate to the Company or its management, are
intended to identify such forward-looking statements. The Company's actual
results, performance, or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors that
could contribute to such differences are discussed in this Annual Report under
the headings "Description of Business -- Risk Factors."
Overview
Gilman + Ciocia, Inc. is a preparer of federal, state and local
income tax returns for individuals predominantly in middle and upper income
brackets. In addition, while preparing tax returns, clients often consider other
aspects of their financial needs, such as insurance, investments, pension and
estate planning. The Company capitalizes on this situation by making available
financial planning services. The financial planners who provide such service are
employees or independent contractors of the Company and are registered
representatives of the Company's broker/dealer subsidiaries. The Company or its
broker/dealer subsidiaries earn a share of commissions (depending on what
service is provided) from the services that the financial planners provide to
the clients in transactions for securities, insurance and related products.
Almost all of the financial planners are also authorized agents of
insurance underwriters, and approximately 2% of the financial planners are
authorized to act as mortgage brokers. As a result, the Company also earns
revenues from commissions for acting as an insurance agent and a mortgage
broker. In addition, the Company owns a 50% equity interest in GTAX/CB, an
insurance broker.
During Fiscal 2000, approximately 19% of the Company's revenues were
earned from tax preparation services, 80% were earned from all financial
planning and related services (with 32% from securities transactions and 67%
from insurance, mutual funds, mortgage brokerage and other related services),
and 1% were earned from e1040.com and other services.
The Company's financial planning clients generally are introduced to
the Company through the Company's tax preparation services. The Company believes
that its tax return preparation business is inextricably intertwined with, and a
necessary adjunct to, its financial planning activities, that neither segment
would operate profitably by itself and that the two segments can be viewed
meaningfully only as a whole.
Plan of Operation
Tax Preparation and Financial Planning
The Company opens new tax offices and acquires existing tax preparation
and financial planning businesses. New offices have historically attracted more
potential tax preparation clients, which have resulted in increased revenues and
have contributed to the Company's growth. In addition, each of the new tax
preparation clients is a potential new financial planning client. The Company
plans to continue to expand and acquire tax preparation and financial planning
practices during the next year (although no specific target has been set),
recruit successful financial planners and acquire existing securities
broker/dealers. The Company anticipates funding this growth through the senior
and subordinate debt financing, possible private placement of equity and
operating cash flow.
The Company anticipates that acquiring new tax preparation and
financial planning businesses will continue to increase its revenues. The
Company has no basis to predict whether its acquisitions will have a material
effect on its net income. However, the Company believes that its current
acquisition model ultimately reduces the potential loss exposure to the Company,
but expansion could reduce the Company's profits or result in losses in future
years. In Fiscal 2000, the Company formalized an acquisition model requiring
each acquired practice to commit to delivering a minimum level of profitability
in the first year of post acquisition operations. These minimum future
performance and profitability targets, established at the closing, limit future
purchase payments unless the targets are met, as well as help to keep the
principals of the acquired practices focused on delivering profitability, which
is accretive to the Company's earnings. In addition to establishing contingent
purchase price performance criteria, the company generally uses its stock as a
significant component of the initial and future purchase price.
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. For this reason the Company has sought
to emphasize acquisitions of existing practices rather than the opening of new
offices in the Company's expansion.
e1040.com
In Fiscal 1999, the Company formed its subsidiary e1040.com, which
acquired all of the assets of an existing on-line tax preparation business. This
subsidiary has grown considerably from preparing 1,525 Federal and State tax
returns in Fiscal 1999 to 34,399 Federal and State tax returns in Fiscal 2000,
contributing $203,180 and $ 1,156,640 in revenues to the Company in Fiscal 1999
and Fiscal 2000, respectively. The Company does not expect to make significant
capital investments or incur extraordinary marketing expenses in future years
related to expanding e1040.com. With an established on-line tax platform already
in place, future marketing initiatives are expected to be in the form of
strategic partnerships and revenue sharing arrangements who are looking for
consumer-oriented content and services like e1040.com has to offer.
Results of Operations
The following table sets forth for the periods indicated certain
items from the Company's statements of income expressed as a percentage of
revenue and the percentage change in such items for Fiscal 1998, Fiscal 1999 and
Fiscal 2000. The trends illustrated in the following table are not necessarily
indicative of future results.
As a Percentage of Revenue Percentage
Year Ended June 30, Increase (Decrease)
2000 1999 1998 2000 to 1999 1999 to 1998
- --------------------------------------------------------------------------------------------------------------------
Tax preparation fees 20.4% 28.0% 42.0% -8% -14%
Financial planning commissions 79.6% 72.0% 58.0% 8% 14%
--------- ---------- -------- ---------- ----------
Total revenue 100.0% 100.0% 100.0% 0% 0%
--------- ---------- -------- ---------- ----------
Salaries and commissions 74.8% 63.0% 51.0% 12% 12%
General and administrative 13.6% 12.0% 17.0% 2% -5%
expense
Advertising 10.2% 8.0% 10.0% 2% -2%
Depreciation and amortization 2.8% 3.0% 3.0% 0% 0%
Other operating expenses 6.1% 7.0% 7.0% -1% 0%
--------- --------- -------- ---------- ----------
Total operating expenses 108.0% 93.0% 88.0% 15% 5%
--------- --------- -------- ---------- ----------
Other income (expense), net 0.7% 0.0% 0.0% 1% 0%
--------- --------- -------- ---------- ----------
Income (loss) before taxes -6.9% 7.0% 12.0% -14% -5%
Provision (benefit)income -2.4% 3.0% 5.0% -5% -2%
taxes --------- --------- -------- ---------- ----------
Net income (loss) -4.5% 4.0% 7.0% -9% -3%
- -------------------------------==========---==========----=========----================---================
- -------------------------------==========---==========----=========----================---================
Fiscal 2000 Compared to Fiscal 1999
The Company's revenues for Fiscal 2000 were $89,578,494 compared to
$50,443,406 for Fiscal 1999, an increase of $39,135,088 or 78%. This increase
was primarily attributed to an increase in Financial Planning services as well
as a full year of revenues in Fiscal 2000 from Prime and North Ridge, which were
acquired in Fiscal 1999.
The Company's total revenues for Fiscal 2000 consisted of $18,311,232,
including $1,153,640 for e1040.com, for tax preparation services and $71,267,262
for financial planning services. Tax preparation services represented 19%,
financial planning services represented 80% and e1040.com consisted of 1% of the
Company's total revenues for Fiscal 2000. The Company's total revenues for
Fiscal 1999 consisted of $14,102,364 for tax preparation services; $36,137,862
for financial planning services; and $203,180 for e1040.com. Tax preparation
services represented 28%, financial planning services represented 72% and
e1040.com represented .4% of the Company's total revenues for Fiscal 1999.
The growth in the tax preparation segment is primarily attributed to
the acquisition of 17 new tax practices during Fiscal 2000. The growth in the
financial planning segment is attributed to the hiring of additional financial
planners, which generated additional commissions, as well as the inclusion in
Fiscal 2000 of a full year of revenues from the Fiscal 1999 acquisitions of
North Ridge and Prime. In Fiscal 2000, the Company hired 55 new employee
Registered Representatives who had $7 million of annual gross revenue commission
production prior to being hired by the Company. Prime and North Ridge
revenue was $31,364,277 more in Fiscal 2000 over 1999. e1040.com
contributed significantly higher revenues in Fiscal 2000 with revenues
increasing from $203,180 in Fiscal 1999 to $1,156,640 in Fiscal 2000. This
increase was attributed to the media campaign used to publicly launch the
website.
The Company's operating expenses for Fiscal 2000 were $96,366,820, or
108% of revenues, an increase of $49,720,265, or 107%, compared to $46,646,555
or 92% of revenues, for Fiscal 1999. The increase in operating expenses was
attributed to an increase of $35,108,963 in salaries and commissions associated
with higher financial planning revenue; $6,199,202 in general and administrative
expenses associated with new and acquired offices; $1,133,079 in rent;
$1,073,620 in depreciation and amortization; $5,282,499 in advertising, a
majority of which is associated with the launch of e1040.com, and $922,902 in
brokerage fees and licenses.
Included in Fiscal 2000 operating expenses were $7,000,000 of one-time
costs primarily attributed to launching e1040.com, which incurred $5,200,000 of
advertising costs along with other one-time related charges. In addition,
various other expense categories increased in Fiscal 2000 associated with the
general increase in central management support required to support the actual
growth experienced in Fiscal 2000, as well as to support the planned future
growth in both Registered Representatives and field offices, which will increase
through future acquisitions.
Salaries and Commissions increased $35,108,963, or 110%, in Fiscal 2000
to $67,024,615 from $31,915,652 in Fiscal 1999. The increase in Salaries and
Commission expense is primarily attributed to an increase in commissions paid to
financial planners as a result of the increased sales of financial planning
services and the addition of financial planners from Prime and North Ridge for
the entire Fiscal 2000.
General and administrative expense increased $6,199,202, or 104%, in
Fiscal 2000 to $12,185,678 from $5,986,476 in Fiscal 1999. The increase in
general and administrative expense is attributed to the opening of seven new
offices in Fiscal 2000 and the inclusion of a full year of the seven new offices
opened in Fiscal 1999 as well as the acquisitions during Fiscal 1999, of Prime
and North Ridge.
Rent expense increased $1,133,079, or 46%, in Fiscal 2000 to
$3,613,146, compared to $2,480,067 in Fiscal 1999. The increase in rent expense
is primarily attributed to the net increase of the Company's offices by nine
during Fiscal 2000 and the full year inclusion of offices opened in Fiscal 1999.
Depreciation and amortization expense increased $1,073,620, or 74%, in
Fiscal 2000 to $2,515,008 compared to $1,441,388 in Fiscal 1999. The increase in
depreciation and amortization is primarily attributed to additional purchases of
computer equipment during Fiscal 2000 and also additional amortization
associated with acquired businesses.
Advertising expense increased $5,282,499, or 136% in Fiscal 2000 to
$9,156,079 compared to $3,873,580 in Fiscal 1999. The increase in advertising is
almost entirely attributed to increased print, media and banner advertisements
associated with the media launch of the e1040.com website. This increase is
associated with a non-recurring advertising campaigns.
Brokerage fees and license expense increased $922,902 or 97% in Fiscal
2000 to $1,872,294 compared to $949,392 in Fiscal 1999. The increase in
brokerage fees and licenses is primarily attributed to the increased in
financial planning business and the addition of financial planners in fiscal
2000.
The increase in other income of $723,942 is primarily attributed to a
$979,489 gain on the sale of marketable securities offset by an increase of
$649,174 in interest expense on debt.
The Company's loss after a benefit for income taxes for Fiscal 2000 was
$4,013,092 compared to income of $2,181,143 for Fiscal 1999. The decrease of
284% is primarily attributed to higher operating expenses incurred from the
non-recurring expense of launching e1040.com along with certain other
non-recurring expenses which contributed $7,000,000 of pre-tax non-recurring
expenses. Also adding to the decrease was the reduction to the Company's
effective tax rate to 35% in Fiscal 2000 from 41% in Fiscal 1999, which has a
negative effect to the Company's benefit for income tax provision computation.
The Company's business is still somewhat seasonal, with a significant
component of its revenue earned during the tax season. The effect of inflation
has not been significant to the Company's business in recent years.
Fiscal 1999 Compared to Fiscal 1998
The Company's revenues for Fiscal 1999 were $50,443,406 compared to
$28,533,083 for Fiscal 1998, an increase of $21,910,323 or 77%. This increase
was attributed to an increase in Financial Planning services as well as the
acquisitions of Prime and North Ridge B/D Subsidiaries.
The Company's total revenues for Fiscal 1999 consisted of $14,102,364
for tax preparation services, $36,137,862 for financial planning services and
$203,180 for e1040.com. Tax preparation services represented 28%, financial
planning services represented 72% and e1040.com consisted of .4% of the
Company's total revenues for Fiscal 1999. The Company's total revenues for
Fiscal 1998 consisted of $11,955,051 for tax preparation services; $16,578,032
for financial planning services; and $0 for e1040.com. Tax preparation services
represented 42%, financial planning services represented 58%.
The growth in the tax preparation segment is primarily attributed to
the acquisition of seven new tax practices during fiscal 1999 and additional tax
revenues generated from the remaining one hundred twenty-eight offices. The
growth in the financial planning segment is attributable to the hiring of
additional financial planners who generated additional commissions from
securities transaction activities. The remaining growth in financial planning
revenues is a result of additional financial planning revenues generated from
the North Ridge, Prime and related acquisitions.
The Company's operating expenses for Fiscal 1999 totaled $46,646,555 or
92% of revenues, an increase of $21,516,142 or 86% compared to $25,130,413 or
88% of revenues for Fiscal 1998. The increase in operating expenses was
attributed to an increase of $17,378,147 in salaries and commissions; $1,021,943
in general and administrative expenses; $442,950 in rent; $582,997 in
depreciation and amortization; $1,140,713 in advertising.
Salaries and commissions increased $17,378,147 or 120% in Fiscal 1999
to $31,915,652 compared to $14,537,505 in Fiscal 1998. The increase in salaries
and commission expense is primarily attributed to an increase in commissions
payable to financial planners as a result of the increased sales of financial
planning services and the addition of financial planners from North Ridge and
Prime.
General and administrative expense increased $1,021,943 or 21% in
Fiscal 1999 to $5,986,476 compared to $4,964,533 in Fiscal 1998. The increase in
general and administrative expense is primarily attributed to the opening of
seven new offices in Fiscal 1999 relating to an increase in office expenses at
the new offices. The additional increase in general and administrative expense
is attributable to North Ridge and Prime.
Rent expense increased $442,950 or 22% in Fiscal 1999 to $2,480,067,
compared to $2,037,117 in Fiscal 1998. The increase in rent expense is primarily
attributed to the opening of the Company's seven new offices during Fiscal 1999
and the offices opened in Fiscal 1998.
Depreciation and amortization expense increased $582,997 or 68% in
Fiscal 1999 to $1,441,388 compared to $858,391 in Fiscal 1998. The increase in
depreciation and amortization is primarily attributed to additional purchases of
computer equipment during Fiscal 1999 and also additional amortization incurred
on purchase acquisitions and tax practices.
The increase in other expense of $111,193 is predominantly due to an
increase in interest expense on debt.
The Company's income after provision for income taxes for Fiscal 1999
is $2,181,143 compared to $2,011,345 for Fiscal 1998. The increase of 8% is
primarily attributed to higher net operating income generated from financial
planning services and tax preparation.
The Company's business is seasonal, with a large percentage 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, somewhat
seasonal. As a result, the Company must generate sufficient cash during the tax
season, in addition to its available bank credit facility, to fund any operating
cash flow deficits in the first half of the following fiscal year. Operations
during the non-tax season are primarily focused on financial planning services
along with some on-going accounting and corporate tax revenue. Since its
inception, the Company has utilized funds from operations, proceeds from its
initial public offering and bank borrowings to support operations, finance
working capital requirements and complete acquisitions. In addition, the Company
received gross proceeds of approximately $3,000,000 from the exercise of
warrants and options during Fiscal 1999. However, the significant recent growth
in financial planning revenue is expected to substantially increase future
operating cash flow in the first two quarters of the fiscal year.
The Company's cash flows used in operating activities totaled
$2,117,446 for Fiscal 2000, compared to cash flows provided by operating
activities of $3,602,400 for Fiscal 1999. The increase of $5,719,846 in cash
used is due primarily to a decrease in net income of $6,194,235 resulting from
the decrease in net income from $2,181,143 in 1999 to a net loss of $4,013,092
in 2000 and an increase in gain on sale of marketable securities of $979,147,
an increase in accounts receivable of $3,441,030 and an increase in income taxes
receivable of $1,389,038. These increases in cash flows used in operating
activities were offset by additional depreciation and amortization of
$1,073,620, and an increase in deferred and other compensation expense of
$488,652 and an increase in accounts payable of $4,921,367.
Net cash used in investing activities totaled $1,361,388 and $8,406,635
for Fiscal 2000 and Fiscal 1999, respectively. The decrease of $7,045,247 is
primarily due to a decrease in acquisitions of $5,352,320, a net decrease in
loans to officers and stockholders of $1,439,039 and an increase in the proceeds
from sale of investments of $1,215,141. These decreases in cash used in
investing activities were partially offset by an increase in capital
expenditures of $1,067,550 associated with property improvements and equipment
purchases of the Company.
Net cash provided by financing activities totaled $4,586,773 and
$6,551,758 in Fiscal 2000 and Fiscal 1999, respectively. The decrease of
$1,964,985 is attributed to a decrease in the exercise of stock options and
warrants of $2,509,369 and an increase in payments of bank and other loans of
$1,422,650. These amounts were offset by an increase in the proceeds from bank
and other loans of $2,005,100.
The Company has a $10,000,000 credit facility with Merrill Lynch. This
facility consists of three separate loans as follows: a line of credit of
$4,000,000 and two revolver loans for a total of $6,000,000. The interest rate
on the line of credit is 2.9% plus the 30-day commercial paper rate. The
interest rate on the two revolving loans is 3.15% plus the 30-day commercial
paper rate. The terms of the two revolving loan facilities are sixty months, and
the line of credit facility expired on June 30, 2000. Both facilities are
secured by a pledge of all of the business assets of the Company and guaranteed
by three principal officers of up to $1,750,000. The outstanding balance at June
30, 2000 under the credit facility is $7,255,101. The loan agreements contain
certain negative covenants that require the Company to maintain, among other
things, specific minimum net tangible worth and a maximum ratio of debt to
tangible net worth at March 31, 2000. As of that date, the Company was not in
compliance with these two covenants, and, accordingly, classified all debt due
to Merrill Lynch as a current liability. On June 15, 2000 Merrill Lynch elected
to forbear from exercising its remedies under the loan documents until November
30, 2000 in order to allow the Company to seek a replacement credit facility.
The forbearance agreement entered into between Merrill Lynch and the Company
obligates the Company to pay every two weeks a minimum of $30,000 together with
a monthly payment equal to 5% of the Company's monthly collections. Principal
and interest payments are required to continue to be paid in accordance with the
terms of the original debt agreements. The agreement further requires that
proceeds from specific liquidations and collections go to Merrill Lynch to
pay-down principal. In addition, the Company will pay Merrill Lynch $250,000 on
October 16, 2000 and November 5, 2000. The Company has reached an agreement in
principle with two institutions that will issue replacement facilities. These
facilities are expected to close in the second quarter of Fiscal 2001, totaling
more than $12,000,000. After the financing is closed on the proposed terms,
working capital as of June 30, 2000, would increase to approximately $4,640,646,
on a pro forma basis.
The Company believes that after the replacement of Merrill Lynch's
credit facility is in place, the Company could continue to operate without any
additional financing during the next 12 months. Additionally, the Company is
presently talking to several sources of institutional capital regarding a
possible capital investment in the Company to continue to fund acquisitions. The
ability of the Company to secure this additional capital could affect the rate
of growth of the Company. However, additional capital will be obtained primarily
associated with acquisitions that would be structured to be immediately
accretive to earnings. 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.
Year 2000
In 1999, the Company completed the implementation of its plans to
become Year 2000 ready, through the final remediation and testing of its
systems. As a result of those planning and implementation efforts, the Company
has not experienced any significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. The Company is not aware of
any material problems resulting from Year 2000 issues, either with its services
or internal systems, or with the products and services of third parties. The
Company will continue to monitor its mission critical computer applications and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
New Accounting Pronouncements
In March 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44") was issued and is
effective July 1, 2000. FIN 44 clarifies the application of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
with respect to the definition of an employee, the criteria for noncompensatory
plans, the consequences of modifying previous awards and the exchange of stock
compensation awards in business combinations.
In December 1999, the Securities and Exchange Commission ("SEC")
issued SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The effective date of SAB 101 was delayed and SAB 101 will
be effective for the Company in the second quarter of Fiscal 2001. The Company
is reviewing the requirements of SAB 101 and currently believes that its revenue
recognition policy is consistent with the guidance of SAB 101.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 ("SFAS 13"),
effective for the Company's fiscal year ending June 30, 2001. However, in June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delays the
effective date of SFAS 133, which will now be effective for the Company's fiscal
year ending June 30, 2002. SFAS 133 requires companies to record derivative
instruments as assets or liabilities, measured at fair value. The recognition of
gains or losses resulting in changes in the values of those derivative
instruments is based on the use of each derivative instrument and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. The Company does not anticipate that the
implementation of SFAS 133 will have a material impact on the consolidated
financial statements.
Item 8. FINANCIAL STATEMENTS
INDEX
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information regarding the executive
officers and directors of the Company:
Name Age Position
- ----------------- ----- ----------
James Ciocia 43 Chief Executive Officer, President and Director
Thomas Povinelli 40 Chief Operating Officer, Executive Vice President and
Director
Kathryn Travis 51 Secretary, Vice President and Director
David D. Puyear(1) 36 Chief Financial Officer
Stephen B. Sacher(2)41 Treasurer
Michael P. Ryan 42 Director and President of Prime Capital Services, Inc
Seth A. Akabas 44 Director
Louis P. Karol 41 Director
Executive Officers and Directors
James Ciocia, Chief Executive Officer, President and Director
Mr. Ciocia is a principal founder of the Company having opened the
Company's first tax preparation office in 1981. In addition to serving the
Company as its Chief Executive Officer since its founding, Mr. Ciocia is a
registered representative of Prime. Mr. Ciocia holds a B.S. in Accounting from
St. John's University and is a member of the International Association for
Financial Planners. Mr. Ciocia is serving a term as director that expires in
2002.
[FN]
- --------
1 On July 6, 2000, David D. Puyear replaced Stephen B. Sacher as Chief
Financial Officer of the Company. Mr. Sacher continues to be an employee of
the Company responsible for tax matters of the Company and is involved in
performing due diligence on prospective tax practice acquisitions.
2 See FN 1, above.
</FN>
Thomas Povinelli, Chief Operating Officer, Executive Vice President and Director
Mr. Povinelli began his tenure with the Company as an accountant in
1983 and has served as an executive officer since November 1984. In addition
to supervising the opening of all new Gilman + Ciocia offices, Mr.Povinelli
is a registered representative of Prime. Mr. Povinelli holds a B.S. in
Accounting from Iona College. Mr. Povinelli is serving a term as director that
expires in 2001.
Kathryn Travis, Secretary, Vice President and Director
Ms. Travis began her career with the Company in 1986 as an accountant
and has served as Secretary, Vice President and a Director since November 1989.
Ms. Travis currently manages the Company's Great Neck office, supervises all
e1040.com tax preparation personnel, and is a registered representative of
Prime. Ms. Travis holds a B.A. in Mathematics from the College of New Rochelle.
Ms. Travis is serving a term as director that expires in 2001.
Stephen B. Sacher, Former Chief Financial Officer and Treasurer
Mr. Sacher joined the Company as its Treasurer and former Chief
Financial Officer in January 1998. Effective July 6, 2000, Mr. Sacher
relinquished his duties as the Company's Chief Financial Officer. His new duties
involve tax matters and conducting due diligence related to tax practice
acquisitions. Mr. Sacher is a Certified Public Accountant, holds a B.A in
Accounting from Queens College of the City of New York and has been practicing
in the public accounting profession since 1981. Mr. Sacher is currently a member
of the SEC Committee of the New York State Society of Certified Public
Accountants and a member of the American Institute of Certified Public
Accountants.
David D. Puyear, Chief Financial Officer
Mr. Puyear joined the Company as its Chief Financial Officer on July 6,
2000. Prior to joining the Company, Mr. Puyear served as the CFO for the past
four years with two, private equity investment advisory firms located in New
York City and Boston. From 1999 until mid-2000, Mr. Puyear served as CFO of
J.E.R. Partners, an institutional advisory firm with assets under management in
excess of $3 billion, and from 1993 until 1999 Mr. Puyear served as Controller
and CFO of A.E.W. Capital Management, an institutional advisory firm with assets
under management in excess of $13 billion. From 1986 to 1993, Mr. Puyear worked
for KPMG Peat Marwick where he served as audit manager, specializing in
Financial Services and Technology. Mr. Puyear holds a B.S. in accounting from
Moorehead State University and passed all parts of the CPA exam in 1986.
Michael P. Ryan, Director and President of Prime Capital Services, Inc.
Mr. Ryan is President of Prime Capital Services, Inc., Gilman +
Ciocia's wholly owned broker/ dealer subsidiary. Mr. Ryan co-founded this
company and has served as its President since 1987. Mr. Ryan is a Certified
Financial Planner and a founding member and past President of the Mid-Hudson
Chapter of the International Association for Financial Planning. Mr. Ryan is a
Registered Principal with the National Association of Securities Dealers and
serves on the Independent Firms Committee of the Securities Industry Association
(SIA). Mr. Ryan holds a B.S. in Finance from Syracuse University. Mr. Ryan was
first elected a director on June 22, 1999, and is serving a term that expires in
2003.
Seth A. Akabas, Director
Mr. Akabas has served as a partner at the law firm of Akabas & Cohen
since June 1991. Mr. Akabas holds a B.A. in Economics from Princeton University
and a J.D.from Columbia University's School of Law and Journalism. Mr. Akabas
was first elected a director on April 1, 1995 and is serving a term that expires
in 2003.
Louis P. Karol, Director
Mr. Karol is a partner of the law firm of Karol, Hausman & Sosnick.
Mr. Karol holds a B.S. from George Washington University, a J.D from the
Benjamin N. Cardozo School of Law and an L.L.M in Taxation from New York
University's School of Law. Mr. Karol currently serves on the Board of Directors
of the Long Island Chapter of the International Association of Financial
Planning and is a Certified Public Accountant. Mr. Karol was first elected a
director on April 1, 1995 and is serving a term that expires in 2002.
Audit Committee
The Audit Committee is composed of two independent directors, Seth
Akabas and Louis Karol, as well as Thomas Povinelli.
Option Committee
Seth Akabas and Louis Karol sit on the Option Committee.
The Company's executive officers serve at the discretion of the Board of
Directors except for Mr. Ryan who has an employment agreement with a term
expiring on December 31, 2004.
Item 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, as to the Chief Executive Officer and
the four other executive officers whose annual salary exceeded $100,000 in
Fiscal 2000 (collectively, the "Named Executive Officers"), information with
respect to annual and long-term compensation earned during the last three fiscal
years:
Summary Compensation Table
Long Term
Compensation
Awards
Name and Other Annual Number of Shares
Principal Position Year Salary Loans* Compensation Underlying Options
- ---------------------------------------------------------------------------------------------
James Ciocia 1998 $190,000 $12,393(1)
- ------------
Chief Executive Officer, 1999 $190,000 $15,266(1) 60,000
President and Director 2000 $367,754 $314,809 $16,455(3)
Thomas Povinelli
- ----------------
Chief Operating Officer, 1998 $190,000
Executive Vice President and 1999 $190,000 60,000
Director 2000 $365,384 $311,086 $4,596(3)
Kathryn Travis
- --------------
Secretary, Vice President 1998 $135,000 $10,758(1)
and Director 1999 $135,000 $10,758(1) 30,000
2000 $154,230 $118,030 $10,758(1)
Michael P. Ryan
- ---------------
Director and President
Prime Capital Services, Inc. 1999(4)$60,000 $2,400 (1)
2000 $240,000 $226,197(5)
Stephen B. Sacher 1998 $36,667 $125,717(2) 220,000
- -----------------
Chief Financial Officer and 1999 $80,000 $120,000(2) 15,000
Treasurer 2000 $250,741 $34,930(2)
- --------------------
*Represents loans taken in previous years that are being applied to the
individuals current W-2 statement.
(1) Auto expense.
(2) Includes professional fees paid to Sacher & Company, PC, a company of
which Mr. Sacher is President.
(3) Represents commission override payment.
(4) Represents the period from April 5, 1999, the date of acquisition of
Prime, to June 30, 1999.
(5) Includes $216,597 paid as bonus compensation and $9,600 paid as auto
expense.
Key Man Insurance
The Company maintains $2.0 million key-man life insurance policies on
both Thomas Povinelli and James Ciocia.
Directors
Directors of the Company receive no compensation for serving as a
director of the Company.
Option Grants
The following table sets forth information regarding options to
purchase shares of Common Stock granted to the Named Executive Officers during
Fiscal 2000
OPTION GRANTS IN FISCAL 2000
Individual Grants
Name Number of Percent of Total Average Expiration Grant Present
Securities Options/SARs Exercise of Date Date Value
Underlying Granted to Base Price
Options/SARs Employees in ($/Sh)
Granted (#) Fiscal Year
James
Ciocia(1) 2,508 0.3% $9.15625 7/1/05 (1) (1)
Thomas
Povinelli(1) 1,521 0.2% $9.15625 7/1/05 (2) (2)
(1) The options were granted on 7/1/99 and 12/31/99 and have a present value of
$8,499 and $14,883, respectively.
(2) The options were granted on 7/1/99 and 12/31/99 and have a present value of
$5,657 and $8,403, respectively.
Option Exercises and Holdings
- -----------------------------
The following table sets forth information concerning the number and
value of unexercised options to purchase shares of Common Stock held by the
Named Executive Officers as of June 30, 2000.
Aggregated Option/SAR Exercises in Last Fiscal Year
---------------------------------------------------
and Fiscal Year-End Option/SAR Values
-------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised Options at In-the-Money
Fiscal Year-End (#) Options
Exercisable/Unexercisable Fiscal Year-End ($)
Name ------------------------- Exercisable/Unexercisable(1)
- ---- -------------------------
James Ciocia 20,000/52,508 $18,750/--
Chief Executive Officer
Thomas Povinelli 20,000/51,521 $18,750/--
Chief Operating Officer
Kathryn Travis 20,000/20,000 $18,750/--
Vice President
Stephen B. Sacher 60,000/155,000 --/--
Chief Financial Officer
(1) Based on our fiscal year-end fair market value of the underlying securities
equal to $4.625
Stock Option Plans
On September 14, 1993, the Company adopted the 1993 Plan pursuant to
which the Company may grant options to purchase up to an aggregate of 816,000
shares. Such options may be intended to qualify as "incentive stock options"
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or they may be intended not to qualify under
such Section ("Non-Qualified Options").
The 1993 Plan is administered by the committee of two independent
directors of the Board of Directors of the Company, which has authority to
determine the persons to whom the options may be granted, the number of shares
of Common Stock to be covered by each option, the time or times at which the
options may be granted or exercised, whether the options will be Incentive Stock
Options or Non-Qualified Stock Options, and other terms and provisions of the
options. The exercise price of the Incentive Stock Options granted under the
1993 Plan may not be less than the fair market value of a share of Common Stock
on the date of grant (110% of such value if granted to a person owning in excess
of ten percent of the Company's securities). Options granted under the 1993 Plan
may not have a term longer than 10 years from the date of grant (five years if
granted to a person owning in excess of ten percent of the Company's securities)
and may not be granted more than ten years from the date of adoption of the 1993
Plan.
The Company has granted under the 1993 Plan Incentive Stock Options to
purchase 20,000 shares at $7.00, 20,000 shares at $7.50, 20,000 shares at $8.00,
20,000 shares at $8.50, 20,000 shares at $9.00, 20,000 shares at 9.50 and
100,000 shares at $20.00 to Stephen Sacher that remain outstanding. In total,
the Company has granted options of which 200,000 are still outstanding. Shares
and options to purchase 110,998 shares remain to be granted under the 1993 Plan.
On April 20, 1999, the Board of Directors of the Company adopted the
Company's 1999 Common Stock and Incentive and Non-Qualified Stock Option Plan
(the "Plan"). The Plan was approved by the Company's stockholders on June 22,
1999.
Under the Plan, the Company may grant options to purchase up to 300,000
shares of Common Stock to key employees of the Company and its subsidiaries, and
directors, consultants and other individuals providing services to the Company.
Such options may either qualify as "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended, or they may not
qualify under such Section ("non-qualified stock options").
The Board of Directors will administer the Plan. The Plan allows the
Board of Directors of the Company to designate a committee of at least two
non-employee directors to administer the Plan for the purpose of complying with
Rule 16(b)(3) under the Securities Exchange Act of 1934, as amended, with
respect to future grants under the Plan. Until such delegation, the Board will
select the persons who are to receive options and the number of shares to be
subject to each option (the administrator of the Plan, whether the Board of
Directors or a committee thereof, is referred to herein as the "Committee"). In
selecting individuals for options and determining the terms, the Board may
consider any factors that it deems relevant, including present and potential
contributions to the success of the Company. Options granted under the Plan must
be exercised within a period fixed by the Board, which may not exceed ten years
from the date of grant. Options may be made exercisable immediately or in
installments, as determined by the Board.
The purchase price of each share for which an incentive stock option is
granted and the number of shares covered by such Option will be within the
discretion of the Committee based upon the value of the grantee's services, the
number of outstanding shares of Common Stock, the market price of such Common
Stock, and such other factors as the Committee determines are relevant; provided
however, that such purchase price may not be less than the par value of the
Common Stock. The purchase price of each share for which an incentive stock
option is granted under the Plan ("Incentive Option Price") shall not be less
than the amount which the Committee determines, in good faith, at the time such
incentive stock option is issued or granted, constitutes 100% of the then Fair
Market Value of a Share of Common Stock.
Grantees under the Plan may not transfer options otherwise than by will
or the laws of descent and distribution; provided that the Committee may
determine with respect to any particular Option that such Option shall be
transferable. No transfer of an Option permitted by terms of such Option or by
will or the laws of descent and distribution will bind the Company unless the
Company has been furnished with written notice thereof and a copy of the will
and/or such other evidence as the Company may deem necessary to establish the
validity of the transfer and the acceptance by the transferee or transferees of
the terms and conditions of such Option. In the case of an Option, during the
lifetime of the grantee, unless transferred as permitted by this Plan and the
Option, the Option may only be exercised by the grantee, except in the case of
disability of the grantee resulting in termination of employment, in which case
the Option may be exercised by such grantee's legal representative.
The Committee will adjust the total number of shares of Common Stock
which may be purchased upon the exercise of Options granted under the Plan for
any increase or decrease in the number of outstanding shares of Common Stock
resulting from a stock dividend, subdivision, combination or reclassification of
shares or any other change in the corporate structure or shares of the Company;
provided, however, in each case, that, with respect to incentive stock options,
no such adjustment shall be authorized to the extent that such authority would
cause the Plan to violate Section 422(b)(1) of the Code. If the Company
dissolves or liquidates or upon any merger or consolidation, the Committee may
make such adjustment with respect to Options or act as it deems necessary or
appropriate to reflect or in anticipation of such dissolution, liquidation,
merger or consolidation including, without limitation, the substitution of new
Options or the termination of existing options.
Under the Plan, the Company will grant to each employee and those
affiliated financial planners who have entered into commission sharing
agreements with the Company, including officers and directors, options to
purchase 100 shares of Common Stock for each whole $25,000 of revenues for tax
preparation and commissions generated by such individual for the Company in the
calendar years 1998, 1999 and 2000. Each option will be exercisable for a period
of five years to acquire one share of Common Stock at the market price on the
date of grant of the option. In Fiscal 2000, the Company granted options to
purchase 229,877 shares under the Plan, with 70,123 options remaining to be
granted under this program.
For Federal income tax purposes, an optionee will not recognize any
income upon the grant of a non-qualified stock option or an incentive stock
option.
Upon the exercise of a non-qualified stock option, the optionee will
realize ordinary income equal to the excess (if any) of the fair market value of
the shares purchased upon such exercise over the exercise price. The Company
will be allowed a deduction from income in the same amount and at the same time
as the optionee realizes such income. Upon the sale of shares purchased upon
such exercise, the optionee will realize capital gain or loss measured by the
difference between the amount realized on the sale and the fair market value of
the shares at the time of exercise of the option. In the case of options granted
to executive and principal officers, directors and stockholders owning greater
than 10% of the outstanding Common Stock, income will be recognized upon
exercise of a non-qualified option only if the option has been held for at least
six months prior to exercise. If such option is exercised within six months
after the date of grant, then such an officer, director or greater than 10%
stockholder will recognize income six months after the date of grant, unless he
or she files an election under Section 83(b) of the Code to be taxed on the date
of exercise.
In contrast, upon the exercise of an incentive stock option, an
optionee will not realize income, and the Company will not be allowed a
deduction. If the optionee retains the shares issued to him upon exercise of an
incentive stock option for more than one year after the date of issuance of such
shares and two years after the date of grant of the option, then any gain or
loss realized on a subsequent sale of such shares will be treated as long-term
capital gain or loss. If, on the other hand, the optionee sells the shares
issued upon exercise within one year after the date of issuance or within two
years after the date of grant of the option, then the optionee will realize
ordinary income, and the Company will be allowed a deduction from income, to the
extent of the excess of the fair market value of the shares on the date of
exercise or the amount realized on the sale (whichever is less) over the
exercise price. Any excess of the sale price over the fair market value of such
shares on the date of exercise will be treated as capital gain. In addition, the
difference between the fair market value of the shares on the date of exercise
and the exercise price constitutes an item of tax preference for purposes of
calculating an alternative minimum tax, which, under certain circumstances,
could cause tax liability as a result of an exercise.
Stock Purchase Plan
On February 1, 2000, the Board of Directors of the Company adopted the
Company's 2000 Employee Stock Purchase Plan (the "Plan"), and on May 5, 2000,
the Plan became effective after majority approval by stockholders was obtained
at the 2000 annual meeting. Under the Plan, the Company will sell shares to
participants at a price equal to 85% of the closing price of the Common Stock on
(i) the first business day of such Plan Period or (ii) the Exercise Date (the
last day of the Plan Period), whichever closing price shall be less. Plan
Periods are six-month periods commencing January 1st and July 1st. Such closing
price shall be (a) the closing price of the Common Stock on any national
securities exchange on which the Common Stock is listed, (b) the closing price
of the Common Stock on the Nasdaq National Market System or (c) the average of
the closing bid and asked prices in the over-the-counter-market, whichever is
applicable, as published in The Wall Street Journal. If no sales of Common Stock
were made on such a day, the price of the Common Stock for purposes of clauses
(a) and (b) above shall be the reported price for the next preceding day on
which sales were made. The Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Board of Directors believes that the Plan will further
encourage broader stock ownership by employees of the Company and thereby
provide an incentive for employees to contribute to the profitability and
success of the Company. In particular, the Board intends that the plan offer a
convenient means for employees who might not otherwise own Common Stock in the
Company to purchase and hold Common Stock, and that the discounted sale feature
of the Plan provides a meaningful inducement to participate. The Company
believes that employees' continuing economic interest, as shareholders, in the
performance and success of the Company will further enhance the entrepreneurial
spirit of the Company, which can greatly contribute to the long-term growth and
profitability of the Company. As of September 1, 2000, 97 employees have
participated in the automatic withholding election for the Plan.
Description of the Plan
The Plan will be administered by the Company's Board of Directors (the
"Board") or by a Committee appointed by the Board (the "Committee"). The Board
or the Committee has authority to make rules and regulations for the
administration of the Plan and its interpretation and decisions with regard
thereto shall be final and conclusive. The Board may at any time, and from time
to time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section 423 of
the Code, such amendment shall not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with Section 423 of the Code.
All employees of the Company, including Directors who are employees,
and all employees of any subsidiary of the Company (as defined in Section 424(f)
of the Code) designated by the Board or the Committee from time to time (a
"Designated Subsidiary"), are eligible to participate in any one or more of the
offerings of Options to purchase Common Stock under the Plan provided that: (a)
they are customarily employed by the Company or a Designated Subsidiary for more
than 20 hours a week and for more than five months in a calendar year; and (b)
they have been employed by the Company or a Designated Subsidiary for at least
[six months] prior to enrolling in the Plan; and (c) they are employees of the
Company or a Designated Subsidiary on the first day of the applicable Plan
Period.
No employee may be granted an Option under the Plan if such employee,
immediately after the Option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary of the
Company. For purposes of the preceding sentence, the attribution rules of
Section 424(d) of the Code shall apply in determining the stock ownership of an
employee, and all stock that the employee has a contractual right to purchase
shall be treated as stock owned by the employee.
The Company will make one or more offerings ("Offerings") to employees
to purchase stock under this Plan. Offerings will begin each January 1 and July
1, or the first business day thereafter (the "Offering Commencement Dates").
Each Offering Commencement Date will begin a six-month period (a "Plan Period")
during which payroll deductions will be made and held for the purchase of Common
Stock at the end of the Plan Period. The Board or the Committee may, at its
discretion, choose a different Plan Period of twelve (12) months or less for
subsequent Offerings.
An employee eligible on the Offering Commencement Date of any Offering
may participate in such Offering by completing and forwarding a payroll
deduction authorization form to the employee's appropriate payroll office at
least 14 days prior to the applicable Offering Commencement Date. The form will
authorize a regular payroll deduction from the Compensation received by the
employee during the Plan Period. Unless an employee files a new form or
withdraws from the Plan, his deductions and purchases will continue at the same
rate for future Offerings under the Plan as long as the Plan remains in effect.
The Company will maintain payroll deduction accounts for all
participating employees. With respect to any Offering made under this Plan, an
employee may authorize a payroll deduction in any dollar amount from a minimum
of 2% up to a maximum of 10%, only in a whole integral percentage, or such
lesser amount as the Board or Committee shall determine before the start of each
Plan Period, of the Compensation he or she receives during the Plan Period or
such shorter period during which deductions from payroll are made.
No employee may be granted an Option that permits his rights to
purchase Common Stock under this Plan and any other employee stock purchase plan
(as defined in Section 423(b) of the Code) of the Company and its subsidiaries
to accrue at a rate which exceeds $25,000 of the fair market value of such
Common Stock (determined at the Offering Commencement Date of the Plan Period)
for each calendar year in which the Option is outstanding at any time.
An employee may decrease or discontinue his payroll deduction once
during any Plan Period by filing a new payroll deduction authorization form.
However, an employee may not increase his payroll deduction during a Plan
Period. If an employee elects to discontinue his payroll deductions during a
Plan Period, but does not elect to withdraw his funds, the funds deducted prior
to his election to discontinue will be applied to the purchase of Common Stock
on the Exercise Date (as defined below).
Interest will not be paid, unless required by law, on any employee
accounts, except to the extent that the Board or the Committee, in its sole
discretion, elects to credit employee accounts with interest at such per annum
rate as it may from time to time determine.
An employee may at any time prior to the close of business on the last
business day in a Plan Period and for any reason permanently draw out the
balance accumulated in the employee's account and thereby withdraw from
participation in an Offering. Partial withdrawals are not permitted. The
employee may not begin participation again during the remainder of the Plan
Period. The employee may participate in any subsequent Offering in accordance
with terms and conditions established by the Board or the Committee.
On the Offering Commencement Date of each Plan Period, the Company will
grant to each eligible employee who is then a participant in the Plan an Option
to purchase on the last business day of such Plan Period (the "Exercise Date"),
at the option price, the largest number of whole shares of Common Stock of the
Company as does not exceed the number of shares determined by multiplying $2,083
by the number of full months in the Offering Period and dividing the product by
the closing price (as defined above) for such Plan Period.
Each employee who continues to be a participant in the Plan on the
Exercise Date shall be deemed to have exercised his Option at the option price
on such date and shall be deemed to have purchased from the Company the number
of full shares of Common Stock reserved for the purpose of the Plan that his
accumulated payroll deductions on such date will pay for, but not in excess of
the maximum number determined in the manner set forth above.
Any balance remaining in an employee's payroll deduction account at the
end of a Plan Period will be automatically refunded to the employee without
interest, unless required by law.
Certificates representing shares of Common Stock purchased under the
Plan may be issued only in the name of the employee, in the name of the employee
and another person of legal age as joint tenants with rights of survivorship, or
(in the Company's sole discretion) in the name of a brokerage firm, bank or
other nominee holder designated by the employee. The Company may, in its sole
discretion and in compliance with applicable laws, authorize the use of book
entry registration of 12 shares in lieu of issuing stock certificates.
Federal Income Tax Consequences
The Company believes that under present law the following federal
income tax consequences would generally result under the Plan. Rights to
purchase shares under the Plan are intended to constitute "options" issued
pursuant to an "employee stock option plan" within the meaning of Section 423 of
the Code: 1. No taxable income results to the participant upon the grant of
right to purchase or upon the purchase of shares for his or her account under
the Plan (although the amount of a participant's payroll contributions under the
Plan will be taxable as ordinary income to the participant). 2. If the
participant disposes of shares less than two years after the first day of an
offering period with respect to which he or she purchased such shares, then at
the time of disposition the participant will recognize as ordinary income an
amount equal to the excess of the fair market value of the shares on the date of
purchase over the amount of the participant's payroll contributions used to
purchase the shares. 3. If the participant holds the shares for at least two
years after the first day of an offering period with respect to which he or she
purchased such shares, then at the time of the disposition the participant will
recognize as ordinary income an amount equal to the lesser of (i) the excess of
the fair market value of the shares on the first day of the offering period over
the option price on that date, and (ii) the excess of the fair market value of
the shares on the date of disposition over the amount of the participant's
payroll contributions used to purchase such shares. 4. In addition, the
participant will recognize a long-term or short-term capital gain or loss, as
the case may be, in an amount equal to the difference between the amount
realized upon any sale of the Common Stock minus the cost (i.e., the purchase
price plus the amount, if any, taxed to the participant as ordinary income, as
noted in (3) above). 5. If the statutory holding period described in (3) above
is satisfied, the Company will not receive any deduction for federal income tax
purposes with respect to any discount in the sale price of Common Stock or
matching contribution applicable to such participant. If such statutory holding
period is not satisfied, the Company generally should be entitled to deduction
in an amount equal to the amount taxed to the participant as ordinary income.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 21, 2000, 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.
Name of Beneficial Owner Amount and Nature of Percent of
Beneficial Ownership Class
James Ciocia 1,073,616(1) 14%
1311 Mamaroneck Avenue
White Plains, NY 10605
Thomas Povinelli 1,128,616(2) 14%
1311 Mamaroneck Avenue
White Plains, NY 10605
Kathryn Travis 385,481(3) 5%
1311 Mamaroneck Avenue
White Plains, NY 10605
Seth Akabas 9,066(4) *
488 Madison Avenue - 11th Floor
New York, NY 10022
Louis Karol 3,180 *
600 Old Country Road
Garden City, NY 11530
Michael P. Ryan 769,804(5) *
11 Raymond Avenue
Poughkeepsie, NY 12603
Steven Gilbert 859,000(6) 10%
2420 Enterprise Road, Suite 100
Clearwater, FL 33763
Stephen Sacher 52,000(7) *
1311 Mamaroneck Avenue
White Plains, NY 10605
Arlington Financial Services, Inc. 762,204(5) 10%
11 Raymond Avenue
Poughkeepsie, NY 12603
All directors and officers 3,421,763 (1) (2) (3) 34%
as a group (6 persons) (4) (5) (7)
- ----------------------
* Less than 1%.
(1) Includes 20,000 shares of Common Stock issuable upon the exercise of
currently exercisable options at a price of $2.75 per share. Does not
include 52,508 shares issuable upon the exercise of options that do not
vest until 2001.
(2) Includes 20,000 shares of Common Stock issuable upon the exercise of
currently exercisable options at a price of $2.75 per share. Does not
include 51,521 shares issuable upon the exercise of the options that do
not vest until 2001.
(3) Includes 20,000 shares of Common Stock issuable upon the exercise of
currently exercisable options at a price of $2.75 per share. Does not
include 20,000 shares issuable upon the exercise of options that do not
vest until 2001.
(4) Includes 8,081 shares owned by the law firm of Akabas & Cohen of which
Mr. Akabas is a partner.
(5) 7,600 shares are owned by Mr. Ryan personally and the 762,204 shares
are owned by Arlington Financial Services, Inc. Mr. Ryan owns 50% of
the capital stock of Arlington Financial Services, Inc.
(6) Includes 169,000 shares owned by Gilbert Family Limited Partnership of
which Steven Gilbert is a 97% beneficiary. In addition, includes
340,000 shares, 100,000 shares and 75,000 shares issuable upon exercise
of options at $3.50, $4.75 and $13.75, respectively. Does not include
14,968 shares and 37,500 shares issuable upon the exercise of options
that do not vest until 2001 and 2002, respectively.
(7) Includes 40,000 shares issuable upon exercise of currently exercisable
options: 20,000 at $7.50 per share and 20,000 at $8.60 per share. Does
not include 15,000 shares issuable upon the exercise of options that do
not vest until 2001, or 160,000 shares issuable upon exercise of
options vesting yearly after 2000.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The three principal stockholders, Messrs. Ciocia and Povinelli and Ms.
Travis personally guaranteed the repayment of the Company's loans from Merrill
Lynch, each with an individual limit of $1,750,000. Such stockholders received
no consideration for such guarantees other than their salaries and other
compensation.
The Company loaned the following amounts to the following individuals:
$100,000 in fiscal June 1997 and $240,000 in fiscal June 1998 to James Ciocia,
$100,000 in fiscal June 1997 and $240,000 in fiscal 1998 to Thomas Povinelli,
$50,000 in fiscal June 1997 and $72,000 in fiscal June 1998 to Kathryn Travis,
and $50,000 in fiscal June 1998 to Steven Gilbert. Each of such individuals is
an officer and director of the Company, except Mr. Gilbert, who is an employee
and stockholder. These loans were 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 Ms. Travis, which have a maturity date of August 1, 2001. Since the
beginning of the Company's fiscal year 2000, the maximum amounts outstanding for
these loans were as follows: $53,515 and $61,294 for the fiscal 1997 and fiscal
1998 loans, respectively, made to Mr. Ciocia; $51,786 and $259,300 for the
fiscal 1997 and fiscal 1998 loans, respectively, made to Mr. Povinelli; $39,642
and $78,388 for the fiscal 1997 and fiscal 1998 loans, respectively, made to Ms.
Travis; and $45,368 for the fiscal 1998 loan made to Mr. Gilbert. During Fiscal
2000, the Company as a one-time bonus increased the salary of each of such
individuals by the aggregate amount outstanding on these loans to such
individual and applied such bonus to discharge in full such loans (See
"Executive Compensation").
During Fiscal 1999, the Company made additional loans for $302,066 to
Mr.Povinelli, for $339,877 to Mr.Ciocia and for $228,589 to Ms. Travis. These
loans are payable on demand and are interest-free. Since the beginning of Fiscal
2000, the maximum amounts outstanding on such loans were $116,046 for Mr.
Povinelli, $339,877 for Mr. Ciocia, and $228,588 for Ms. Travis. As of June 30,
2000 the balances are $101,544 for Mr. Povinelli, $198,237 for Mr. Ciocia and $0
for Ms.Travis. Each of such individuals has pledged certain shares of his or her
stock in the Company as collateral for these loans.
From time to time the Company employs the professional services of
Sacher & Co. P.C. The President of Sacher & Co. P.C. was the Chief Financial
Officer of the Company until July 6, 2000. The amounts paid to Mr. Sacher in
this capacity are set forth above in "Executive Compensation."
Seth Akabas, is a partner in the law firm of Akabas & Cohen and also a
director of the Company. Akabas & Cohen was paid $116,731 in Fiscal 2000 for
legal services. Akabas & Cohen continues to provide legal services in Fiscal
2001.
In July 2000, the Company borrowed $250,000 at 12% interest from
Mysemia, a general partnership in which Seth Akabas is a general partner with a
1/3 interest. No interest or principal has been paid on such loan to date.
The Company has made a loan to Steven Gilbert, a stockholder of the
Company. The loan is for $100,000, with interest charged at 9% per annum, has
received payments in Fiscal 2000 with a remaining balance at June 30, 2000 of
$35,927.
In addition, the Company holds a note receivable from Dominic Ciocia,
the brother of the Company's Chief Executive Officer. The note receivable
including accrued interest is for $118,000 with interest charged at 6% per
annum. Subsequent to year-end, this note has been paid down by approximately
$92,000.
Item 14. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Registrant's Articles of Incorporation, as amended,
incorporated by reference to the like numbered exhibit in the
Registrant's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, File No. 33-70640-NY.
3.2. Registrant's Amended Articles of Incorporation, incorporated by
reference to Exhibit A in the Registrant's Proxy Statement on
Form14-A under the Securities Exchange Act of 1934, as amended,
filed for the annual meeting held on June 22, 1999.
3.3 Registrant's By-Laws, incorporated by reference to the like
numbered exhibit in the Registrant's Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended, File
No. 33-70640 -NY.
10.1 1993 Joint Incentive and Non-Qualified 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.
10.2 1999 Joint Incentive and Non-Qualified Stock Option Plan of the
Registrant, incorporated by reference to Exhibit B in the
Registrant's Proxy Statement on Form 14-A under the Securities
Exchange Act of 1934, as amended, filed for the annual meeting
held on June 22, 1999.
10.3 2000 Employee Stock Purchase Plan of the Registrant,
incorporated by reference to Exhibit B in the Registrant's
Proxy Statement on Form14-A under the Securities Exchange Act
of 1934, as amended, filed for the annual meeting held on May
5, 2000.
10.4 Stock Purchase Agreement dated November 19, 1998 among
Registrant, North Shore Capital Management and North Ridge
Securities Corp., incorporated by reference to Exhibit 1 on the
Registrant's Current Report on Form 8-K, dated November 19,
1998.
10.5 Non-competition Agreement dated November 19, 1998 among
Registrant, Daniel Levy, and Joseph Clinard, incorporated by
reference to Exhibit 2 on the Registrant's Current Report on
Form 8-K, dated November 19, 1998.
10.6 Employment Agreement dated November 19, 1998
between Daniel Levy and North Shore Capital
Management Corp. and North Ridge Securities Corp.,
incorporated by reference to Exhibit 3 on the
Registrant's Current Report on Form 8-K, dated
November 19, 1998.
10.7 Stock Option Agreement dated November 19, 1998 between
Registrant and Daniel Levy, incorporated by reference to
Exhibit 4 on the Registrant's Current Report on Form 8-K, dated
November 19, 1998.
10.8 Consulting Agreement dated November 19, 1998
between Joseph Clinard and North Ridge Securities
Corp., incorporated by reference to Exhibit 5 on the
Registrant's Current Report on Form 8-K, dated
November 19, 1998.
10.9 Stock and Asset Purchase Agreement dated April 5,
1999 among Registrant, Prime Financial Services,
Inc., Prime Capital Services, Inc., Asset & Financial
Planning, Ltd., Michael Ryan and Ralph Porpora,
incorporated by reference to Exhibit 1 on the
Registrant's Current Report on Form 8-K, dated April
5, 1999.
10.11 Non-competition Agreement dated April 5, 1999 among Registrant,
Prime Financial Services, Inc., Michael Ryan and Ralph Porpora,
incorporated by reference to Exhibit 2 on the Registrant's
Current Report on Form 8-K, dated April 5, 1999.
10.12 Registration Rights Agreement dated April 5, 1999 among
Registrant, Prime Financial Services, Inc., Michael Ryan and
Ralph Porpora, incorporated by reference to Exhibit 3 on the
Registrant's Current Report on Form 8-K, dated April 5, 1999.
10.13 Limited Liability Company Interest Option Agreement dated April
5, 1999 between Registrant and Prime Financial Services, Inc.,
incorporated by reference to Exhibit 4 on the Registrant's
Current Report on Form 8-K, dated April 5, 1999.
21 List of Subsidiaries.
23 Consent of Arthur Andersen, LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GILMAN + CIOCIA, INC.
By: /s/ Thomas Povinelli
-----------------------------------------
Thomas Povinelli, Chief Operating Officer
In accordance with the Exchange Act, this Annual Report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Title Date
- -------------------------------------------------------------------
/s/ James Ciocia Chief Executive Officer October 13, 2000
- ---------------------------and President (principal ----------------
James Ciocia executive officer) and Director
/s/David D. Puyear Chief Financial Officer, October 13, 2000
- ---------------------------(principal financial officer ----------------
David D. Puyear and principal accounting officer)
/s/ Thomas Povinelli Director October 13, 2000
- --------------------------- ----------------
Thomas Povinelli
/s/ Kathryn Travis Director October 13, 2000
- --------------------------- -----------------
Kathryn Travis
/s/ Michael Ryan Director October 13, 2000
- --------------------------- ----------------
Michael Ryan
/s/Louis Karol Director October 13, 2000
- --------------------------- ----------------
Louis Karol
/s/ Seth Akabas Director October 13, 2000
- --------------------------- ----------------
Seth Akabas
INDEX Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5-6
Consolidated Statements of Stockholders' Equity F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8-22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gilman + Ciocia, Inc.
We have audited the accompanying consolidated balance sheets of Gilman + Ciocia,
Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures to the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the financial position of Gilman + Ciocia, Inc. and
subsidiaries as of June 30, 2000 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
New York, New York
October 13, 2000
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Balance Sheets
As of June 30,
ASSETS 2000 1999
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 4,561,293 $ 3,453,354
Marketable securities .................................................................... 73,044 316,937
Accounts receivable, net of allowance for doubtful accounts of
$187,500 and $87,500 as of June 30, 2000 and 1999, respectively.......................... 6,355,115 3,585,518
Receivables from officers and stockholders, current portion .............................. 709,538 568,233
Prepaid expenses and other current assets ................................................ 1,210,611 983,130
Income taxes receivable .................................................................. 3,134,824 1,460,259
Deferred tax assets ...................................................................... 690,000 183,000
------------- -------------
Total current assets ..................................................................... 16,734,425 10,550,431
Property and equipment, net of accumulated depreciation of $3,397,927
and $2,420,785 as at June 30, 2000 and 1999, respectively ................................ 4,423,455 2,372,174
Intangible assets, net of accumulated amortization of $3,172,897 and
$1,635,581 as of June 30, 2000 and 1999, respectively .................................... 21,260,307 17,387,317
Receivables from officers and stockholders, net of current portion ....................... 17,590 1,570,964
Security deposits ........................................................................ 658,818 374,348
Deferred tax asset ....................................................................... - 10,000
Other assets ............................................................................. 810,583 733,746
------------ -------------
Total assets ............................................. $ 43,905,178 $ 32,998,980
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .......................................................... $ 9,112,734 $ 1,695,529
Accounts payable and accrued expenses .......................................................... 9,233,127 3,605,386
----------- --------------
Total current liabilities .......................................... 18,345,861 5,300,915
Long-term debt - net of current portion .................................................... 826,476 2,738,124
Deferred tax liability ..................................................................... 20,000 --
----------- --------------
Total liabilities .............................................. 19,192,337 8,039,039
----------- --------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value - shares authorized
100,000; none issued and outstanding .................................................... - -
Common stock - $.01 par value - shares authorized 20,000,000;
8,030,834 shares and 7,508,266 shares issued and outstanding as of
June 30, 2000 and 1999,respectively 80,308 75,083
Paid-in capital ............................................................................ 23,812,621 19,890,577
Deferred compensation ...................................................................... 164,276 136,867
Retained earnings .......................................................................... 1,772,766 5,785,858
----------- --------------
25,829,971 25,888,385
Less- treasury stock, at cost .............................................................. (1,012,130) (777,039)
Note receivable for shares sold, stock subscriptions
and accrued interest receivable ........................................................ (105,000) (159,646)
Unrealized gain on marketable securities, net of income taxes .............................. -- 8,241
----------- --------------
Total stockholders' equity .......................................... 24,712,841 24,959,941
----------- --------------
Total liabilities and stockholders' equity .................................. $ 43,905,178 $ 32,998,980
------------- --------------
The accompanying notes are an integral part of these consolidated balance sheets ............... ------------- --------------
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended June 30,
2000 1999 1998
------------ -------------- -------------
Revenues:
Tax preparation fees $ 18,311,232 $ 14,305,544 $ 11,955,051
Financial planning services 71,267,262 36,137,862 16,578,032
------------- -------------- -------------
Total revenues 89,578,494 50,443,406 28,533,083
------------- -------------- -------------
Operating expenses:
Salaries and commissions 67,024,615 31,915,652 14,537,505
General and administrative expenses 12,185,678 5,986,476 4,964,533
Advertising 9,156,079 3,873,580 2,732,867
Brokerage fees & licenses 1,872,294 949,392 -
Rent 3,613,146 2,480,067 2,037,117
Depreciation and amortization 2,515,008 1,441,388 858,391
------------ ------------ ------------
Total operating expenses 96,366,820 46,646,555 25,130,413
------------ ------------ ------------
Operating income / (loss) (6,788,326) 3,796,851 3,402,670
------------ ------------ ------------
Other income / (expense):
Interest and investment income 1,412,990 129,041 107,953
Interest expense (930,135) (280,961) (175,536)
Other income 145,379 56,212 83,068
------------ ------------ ------------
Total other income (expense) 628,234 (95,708) 15,485
------------ ------------ ------------
Income / (loss) before provision (benefit) for income taxes (6,160,092) 3,701,143 3,418,155
Provision / (benefit) for income taxes (2,147,000) 1,520,000 1,406,810
------------ ------------ ------------
Net income (loss) $(4,013,092) $ 2,181,143 $ 2,011,345
------------ ------------ ------------
Net income / (loss) per share: ------------ ------------ ------------
Basic $ (0.53) $ 0.35 $ 0.37
Diluted (0.53) 0.32 0.32
Weighted average shares:
Basic 7,552,396 6,264,228 5,383,093
Diluted 7,552,396 6,917,436 6,315,345
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended June 30,
2000 1999 1998
------------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,013,092) $ 2,181,143 $ 2,011,345
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Compensation expense recognized in connection with the
reissuance of treasury stock and the issuance of stock
options 57,859 184,927 61,831
Depreciation and amortization 2,515,008 1,441,388 858,391
Deferred tax benefit (477,000) (42,000) (124,000)
(Gain) loss on sale of marketable securities (979,489) (342) 16,213
Amortization of deferred and other compensation expense 946,984 458,332 162,477
Provision (recovery) for doubtful accounts 142,714 (100,000) 100,000
Interest on stock subscriptions - (10,801) (13,546)
Changes in:
Accounts receivable (2,828,368) 612,662 (1,141,576)
Prepaid expenses and other current assets (129,151) (743,382) (180,974)
Advances to financial planners (122,060) 133,039 (87,500)
Security deposits and other assets (315,579) (64,965) (53,783)
Accounts payable and accrued expenses 4,636,655 (284,712) 33,883
Income taxes payable (1,551,927) (162,889) 94,689
---------------- ---------------- -----------
Net cash (used in) provided by operating activities (2,117,446) 3,602,400 1,737,450
---------------- ---------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,818,944) (751,394) (772,930)
Cash payments for acquisitions -net of cash acquired (1,359,288) (6,711,608) (145,176)
Marketable securities 9,025 (97,272) (105,172)
Deferred acquisition costs - - (54,955)
Proceeds from sale of investments 1,215,141 - 236,975
Loan repayments from officers and stockholders 716,680 385,819 273,813
Loans to officers and stockholders (124,002) (1,232,180) (631,228)
--------------- ------------- -----------
Net cash used in investing activities (1,361,388) (8,406,635) (1,198,673)
--------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock (257,385) (136,116) (179,123)
Proceeds from bank and other loans 10,505,100 8,500,000 3,000,000
Payments of bank and other loans (6,209,021) (4,786,371) (4,401,487)
Proceeds from the sale of common stock
and exercise of stock options and warrants 464,876 2,974,245 54,125
Proceeds from stock subscriptions 83,203 - 87,869
Incurrence of deferred registration costs - - (314,819)
--------------- ------------- -----------
Net cash provided by (used in) financing activities 4,586,773 6,551,758 (1,753,435)
---------------------------------------------
Net increase (decrease) in cash 1,107,939 1,747,523 (1,214,658)
CASH, and cash equivalents beginning of year 3,453,354 1,705,831 2,920,489
---------------- ------------- -----------
CASH, and cash equivalents end of year $ 4,561,293 $ 3,453,354 $ 1,705,831
================ ================ ================
================ ================ ================
The accompanying notes are an integral part of these consolidated statements.
Gilman & Ciocia, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
For the years ended June 30,
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 792,859 $ 280,961 $ 188,592
Income taxes 784,962 2,267,011 1,297,320
Noncash transactions-
Liquidation of investment in partnership into
marketable securities - - 110,793
Reissuance of treasury stock at fair value 22,294 143,859 32,897
Issuance of common stock as consideration in business combination 3,220,018 9,420,995 -
Exercise of stock options 105,000 2,412 -
Capital leases 1,209,478 - -
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Details of business combinations:
Fair value of assets acquired 5,410,306 21,424,445 145,176
Less: Liabilities assumed - (4,039,411) -
Stock issued (4,051,018) (9,420,995) -
----------- ----------- --------
Cash paid for acquisitions 1,359,288 7,964,039 145,176
Cash acquired in acquisitions - (1,252,431) -
----------- ----------- --------
Net cash paid for acquisitions $ 1,359,288 $ 6,711,608 $ 145,176
----------- ----------- --------
----------- ----------- --------
The accompanying notes are an integral part of these consolidated statements.
Gilman & Ciocia, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the years ended June 30, 2000, 1999 and 1998
Common Stock
---------------------- Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
-----------------------------------------------------------------------------
Balance at July 1,1997 $ 5,578,913 $ 55,789 $ 6,231,555 $ - $ 1,593,369
Payments received on stock
Purchase of treasury stock
Reissuance of treasury stock 28,934
Issuance of common stock on exercise
of stock options 28,000 280 53,845
Accrued interest income
Amortization of deferred compensation 52,993
Income tax benefit on exercise of
stock options 63,000
Comprehensive income:
Unrealized loss on marketable securities
Net income 2,011,346
- -------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,011,346
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 5,606,913 $ 56,069 $ 6,377,334 $ 52,993 $ 3,604,715
=========================================================================================================================
Balance at July 1, 1998 5,606,913 $ 56,069 $ 6,377,334 $ 52,993 $ 3,604,715
Purchase of treasury stock
Reissuance of treasury stock 86,067
Issuance of common stock on
exercise of stock options 372,227 3,722 361,529
Issuance of common stock upon
exercise of warrants-net 700,852 7,009 2,556,986
Issuance of common stock upon
business combinations 793,774 7,938 9,413,056
Accrued interest income
Amortization of deferred compensation 83,874
Shares issued upon settlement of
litigation 34,500 345 138,605
Income tax benefit upon exercise of
stock options 957,000
Comprehensive income:
Unrealized gain on marketable securities
Net income 2,181,143
- -------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,181,143
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 7,508,266 $ 75,083 $ 19,890,577 $ 136,867 $ 5,785,858
=========================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
Gilman & Ciocia, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity-Continued
For the years ended June 30, 2000, 1999 and 1998
Stock Accumulated Total
Treasury Stock Subcriptions/Note Other Stockholders'
-------------- Receivable for Comprehensive Equity
Shares Amount Shares Sold Income
-----------------------------------------------------------------
Balance at July 1, 1997 157,433 $(638,556) $ (223,168) $ - $ 7,018,989
Payments received on stock 87,869 87,869
Purchase of treasury stock 60,700 (179,123) (179,123)
Reissuance of treasury stock (6,818) 32,897 61,831
Issuance of common stock on
exercise of stock options 54,125
Accrued interest income (13,546) (13,546)
Amortization of deferred compensation 52,993
Income tax benefit on exercise of
stock options 63,000
Comprehensive income:
Unrealized loss on marketable securities (86,903) (86,903)
Net income 2,011,346
- ---------------------------------------------------------------------------------------------------------------
Total comprehensive income (86,903) 1,924,443
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 211,315 $ (784,782) $(148,845) $ (86,903) $9,070,581
===============================================================================================================
Balance at July 1, 1998 211,315 $ (784,782) $(148,845) $ (86,903) $9,070,581
Purchase of treasury stock 16,400 (136,116) (136,116)
Reissuance of treasury stock (28,070) 143,859 229,926
Issuance of common stock on
exercise of stock options 365,251
Issuance of common stock upon
exercise of warrants-net 2,563,995
Issuance of common stock upon
business combinations 9,420,994
Accrued interest income (10,801) (10,801)
Amortization of deferred compensation 83,874
Shares issued upon settlement of
litigation 138,950
Income tax benefit upon exercise of
stock options 957,000
Comprehensive income:
Unrealized gain on marketable securities 95,144 95,144
Net income 2,181,143
- ---------------------------------------------------------------------------------------------------------------
Total comprehensive income 95,144 2,276,287
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 199,645 $(777,039) $(159,646) $ 8,241 $24,959,941
================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
Gilman & Ciocia, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity - Continued
For the years ended June 30, 2000, 1999 and 1998
Common Stock
--------------- Paid-In Deferred Retained
Shares Amount Capital Compensation Earnings
-----------------------------------------------------------------
Balance at July 1, 1999 7,508,266 $ 75,083 $ 19,890,577 $ 136,867 $5,785,858
Purchase of treasury stock
Re-issuance of treasury stock 8,156
Issuance of common stock on
exercise of stock options 107,081 1,071 568,805
Issuance of common stock upon
business combinations 385,487 3,854 3,216,164
Amortization of deferred compensation 27,409
Shares issued upon settlement of
litigation 30,000 300 6,281
Income tax benefit upon exercise
of stock options 122,638
Payment/write-off of stock
subscriptions receivable
Issuance of note receivable for
shares sold
Comprehensive income:
Unrealized gain on marketable securities
Net loss (4,013,092)
- -------------------------------------------------------------------------------------------------------
Total comprehensive income (4,013,092)
- -------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 8,030,834 $ 80,308 $ 23,812,621 $ 164,276 $ 1,772,766
=======================================================================================================
The accompanying notes are an integral part of these consolidated statements.
Gilman & Ciocia, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity - Continued
For the years ended June 30, 2000, 1999 and 1998
Stock
Subscriptions/ Accumulated
Treasury Stock Note Other Total
----------------- Receivable for Comprehensive Stockholders'
Shares Amount Shares Sold Income Equity
----------------------------------------------------------------------
Balance at July 1, 1999 199,645 $ (777,039) $ (159,646) $ 8241 $ 24,959,941
Purchase of treasury stock 52,600 (257,385) (257,385)
Re-issuance of treasury stock (4,350) 22,294 30,450
Issuance of common stock on
exercise of stock options 569,876
Issuance of common stock upon
business combinations 3,220,018
Amortization of deferred compensation 27,409
Shares issued upon settlement of
litigation 6,581
Income tax benefit upon exercise
of stock options 122,638
Payment/write-off of stock
subscriptions receivable 159,646 159,646
Issuance of note receivable for
shares sold (105,000) (105,000)
Comprehensive income:
Unrealized gain on marketable securities (8,241) (8,241)
Net loss (4,013,092)
- -----------------------------------------------------------------------------------------------------------
Total comprehensive income (4,013,092)
- -----------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 247,895 $ (1,012,130) $(105,000) $ - $ 24,712,841
===========================================================================================================
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION AND
NATURE OF BUSINESS
------------------
Business
- --------
Gilman + Ciocia, Inc. and subsidiaries (the "Company" or "G+C"), which is
incorporated in Delaware, provides income tax preparation and financial planning
services to individuals and businesses. The Company has six active wholly owned
subsidiaries, Prime Capital Services, Inc ("PCS") and North Ridge Securities,
Inc. ("North Ridge") which are registered broker-dealers pursuant to the
provisions of the Securities Exchange Act of 1934; Prime Financial Services,
Inc. ("PFS") and North Shore Capital Management, Inc. ("North Shore"), which
manage PCS and North Ridge, respectively, as well as sell life insurance and
fixed annuities; Asset and Financial Planning, Ltd. ("AFP"), an asset management
business; and e1040.com, Inc. ("e1040") an internet tax preparation business.
The Company has experienced, during the year ended June 30, 2000, a net loss of
$4,013,092 and negative cash flow from operations of $2,117,446. The Company has
fallen out of compliance with two covenants of its credit facility with Merrill
Lynch and has accordingly classified this debt within current liabilities
resulting in a working capital deficit of $1,611,437 as of June 30, 2000. The
Company has reached an agreement in principal with two financial institutions
that will issue replacement credit facilities. These facilities, which are
expected to close in the second quarter of Fiscal 2001, total more than
$12,000,000, will mature over 1-5 years and will bear competitive market
interest rates. Based on several management disciplines introduced to better
manage and increase profitability, in combination with the continued growth in
financial planning and tax preparation revenues, the Company expects to increase
income and cash flows from operations in the future.
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.
Reclassifications
- -----------------
Certain prior years' numbers have been reclassified to conform with current year
presentation.
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
- ---------------------
The Company has classified its short-term investments in debt instruments as
available for sale securities that are reported at fair value with unrealized
gains and losses included in stockholders' equity or earnings, respectively.
Realized gains and losses are charged to the statement of operations as
realized.
Other Investments
- -----------------
The Company has three investments in which it exercises significant influence,
40% - 50%, these investments are accounted for by the equity method, whereby the
Company recognized its appropriate share of such entity's net income or loss.
The Company's share of the net income (loss) of approximately $31,000 ($6,000),
and $25,000 for June 30, 2000, 1999 and 1998 respectively, is included in other
income.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation and amortization are
determined using straight-line or accelerated methods over the estimated useful
lives of the assets or, for leasehold improvements, over lease terms which range
from one to seven years.
Intangible Assets
- -----------------
Intangible assets represent the identifiable intangible assets and goodwill in
connection with the acquisitions of income tax businesses, broker-dealers,
related covenants not to compete, customer lists and others. Amortization
expense is computed on a straight-line basis over a period of five to twenty
years, and amounted to $1,537,309, $814,683 and $354,649 for the years ended
June 30, 2000, 1999 and 1998, respectively.
During fiscal 2000, 1999 and 1998, the Company acquired intangible assets valued
at approximately $5,410,300, $21,424,400 and $145,000, respectively.
Website Development Costs
- -------------------------
In accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," as well as
Emerging Issues Task Force ("EIFT') 00-02, "Accounting for Website Development
Costs," the Company capitalized costs incurred in the application development
stage related to the development of its website in the amount of $280,780 and $0
in fiscal year 2000 and 1999, respectively. Amortization expense is computed on
a straight-line basis over a period of three years, the expected useful life,
and amounted to $45,797 for the year ended June 30, 2000 (Note 5).
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. Financial planning
services include securities and other transactions, and the related commission
revenue and expenses are recognized on a trade date basis. Commission revenue
and expenses on sales of life insurance policies are recognized when the
policies are effective.
Advertising
- -----------
Costs to develop direct-mail advertising are accumulated and expensed upon the
first mailing of such advertising in accordance with SOP No. 93-7 "Reporting on
Advertising Costs." Costs to develop tax season programs and associated printing
and paper costs are deferred in the first and second fiscal quarters and
expensed in the third fiscal quarter upon the first use of such advertisement in
the advertising programs.
Income Taxes
- ------------
Income taxes have been provided using the liability method in accordance with
SFAS No. 109 "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
estimated tax rates and laws to taxable years in which such differences are
expected to reverse.
Stock-based Compensation
- ------------------------
SFAS No. 123, "Accounting for Stock Based Compensation," encourages, but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation awards to employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options awarded to employees and
directors is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee or director
must pay to acquire the stock.
As required, the Company follows SFAS No. 123 to account for stock-based
compensation awards to outside consultants. Accordingly, compensation costs for
stock option awards granted to outside consultants and non-employee financial
planners is measured at the date of grant based on the fair value of the award
using the Black-Scholes option pricing model (Note 10).
Net Income (Loss) Per Share
- ---------------------------
Net income (loss) per common share amounts ("basic EPS") are computed by
dividing net earnings (loss) by the weighted average number of common shares
outstanding and exclude any potential dilution. Net income (loss) per common
share amounts assuming dilution ("diluted EPS") are computed by reflecting
potential dilution from the exercise of stock options and warrants (Note 11).
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of financial instruments, including cash and cash
equivalents, marketable securities, accounts receivable, notes receivable,
accounts payable and borrowings, approximated fair value as of June 30, 2000
because of the relatively short-term maturity of these instruments and their
market interest rates.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of trade receivables. The majority of the Company's trade
receivables are commissions earned from providing financial planning services
that include securities/brokerage services, insurance and mortgage agency
services. As a result of the diversity of services and markets as well as, the
wide variety of customers, the Company does not consider itself to have any
significant concentration of credit risk.
Comprehensive Income (Loss)
- ---------------------------
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." This
statement requires the disclosure of comprehensive income to reflect changes in
equity that result from transactions and economic events from non-owner sources.
Included in comprehensive income is unrealized gain (loss) on marketable
securities of ($8,241), $95,144, and ($86,903) for the years ended June 30,
2000, 1999, and 1998, respectively.
Segment Disclosure
- ------------------
The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 131 requires entities to disclose financial and
detailed information about their operating segments in a manner consistent with
internal segment reporting used by the Company to allocate resources and assess
financial performance (Note 13).
New Accounting Pronouncements
- -----------------------------
In March 2000, FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN 44") was issued and is effective July 1,
2000. FIN 44 clarifies the application of APB No. 25, "Accounting for Stock
Issued to Employees," with respect to the definition of an employee, the
criteria for non-compensatory plans, the consequences of modifying previous
awards and the exchange of stock compensation awards in business combinations.
No impact to the Company is expected under this interpretation.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The effective date of SAB 101 was delayed and SAB 101 will be effective for the
Company in the fourth quarter of fiscal 2001. The Company currently believes
that its revenue recognition policy is consistent with the guidance of SAB 101.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000, effective for the
Company's fiscal year ending June 30, 2001. However, in June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS 137
delays the effective date of SFAS 133, which will now be effective for the
Company's fiscal year ending June 30, 2002. SFAS 133 requires companies to
record derivative instruments as assets or liabilities, measured at fair value.
The recognition of gains or losses resulting from changes in the values of those
derivative instruments is based on the use of each derivative instrument and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. The Company does not
anticipate that the implementation of SFAS 133 will have a material impact on
the consolidated financial statements.
3. BUSINESS COMBINATIONS
----------------------
In November 1998, the Company acquired all of the outstanding stock of North
Ridge and North Shore (collectively "NSR") for $5,250,000. The acquired business
is a full-service financial organization, which provides its clients with a wide
range of financial investment services. The acquisition has been accounted for
by the purchase method. The results of operations of NSR have been included in
the Company's results of operations from November 1998.
On April 5, 1999 the Company consummated the acquisition of all of the issued
and outstanding capital stock of PCS and AFP. A newly formed subsidiary of the
Company acquired certain assets of PFS pursuant to a Stock and Asset Purchase
Agreement. PCS, AFP and PFS are collectively hereinafter referred to as Prime.
The Company delivered at the closing of this acquisition 751,004 shares of its
Common Stock (the "Purchase Shares'), for all the outstanding shares of the
common stock of PCS and AFP and for the assets acquired from PFS. The amount of
Purchase Shares may be adjusted downward, if the 1999 adjusted pre-tax profits
of Prime fails to meet certain targets set forth in the Purchase Agreement. The
purchase method of accounting was used to record the transaction.
Throughout fiscal 2000, the Company acquired five financial planning practices
with a valuation of $2,155,000, and seventeen tax practices with a valuation of
$5,323,000. The acquisitions were made in both cash and stock or all stock. The
purchase price is usually determined on the basis of their historical revenue
stream; however, the purchase value may be adjusted downward, if the 2000
adjusted pretax profits fail to meet certain revenue targets as set forth in the
purchase agreements. In fiscal 2000, the Company recorded $5,410,306 as the
measurable fair value of the assets acquired with the balance recorded in 2001
and 2002 if performance targets are met in accordance with the purchase
agreements.
The pro forma results for fiscal 2000, assuming the acquisitions had been made
at the beginning of the fiscal year, would not be materially different from
reported results. Unaudited pro forma results for fiscal 1999 and fiscal 1998
are as follows:
G&C NSR Prime Pro Forma
---------------------------------------------------------
Fiscal 1999
Revenues $36,491,000 $5,529,000 $24,993,000 $67,013,000
Net Income $1,110,000 $42,000 $982,000 $2,134,000
Income per share of common stock-basic $0.18 $0.30
Income per share of common stock-diluted $0.16 $0.28
Weighted average shares outstanding-basic 6,264,228 751,000 7,015,228
Weighted average shares outstanding-diluted 6,917,430 751,000 7,668,436
Fiscal 1998
Revenues $28,533,000 $6,016,000 $15,562,000 $50,511,000
Net Income $2,011,000 ($324,000) $181,000 $1,868,000
Income per share of common stock-basic $0.37 $0.30
Income per share of common stock-diluted $0.32 $0.26
Weighted average shares outstanding-basic 5,383,093 751,000 6,134,093
Weighted average shares outstanding-diluted 6,315,345 751,000 7,066,345
4. RECEIVABLES FROM OFFICERS AND STOCKHOLDERS
---------------------------------------------
Receivables from officers and stockholders consist of the following as
of June 30:
2000 1999
----------------- ------------------
Notes receivable from officers of the Company that are due in aggregate bi-
weekly installments at 7%. $ - $ 733,090 a
Demand loans to officers 326,633 a 689,512 a
Notes receivable from stockholders of the Company. Interest is charged
with rates between 6% and 10% per annum. 299,299 431,574
Other 101,196 285,021
---------------- ------------------
727,128 2,139,197
Less- Current portion 709,538 568,233
---------------- ------------------
Long-term portion $ 17,590 $1,570,964
================= ==================
(a) The officers have pledged their stock in the Company as collateral for
these loans.
Interest Income from officers and stockholders was approximately $60,000,
$82,000 and $21,000 for the years ended June 30, 2000, 1999 and 1998,
respectively.
5. PROPERTY AND EQUIPMENT, NET
- ------------------------------------
Major classes of property and equipment consist of the following as of
June 30:
2000 1999
----------------- ------------------
Buildings $ 405,867 $ 626,864
Equipment 4,589,851 3,330,151
Furniture and fixtures 574,148 495,175
Leasehold improvements 793,040 340,769
Software 280,780 -
Capital Leases 1,177,696 -
----------------- ------------------
7,821,382 4,792,959
Less- Accumulated depreciation and amortization 3,397,927 2,420,785
----------------- -------------------
$4,423,455 $2,372,174
================= ==================
Depreciation expense for property and equipment was $977,141, $604,724 and
$503,655 for the years ended June 30, 2000, 1999 and 1998, respectively.
6. INTANGIBLE ASSETS
-------------------
Intangible assets consist of the following as of June 30:
2000 1999
----------------- ------------------
Customer Lists $10,063,224 $4,652,918
Broker-Dealer Registration 200,000 200,000
Non-Compete Contracts 800,000 800,000
House Accounts 900,000 900,000
Administrative Infrastructure 700,000 700,000
Independent Contractor Agreements 5,700,000 5,700,000
Goodwill 6,069,980 6,069,980
----------------- ------------------
24,433,204 19,022,898
Less- Accumulated amortization 3,172,897 1,635,581
----------------- ------------------
$21,260,307 $17,387,317
================= ==================
Amortization expense is computed on a straight-line basis over periods of five
to twenty years, and amounted to $1,537,316, $814,683 and $354,649 for the years
ended June 30, 2000, 1999 and 1998, respectively.
7. DEBT
--------
Debt consists of the following as of June 30:
2000 1999
----------------- ------------------
Merrill Lynch facility (a) $7,208,052 $ -
Bank line of credit (b) - 4,000,000
Unsecured promissory notes (c) 1,250,000 -
Notes payable for client settlements, payable over periods of 3-5
years at varying interest rates between 9% to 10% 271,680 304,141
Capitalized lease obligations (note 8) 1,209,478 129,512
----------------- ------------------
9,939,210 4,433,653
Less: Current portion 9,112,734 1,695,529
----------------- ------------------
$ 826,476 $2,738,124
================= ==================
(a) The Company has a $10,000,000 credit facility with Merrill Lynch. This
facility consists of three separate loans as follows: a line of credit of
$4,000,000 and two revolver loans that total $6,000,000. The interest rate
on the line of credit is 30-day commercial paper rate plus 2.9%. The
interest rate on the two revolver loans is the 30-day commercial paper rate
plus 3.15%. The terms of the two revolving loans are sixty months, while
the line of credit expired on June 30, 2000. Both facilities are secured by
a pledge of all of the business assets of the Company and guaranteed by
each of the three principal officers of the Company up to $1,750,000. The
outstanding principal and interest balance at June 30, 2000 under the
credit facility is $7,255,101. The loan agreements contain certain negative
covenants that require the Company to maintain, among other things,
specific minimum net tangible worth and maximum debt to tangible net worth.
The Company has fallen out of compliance with two covenants, and,
accordingly, has classified all debt due to Merrill Lynch as a current
liability. As a result of the default, on June 15, 2000, Merrill Lynch
elected to forbear from exercising its remedies under the loan documents
until November 30, 2000 in order to allow the Company to seek a replacement
credit facility. The Forbearance agreement entered into between Merrill
Lynch and the Company obligates the Company to pay every two weeks a
minimum of $30,000 together with a monthly payment equal to 5% of the
Company's monthly collections. Principal and interest payments are required
to continue to be paid in accordance with the terms of the original debt
agreements. The agreement further requires that proceeds from specific
liquidations and collections go to Merrill Lynch to pay-down principal. In
addition, the Company will pay Merrill Lynch $250,000 on October 16, 2000
and November 15, 2000. The Company has reached an agreement in terms with
two institutions that will issue replacement facilities. These facilities
are expected to close in the second quarter of Fiscal 2001, totaling more
than $12,000,000.
(b) The line of credit facility provided for borrowings up to $8,000,000; with
$4,500,000 of the facility to support the Company's working capital needs,
with a rate of interest at prime plus 1.5% and a maturity date of November
30, 1999; and the $3,500,000 balance, to fund new acquisitions, with a rate
of interest charged at prime plus 1.5% and a maturity date of October 31,
2001. This line of credit was fully repaid and expired during fiscal 2000.
(c) Represent non-negotiable unsecured promissory note of $1,000,000 and an
unsecured demand note of $250,000; both bearing interest rates of 12% per
year. The promissory note is due June 30, 2000 and the demand note is
callable after September 15, 2000.
8. CAPITAL LEASE OBLIGATIONS
-------------------------
The Company is the lessee of certain equipment under capital leases expiring
through 2005. The assets and liabilities under capital leases are carried at the
lower of the present value of minimum lease payments or the fair market value of
the asset. The assets are depreciated over the shorter of their estimated useful
lives or their respective lease terms. Depreciation of assets under capital
leases is included in depreciation expense for the year ended June 30, 2000.
Minimum future lease payments under capital leases as of June 30 are as follows:
2001 $ 436,418
2002 389,231
2003 324,719
2004 183,519
2005 128,452
------------
1,462,339
Less: Amount representing finance charges 252,861
------------
Present Value of net minimum lease payments $ 1,209,478
Capital equipment leases have the lease rate factor (finance charge) built in to
the monthly installment and range between 8.25% to 11.7%.
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases
- ------
The Company is obligated under various non-cancelable lease agreements for the
rental of office space through 2009. 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,
2000:
2001 $ 3,645,028
2002 2,874,986
2003 2,094,022
2004 1,566,756
2005 968,585
Thereafter 1,381,051
$ 12,530,428
-----------------
-----------------
Rent expense for the fiscal years ended June 30, 2000, 1999 and 1998 was
$3,613,146, $2,480,067 and $2,037,117, respectively.
Professional Liability or Malpractice Insurance
- -----------------------------------------------
The Company does not maintain any professional liability or malpractice
insurance policy. Although the Company believes it complies with all applicable
laws and regulations, no assurance can be given that the Company will not be
subject to professional liability or malpractice suits.
Clearing Agreements
- -------------------
The Company is a party to clearing agreements with unaffiliated correspondent
brokers, which state that the Company will assume customer obligations should a
customer default. At June 30, 2000, approximately $100,000 of cash is held as a
deposit requirement by the correspondent brokers.
Net Capital Requirements
- ------------------------
PCS and North Ridge are subject to the SEC's Uniform Net Capital Rule 15c 3-1
[PCS] and 15c 3-3 [North Ridge], which require the maintenance of minimum
regulatory net capital and that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed the greater of 15 to 1 or $100,000
and $25,000, respectively. At June 30, 2000, PCS and North Ridge had net capital
of $934,720 and $122,486, which was $643,168 and $97,486 in excess of its
required net capital of $291,552 and $25,000, respectively.
Financial Instruments with Off-Balance Sheet Risk
- -------------------------------------------------
In the normal course of business, PCS and North Ridge execute, as agents,
transactions on behalf of customers. If the agency transactions do not settle
because of failure to perform by either the customer or the counterparties, PCS
and North Ridge may be obligated to discharge the obligation of the
nonperforming party and, as a result, may incur a loss if the market value of
the security is different from the contract amount of the transactions.
PCS and North Ridge do not anticipate nonperformance by customers or
counterparties in the above situation. The Company's policy is to monitor its
market exposure and counterparty risk. In addition, PCS and North Ridge have a
policy of reviewing, as considered necessary, the credit standing of each
counterparty and customer with which it conducts business.
Litigation
- ----------
In April 1998, an investment banker and its assignee, instituted a suit in the
U.S. District Court in Austin Texas, demanding issuance, collectively, of
100,000 warrants to purchase the Company's common stock at $5.13 per share
(alleged to have been issuable under an investment banking agreement pursuant to
which the investment banker was to have provided investment banking services to
the Company), as well as attorney's fees and exemplary damages. This action was
settled in December 1998 in a settlement agreement under which the Company
issued warrants to purchase an aggregate of 85,000 shares of the Company's
common stock and agreed to reimburse its Executive Vice President for the
transfer of an aggregate of 12,500 shares to the complainants. The Company
subsequently exchanged the warrants for an aggregate of 34,500 shares of common
stock. Expense of $139,000 was recognized in fiscal year 1999 relating to the
34,500 shares of common stock.
In August 1998, a legal action was instituted against the Company pertaining to
a wrongful death matter allegedly sustained in a Company automobile more than
twelve years ago. The complainant (an insurance company) 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 complainant (former defendant to a suit
with another insurance company) plus an additional $1.8 million payment for
which complainant ultimately may be held liable for payments made by the other
insurance company. On January 29, 1999, the complainant filed a motion for
summary judgment and on February 19, 1999, the Company filed a cross-motion for
summary judgment. The court has not yet made a ruling on either of the motions.
However, in October 2000, in an action to determine the liability allocation
between the two insurance companies that made payments related to the automobile
accident, the other insurance company was ordered to pay the complaintant
$857,000 plus interest. This payment should reduce the complainant's total
indemnification claim against the Company to an amount less than $900,000.
In July 1999, a lawsuit was initiated against the Company by Euromarket
Advisory, Inc., demanding the issuance of 150,000 warrants to purchase the
Company's common stock at $5.13 per share (alleged to have been issuable under a
consulting agreement pursuant to which the consultant was to have provided
consulting services to the Company). This action was settled in April 2000 in a
settlement agreement under which the Company issued an aggregate of 30,000
shares of the newly issued common stock of the Company. The expense associated
with this settlement had been accrued during Fiscal 1999.
The Company is also engaged in other lawsuits in the ordinary course of business
that it believes will not have a material effect on its financial position.
Payroll Taxes
- -------------
The Company annually provides its employees with Form W-2 and its outside
consultants with Form 1099 in accordance with tax law and industry practices.
While the Company has not experienced any federal or state payroll tax audits,
should a taxing authority assert that an outside consultant is an employee,
employment taxes and other amounts might be assessed. The Company believes that
it is unlikely that any such audit would have a material effect on its
consolidated financial position, results of operations or cash flows.
10. STOCKHOLDERS' EQUITY
--------------------
Warrants
- --------
During Fiscal 1999, outstanding warrants, in connection with the Initial Public
Offering in 1994, of 558,709 were registered and the corresponding shares sold
resulting in net proceeds of $2,563,995 to the Company.
Stock Option Agreements and Stock Option Plans
- ----------------------------------------------
The Company has granted stock options to employees, directors and consultants
pursuant to individual agreements or to its incentive and non-qualified stock
option plans.
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.
During Fiscal 2000, options totaling 395,998 were granted under this Option Plan
and of these options 87,833 were exercised. At June 30, 2000, all of the 816,000
options have been granted, 432,612 have been exercised and 75,223 have expired.
On April 20, 1999, the Board of Directors of the Company adopted the Company's
1999 Common Stock and Incentive and Non-Qualified Stock Option Plan (the
"Plan"), pursuant to which the Company may grant options to purchase up to an
aggregate of 300,000 shares. The Plan was approved by the Company's stockholders
on June 22, 1999, 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").
In Fiscal 2000, the Company granted options to purchase 229,877 shares under the
Plan, with 70,123 options remaining to be granted under this program. None of
the shares granted are exercised or expired at June 30, 2000.
The Company charged earnings for compensation expense of $27,409, $83,874 and
$52,993 for the years ended June 30, 2000, 1999 and 1998 respectively, in
connection with the issuance of stock options.
The table below summarizes plan and nonplan stock option activity:
Weighted
Average
Number of Exercise
Shares Price
---------------- ---------------
Outstanding, July 1, 1997 1,366,002 $ 3.59
Granted 1,748,000 9.18
Exercised (28,000) 1.93
Canceled (250,000) 5.13
---------------- ---------------
Outstanding, June 30, 1998 2,836,002 6.92
Granted 525,500 8.59
Exercised (560,779) 3.16
Cancelled (75,223) 3.07
-----------------
Outstanding, June 30, 1999 2,725,500 8.12
Granted 941,205 8.64
Exercised (87,833) 4.78
Cancelled (85,000) 5.13
-----------------
Outstanding, June 30, 2000 3,493,872 $ 8.36
-----------------
-----------------
Exercisable, June 30, 1998 845,000 $ 3.54
Exercisable, June 30, 1999 522,000 $ 3.82
Exercisable, June 30, 2000 1,952,167 $ 7.40
The weighted average fair value of options granted during the years ended June
30, 2000, 1999 and 1998 are $4.61, $5.72 and $5.41 per option, respectively.
Options outstanding and exercisable at June 30, 2000 and related weighted
average exercise price and life information follows:
Options Outstanding Options Exercisable
----------------------------------------------------
Fiscal Year Shares Price Shares Price Remaining Life
Grant Date Life (Years)
- -------------------------------------------------------------------------------
1995 340,000 $ 3.50 340,000 $ 3.50 6
1996 - - - - -
1997 135,500 2.75 135,500 2.75 3
1998 1,636,667 9.43 1,476,667 8.73 7
1999 440,500 9.26 - - 4
2000 941,205 8.64 - - 4
----------- -----------
Total 3,493,872 1,952,167
------===============------------------==================----------------------
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:
Years ended June 30,
2000 1999 1998
---- ---- ----
Net (loss) income , as reported $ (4,013,092) $ 2,181,143 $ 2,011,345
Net loss, pro forma (8,217,792) (3,506,734) (46,191)
Net income/(loss) per share, as reported
Basic (0.53) 0.35 0.37
Diluted (0.53) 0.32 0.32
Loss per share, pro forma (Basic & Diluted) (1.09) (0.51) (0.01)
The pro forma effect on net income or loss for fiscal years 2000, 1999 and 1998
does not take into consideration pro forma compensation expense related to
grants made prior to fiscal year 1996.
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
Expected life (years) 3
Interest rate 6.20%
Volatility:
30-Jun-00 71.00%
30-Jun-99 74.50%
30-Jun-98 73.60%
Dividend yield 0%
Treasury Stock
- --------------
During fiscal 2000, the Company acquired 52,600 shares of its common stock for
an aggregate cost of $257,385 and reissued 4,350 of these shares to employees.
The re-issuance gave rise to the recognition of compensation expense in the
amount of $30,450 representing the excess of the fair value of these shares at
re-issuance over proceeds received.
During fiscal 1999, the Company acquired 16,400 shares of its common stock for
an aggregate cost of $136,116 and reissued 28,070 of these shares to employees.
The re-issuance gave rise to the recognition of compensation expense in the
amount of $229,926 representing the excess of the fair value of these shares at
re-issuance over proceeds received.
During fiscal 1998, the Company acquired 60,700 shares of its common stock for
an aggregate cost of $179,123 and reissued 6,818 of these shares to employees.
The re-issuance gave rise to the recognition of compensation expense in the
amount of $61,831 representing the excess of the fair value of these shares at
reissuance over their proceeds received.
Stock Subscriptions Receivable and Note Receivable for Shares Sold
- ------------------------------------------------------------------
In fiscal 2000, the Company's proceeds on stock subscriptions received were
$83,203. Also, the Company elected to write-off the balance or $76,443 of the
remaining outstanding stock subscription receivable in fiscal 2000. For the
years ended June 30, 2000, 1999 and 1998, the Company recognized interest income
on stock subscriptions receivable of $3,406, $10,801 and $13,546, respectively.
In fiscal 2000, an employee exercised options for 21,000 shares at $5 per share
and simultaneously signed a note for $105,000, equal to the total exercise
price. The promissory note bears interest at a fixed rate of 9% per annum and is
not secured by the shares. The Company has classified the note as a reduction of
stockholders' equity while the note remains outstanding at June 30, 2000.
11. EARNINGS (LOSS) PER SHARE
-------------------------
In accordance with SFAS No. 128, reconciliation between the numerators and
denominators of the basic and diluted EPS computations for net earnings is as
follows:
Year Ended June 30, 2000
Net (Loss) Shares Per
Income Share
-----------------------------------------
Basic & Diluted EPS $(4,013,092) 7,552,396 $ (0.53)
Year Ended June 30, 1999
----------------------------------------
Basic EPS $ 2,181,143 6,264,228 $ 0.35
Dilutive Stock options
& warrants - 653,208
------------ ----------
Dilutive EPS $ 2,181,143 6,917,436 $ 0.32
Year Ended June 30, 1998
----------------------------------------
Basic EPS $ 2,011,345 5,383,093 $ 0.37
Dilutive Stock options
& warrants - 932,252
------------ -----------
Dilutive EPS $ 2,011,345 6,315,345 $ 0.32
The potentially dilutive shares, that were not included in the computation of
diluted earnings per share because to do so would be antidilutive, consist of
stock options and warrants as follows:
Options/
Warrants
---------
Year Ended June 30, 2000 1,952,167
Year Ended June 30, 1999 520,000
Year Ended June 30, 1998 675,000
12. RELATED PARTY TRANSACTIONS
--------------------------
Refer to Receivables from Officers (note 4) for more related party transactions.
Investment in ATM Partners, L.P.
- --------------------------------
In July 1995, the Company, together with one of its officers and five
individuals who are relatives of the officers of the Company formed ATM
Partners, LP former (the "Partnership"), an Investment Partnership. At July 1,
1997, the Company had approximately a 41%, interest in the Partnership. Such
partnership fully liquidated its remaining investment in fiscal 1998. During
fiscal 1998, the Company wrote-off a $100,000 receivable due from the
Partnership.
Professional Fees
- -----------------
During Fiscal 2000, 1999 and 1998, professional firms related to officers and
directors of the Company charged the Company fees totaling approximately
$166,000, $440,000 and $200,000, respectively.
13. SEGMENTS OF BUSINESS
--------------------
The Company's reportable segments are strategic business units that offer
different product and services or are managed separately because the business
requires different technology and marketing strategies. The Company has three
reportable segments: income tax preparation, financial planning services and
e1040.com.
Income tax preparation is predominantly a seasonal business that focuses on a
broad marketing program in a face to face fashion. Financial planning services
is a year-round business with a targeted marketing strategy that is serviced by
registered representatives dealing in a highly regulated environment. e1040.com
is an online tax preparation service that resides in an on-line technology
platform and requires consistent monitoring of software, systems and strategies,
however, provides the service to the clients in an on-line fashion.
The accounting policies of the segments are the same as those described in the
summary of accounting policies. The Company evaluates performance based on
operating earnings of the respective business segments.
SEGMENT REPORTING:
Financial
Tax Preparation Planning e1040.com Elimination's Consolidation
--------------- ------------ ------------ ------------- ----------------
Year ended June 30, 2000
Revenues $ 17,154,592 $ 71,267,262 $ 1,156,640 $ 89,578,494
------------- ------------- ------------- ---------------
Direct Costs 10,175,668 54,166,134 5,916,434 70,258,236
Depreciation and Amortization 491,830 1,894,616 128,562 2,515,008
General Corporate Expenses 5,390,603 15,875,904 1,135,308 22,401,815
------------- ------------- ------------- ------------- ---------------
Operating Income (loss) 1,096,491 (669,392) (6,023,664) (5,596,565)
------------- ------------- ------------- ------------- ---------------
Interest Expense 241,155 494,207 194,773 930,135
Identifiable assets 18,475,738 52,744,783 (6,338,016) (20,977,327) 43,905,178
Capital expenditures 990,034 299,903 248,227 1,538,164
Direct costs consist of the following:
Advertising 1,910,429 2,538,953 5,177,934 9,627,316
Rent 1,203,240 2,357,180 52,726 3,613,146
Salaries and commissions 7,062,000 49,270,000 685,774 57,017,774
------------- ------------- ------------- ------------- ---------------
Total Direct Costs 10,175,668 54,166,134 5,916,434 70,258,236
------------- ------------- ------------- ------------- ---------------
Year ended June 30, 1999
Revenues $ 14,102,364 $ 36,137,861 $ 203,180 $ 50,443,405
------------- ------------- ------------- ---------------
Direct Costs 6,929,524 25,550,995 472,559 32,953,078
Depreciation and Amortization 293,386 1,148,002 27,088 1,468,476
General Corporate Expenses 2,487,227 10,237,422 248,067 12,972,716
------------- ------------- ------------- ------------- ---------------
Operating Income (loss) 4,392,227 (798,558) (544,534) 3,049,135
------------- ------------- ------------- ------------- ---------------
Interest Expense 73,050 207,911 - 280,961
Identifiable assets 13,708,608 40,653,346 (280,535) (21,082,439) 32,998,980
Capital expenditures 686,433 29,915 13,064 729,412
Direct costs consist of the following:
Advertising 1,001,804 2,861,776 100,060 3,963,640
Rent 652,631 1,827,435 15,836 2,495,902
Salaries and commissions 4,673,436 20,861,784 356,663 25,891,883
------------- ------------- ------------- ------------- ---------------
Total Direct Costs 6,327,871 25,550,995 472,559 32,351,425
------------- ------------- ------------- ------------- ---------------
Year ended June 30, 1998
Revenues $ 11,955,051 $ 16,578,032 $ 28,533,083
------------- ------------- ---------------
Direct Costs 7,792,130 9,868,394 17,660,524
Depreciation and Amortization 350,289 508,102 858,391
General Corporate Expenses 2,650,936 3,960,564 6,611,500
------------- ------------- ------------- ------------- ---------------
Operating Income (loss) 1,161,696 2,240,972 3,402,668
------------- ------------- ------------- ------------- ---------------
Interest Expense 89,207 86,329 175,536
Identifiable assets 6,838,548 6,043,903 (3,131,264) 9,751,187
Capital expenditures 852,797 - 852,797
Direct costs consist of the following:
Advertising 2,171,311 1,332,030 3,503,341
Rent 818,481 1,218,636 2,037,117
Salaries and commissions 4,802,338 7,317,728 12,120,066
------------- ------------- ------------- ------------- ---------------
Total Direct Costs 7,792,130 9,868,394 17,660,524
------------- ------------- ------------- ------------- ---------------
14. TAXES ON INCOME
---------------
The provisions for income taxes and income tax benefits in the consolidated
financial statements for the June, 30 fiscal years consist of the following:
2000 1999 1998
---------------- --------------- ---------------
Federal $ (1,945,000) $ 1,292,165 $ 1,247,828
State and local 275,000 269,835 282,982
---------------- --------------- ---------------
Total current tax (benefit) provision (1,670,000) 1,562,000 1,530,810
---------------- --------------- ---------------
Deferred:
Federal 11,000 (34,734) (90,304)
State and local (488,000) (7,266) (33,696)
---------------- --------------- ---------------
Total deferred tax (benefit) provision (477,000) (42,000) (124,000)
---------------- --------------- ---------------
Total income tax (benefit) provision $ (2,147,000) $ 1,520,000 $ 1,406,810
================ =============== ===============
Deferred tax assets as of June 30, consist of the following:
2000 1999 1998
---------------- --------------- ---------------
Compensation expense recognized for financial reporting
purposes in connection with common stock option grants $ 163,000 $ 152,000 $ 114,400
Book amortization of intangibles in excess of tax 274,000 225,000 144,400
Provision for bad debts 36,000 36,000 75,200
Provision for deferred rent liability - (15,000) 27,600
Tax depreciation in excess of book (175,000) (157,000) (146,717)
Investments in marketable securities - 10,000 -
Software development costs (96,000) - -
Investments accounted for under equity method (23,000) (58,000) (62,984)
Net operating loss carryforwards for state tax purposes 491,000
---------------- --------------- ---------------
Total deferred tax assets-net $ 670,000 $ 193,000 $ 151,899
================ =============== ===============
No valuation allowance has been established for the deferred tax assets because
management believes that all of the deferred tax assets will be realized.
The net operating loss is being carried back for federal income tax purposes to
the two preceding tax years to offset taxable income for those years. The timing
of the utilization of state net operating losses being carried forward may be
impacted if there has been a change in ownership of the company pursuant to
Internal Revenue Code section 382. The income tax receivable of $3,134,824
consist of approximately $1,945,000 of federal refunds due to the NOL carryback,
$571,000 of 1998 federal and state refunds and $619,000 of overpayments.
The reconciliations of the federal statutory rate to the provision for income
taxes and income tax benefits are as follows:
Year ended June 30: 2000 1999 1998
---------------- --------------- ---------------
Federal income taxes (benefit) computed at statutory rates $ (2,094,000) -34.0% $ 1,257,000 34.0% $ 1,162,173 34.0%
State and local taxes (benefit), net of federal tax benefit (141,000) -2.2% 241,000 6.5% 205,089 6.0%
Amortization of intangible assets with no benefit 254,000 4.1% 145,000 3.9% - 0.0%
AMT credit utilized and not previously benefitted (172,000) -2.8%
Other 6,000 0.0% (123,000) -3.3% 39,548 1.2%
---------------- --------------- ---------------
Total income tax (benefit)/provision $ (2,147,000) -34.9% $ 1,520,000 41.1% $ 1,406,810 41.2%
================ =============== ===============