================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly Period Ended December 31, 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, 10605
White Plains, NY (Zip Code)
(Address of principal executive offices)
(914) 397-4829
(Issuer's Telephone Number, Including Area Code)
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 [ ]
State the number of shares outstanding of each class of the issuer's
classes of common equity, as of the latest practicable date. As of February 9,
2001, 7,993,983 shares of the issuer's common equity were outstanding.
================================================================================
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of December 31, 2000 3
and June 30, 2000
Consolidated Statements of Operations for the Three Months
and Six Months Ended December 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2000 and 1999 5-6
Consolidated Statements of Stockholders' Equity for the
Year Ended June 30, 2000 and the Quarter Ended December
31, 2000 7-8
Notes to Consolidated Financial Statements 9-11
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, June 30,
------------- ------------
2000 2000
ASSETS ---- ----
(unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,830,811 $ 4,561,293
Marketable securities 11,442 73,044
Accounts receivable, net of allowance for
doubtful accounts of $337,500 as of
December 31, 2000 and $187,500 as of
June 30, 2000 6,906,855 6,355,115
Receivables from officers, employees and
stockholders, current portion 1,076,112 709,538
Prepaid expenses and other current assets 1,324,835 1,210,611
Income taxes receivable 2,424,296 3,134,824
Deferred tax assets 2,728,092 690,000
-------------- -----------
Total current assets 18,302,443 16,734,425
Property and equipment, net of accumulated
depreciation of $4,003,495 and
$3,397,927 as at December 31, 2000
and June 30, 2000, respectively 4,412,041 4,423,455
Intangible assets, net of accumulated amortization
of $3,991,915 and $3,172,897 as at
December 31, 2000 and June 30, 2000,
respectively 22,758,615 21,260,307
Receivables from officers, employees and
stockholders, net of current portion - 17,590
Security deposits 778,146 658,818
Other assets 822,421 810,583
-------------- -----------
Total assets $ 47,073,666 $ 43,905,178
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,753,436 $ 9,112,734
Accounts payable and accrued expenses 9,475,435 9,233,127
--------------- -----------
Total current liabilities 17,228,871 18,345,861
Long-term debt - net of current portion
and net of discount of $775,203 5,234,015 826,476
Deferred tax liability - 20,000
--------------- -----------
Total liabilities 22,462,886 19,192,337
--------------- -----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock-$.001 par value-shares authorized
100,000; none issued and outstanding
Common stock-$.01 par value - shares authorized
20,000,000; 8,402,506 shares and 8,030,834
shares issued and outstanding as at December
30, 2000 and June 30, 2000, respectively 84,025 80,308
Paid-in capital 26,691,238 23,812,621
Deferred compensation 164,276 164,276
Retained earnings (loss) (564,151) 1,772,766
---------------- -----------
26,375,388 25,829,971
Less - treasury stock, at cost (1,659,608) (1,012,130)
Note receivable for shares sold (105,000) (105,000)
---------------- -----------
Total stockholders' equity 24,610,780 24,712,841
---------------- -----------
Total liabilities and stockholders' equity $ 47,073,666 $ 43,905,178
================ ===========
The accompanying notes are an integral part of these consolidated
balance sheets.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended
December 31,
2000 1999
---- ----
Revenues:
Tax preparation fees $ 1,585,776 $ 430,891
Financial planning services 17,863,513 13,906,675
------------ -----------
Total revenues 19,449,289 14,337,566
------------ -----------
Operating expenses:
Salaries and commissions 16,581,073 12,113,858
General and administrative expenses 2,086,699 2,191,821
Advertising 303,106 601,707
Brokerage fees & licenses 446,237 505,936
Rent 1,236,453 865,358
Depreciation and amortization 786,482 642,242
------------ ------------
Total operating expenses 21,440,050 16,920,922
------------ ------------
Operating loss (1,990,761) (2,583,356)
------------ -------------
Other income (expense):
Interest and investment income 124,529 207,209
Interest expense (314,030) (186,617)
Other income 23,866 (67,188)
------------ -------------
Total other income (expense) (165,635) (46,596)
------------ -------------
Loss before income tax benefit (2,156,396) (2,629,952)
Income tax benefit (1,229,145) (1,124,176)
------------ -------------
Net Loss $ (927,251) $ (1,505,776)
============== =============
Net loss per share:
Basic and Diluted $ (0.12) $ (0.20)
Weighted average shares:
Basic and Diluted 7,917,859 7,371,827
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Operations
(continued)
For the Six Months Ended
December 31,
2000 1999
---- ----
Revenues:
Tax preparation fees $ 3,195,219 $ 1,067,480
Financial planning services 37,593,851 26,006,815
------------ -----------
Total revenues 40,789,070 27,074,295
------------ -----------
Operating expenses:
Salaries and commissions 35,154,430 23,234,669
General and administrative expenses 4,022,362 4,456,992
Advertising 705,828 1,202,526
Brokerage fees & licenses 850,942 867,955
Rent 2,422,483 1,638,884
Depreciation and amortization 1,610,215 1,185,554
------------ ------------
Total operating expenses 44,766,260 32,586,580
------------ ------------
Operating loss (3,977,190) (5,512,285)
------------ -------------
Other income (expense):
Interest and investment income 190,920 238,896
Interest expense (567,737) (248,259)
Other income 18,837 36,892
------------ -------------
Total other income (expense) (357,980) 27,529
------------ -------------
Loss before income tax benefit (4,335,170) (5,484,756)
Income tax benefit (1,998,253) (2,351,028)
------------ -------------
Net Loss $ (2,336,917) $ (3,133,728)
============== =============
Net loss per share:
Basic and Diluted $ (0.30) $ (0.43)
Weighted average shares:
Basic and Diluted 7,860,754 7,349,693
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended December 31,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,336,917) $ (3,133,728)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,610,215 1,185,554
Deferred tax benefit (1,998,253) (2,587,177)
Gain on sale of marketable securities - (19,702)
Amortization of deferred and other
compensation expense (6,766) 1,180,680
Interest on stock subscriptions - (2,701)
Income tax refund 610,619 -
Changes in:
Accounts receivable (551,740) (743,481)
Prepaid expenses and other current assets (81,351) (1,988,348)
Advances to financial planners and
employees (816,699) (52,695)
Security deposits and other assets (128,137) (222,389)
Accounts payable and accrued expenses 242,307 3,671,646
Income taxes payable 40,070 -
---------- -----------
Net cash used in operating activities (3,403,120) (2,712,341)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (594,154) (822,706)
Cash payments for acquisitions - net of cash
acquired (303,944) (524,724)
Marketable securities 61,602 49,380
Proceeds from sale of investments - 25,146
Loan repayments from officers and stockholders 333,165 37,072
---------- -----------
Net cash used in investing activities (503,331) (1,235,832)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock (648,503) (45,504)
Reissuance of treasury stock 1,025 -
Proceeds from bank and other loans 11,173,175 8,155,541
Payments of bank and other loans (7,349,728) (4,000,000)
Exercise of stock options and warrants - 297,975
---------- -----------
Net cash provided by
(used in) financing activities 3,175,969 4,408,012
---------- -----------
Net increase (decrease) in cash (730,482) 459,839
Cash and cash equivalents beginning of
the period 4,561,293 3,453,354
----------- -----------
Cash and cash equivalents end of the period $3,830,811 $3,913,193
=========== ============
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows - Continued
For the Six Months Ended December 31,
2000 1999
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the three months ended for:
Interest $ 529,780 $ 248,259
Income taxes 73,569 225,311
Non-cash transactions:
Issuance of common stock as
consideration in business combination 2,013,382 -
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Details of business combinations:
Fair value of assets acquired 2,317,326 3,895,989
Less: Stock issued (2,013,382) (3,371,265)
------------ -----------
Cash paid for acquisitions 303,944 524,724
Cash acquired in acquisitions _ -
------------ -----------
Net cash paid for acquisitions $ 303,944 $ 524,724
============= ============
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Year Ended June 30, 2000 and the Six Months ended December 31, 2000
Common Stock Paid-In Deferred Retained Treasury Stock
------------ -----------------
Shares Amount Capital Compensation Earnings Shares Amount
---------------------------------------------------------------------------
Balance at July 1, 2000 8,030,834 $ 80,308 $ 23,812,621 $164,276 $ 1,772,766 247,895 $ (1,012,130)
Purchase of treasury stock 160,439 (648,503)
Reissuance of treasury stock (200) 1,025
Issuance of common stock upon
business combinations 362,351 3,624 2,009,758
Issuance of common stock in lieu
of cash payment 5,250 52 52,466
Stock based compensation 4,071 41 16,393
Warrants issued in connection with
refinancing 800,000
Net loss (2,336,917)
- ------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (2,336,917)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 8,402,506 $ 84,025 $ 26,691,238 $164,276 $ (564,151) 408,134 $ (1,659,608)
==================================================================================================================
$ (1,368,475)
The accompanying notes are an integral part of
these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity -Continued
For the Year Ended June 30, 2000 and the Six Months Ended December 31, 2000
Stock
Subscriptions/
Note Total
Receivable for Stockholders'
Shares Sold Equity
- --------------------------------------------------------------------------------
Balance at July 1, 1999 $ (105,000) $ 24,712,841
Purchase of treasury stock (648,503)
Reissuance of treasury stock 1,025
Issuance of common stock upon
business combinations 2,013,382
Issuance of common stock in lieu
of cash payment 52,518
Stock based compensation 16,434
Warrants issued in connection with
refinancing - net of amortization 800,000
Net loss (2,336,917)
- --------------------------------------------------------------------------------
Total comprehensive loss (2,336,917)
- --------------------------------------------------------------------------------
Balance at December 31, 2000 $ (105,000) $24,610,780
================================================================================
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
--------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Unaudited
---------
1. ORGANIZATION AND
NATURE OF BUSINESS
------------------
Business
- --------
Gilman + Ciocia, Inc. and subsidiaries (the "Company" or "G+C"), 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.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
-------------------
The Consolidated Balance Sheet as of December 31, 2000, the Consolidated
Statements of Operations for the three and six months ended December 31, 2000
and 1999, and the Consolidated Statements of Cash Flows for the six months ended
December 31, 2000 and 1999 have been prepared by the Company, without audit. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at December 31, 2000 and for all periods presented
have been made.
Reclassifications have been made to prior year amounts to conform with the
current year presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's June 30, 2000 Annual Report on Form 10-K.
Operating revenues are seasonal in nature with peak revenues occurring in the
months of January through April. Thus, the three-month and six-month results are
not indicative of results to be expected for the full year.
3. CONTINGENCIES
-------------
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 (a former defendant to a
suit with another insurance company) plus an additional $1.8 million payment for
which the complainant ultimately may be held liable (for payments made by the
other insurance company). 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 complainant $857,000. This order is subject to appeal, but the payment
should reduce the principal amount of the complainant's indemnification claim
against the Company to an amount less than $900,000. In addition, in January
2001, the legal action against the Company was dismissed on the Company's motion
for summary judgment based on the court's determination that the indemnification
of an insurance company in this situation would be against the public policy of
New York State. The complainant insurance company in the action against the
Company has filed a notice of appeal from the dismissal.
The Company is also engaged in other lawsuits in the ordinary course of business
that it believes will not have a material adverse effect on its financial
position or results of operations.
4. DEBT
----
The Company had a $10,000,000 credit facility with Merrill Lynch. This facility
consisted 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 was 2.9% plus the 30-day commercial paper rate. The interest rate on the
two revolver loans was 3.15% plus the 30-day commercial paper rate. The terms of
the two revolver loan facilities were sixty months, and the line of credit
facility expired on June 30, 2000. Both facilities were 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 credit facilities contained certain negative covenants that required the
Company to maintain, among other things, specific minimum net tangible worth and
a maximum ratio of debt to tangible net worth. The Company fell out of
compliance with the two covenants and, accordingly, had classified all debt due
to Merrill Lynch as a current liability at June 30, 2000. After 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 lending facility.
On November 1, 2000, the Company closed an $11,000,000 financing to replace the
Merrill Lynch credit facility. The new financing consists of a $5,000,000 debt
financing ("debt facility") with Travelers Insurance Company and a $6,000,000
senior credit facility ("senior credit facility") with European American Bank.
The interest rate on the senior credit facility is either LIBOR plus 275 basis
points on draw-downs with three-day advance notice or Prime plus .75% otherwise.
The term of the senior credit facility is twelve months. The interest rate on
the debt facility ranges from Prime plus or minus 1%. The debt facility has a
term of five years. The outstanding principal and interest balance at December
31, 2000 under the debt facility and senior credit facility was $5,098,185 and
$6,020,098, respectively.
As part of the debt facility financing with Travelers Insurance Company, the
Company issued warrants to purchase 425,000 shares of the Company's common stock
at $4.23 and 300,000 shares of the Company's common stock which will be priced
on November 1, 2002 at 75% of the average closing price for 20 previous days.
The 425,000 warrants are exercisable between November 1, 2000 and May 2, 2003,
and the 300,000 warrants are exercisable between November 1, 2001 and May 2,
2004. The estimated value of these warrants at the date issued was set at
$800,000, subject to a fair market valuation appraisal to be obtained prior to
the Company's fiscal year-end. The warrant valuation was treated as a debt
discount and amortized over the five-year term of the debt facility. The second
quarter amortization was $24,797, under the interest rate method.
On the December 31, 2000 Consolidated Balance Sheet, $5,000,000 of the Merrill
Lynch debt classified as short-term at June 30, 2000 was reclassified to
long-term based on the subsequent use of the debt facility, which has a
five-year term, to repay Merrill Lynch.
5. SEGMENTS OF BUSINESS
--------------------
The Company's reportable segments are strategic business units that offer
different products 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 uses on a broad
marketing program and which is delivered 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 and provides the service to the clients in an on-line
fashion.
SEGMENT REPORTING: Tax Financial
- ------------------ Preparation Planning e1040.com Eliminations Consolidation
-------------------------------------------------------------------------
Quarter ended December 31, 2000
- --------------------------------
Revenues $1,567,375 $17,863,513 $18,401 $19,449,289
---------- ----------- ------- ------------- -----------
Direct Costs 1,470,316 14,432,328 179,875 16,082,519
Depreciation and Amortization 152,028 585,637 48,817 786,482
General Corporate Expenses 2,475,871 2,063,884 31,294 4,571,049
------------ ----------- ------- ------------- -----------
Operating Income (loss) (2,530,840) 781,664 (241,585) (1,990,761)
------------ ----------- -------- ------------- -----------
Interest Expense 11,425 89,532 213,073 314,030
Identifiable assets 6,815,397 61,755,342 (7,149,001) (14,348,072) (47,073,666)
Capital expenditures 183,358 66,929 129,166 379,453
Direct costs consist of
the following:
Direct mail costs 141,021 141,021
Advertising 32,461 210,520 60,125 303,106
Rent 400,754 831,469 4,230 1,236,453
Salaries and commissions 896,080 13,390,340 115,519 14,401,939
--------- ---------- ------- ------------ ----------
Total Direct Costs 1,470,316 14,432,328 179,875 - 16,082,519
--------- ----------- ------- ------------ ----------
Quarter ended December 31, 1999
- --------------------------------
Revenues $ 419,879 $ 13,906,674 $ 11,013 $ 14,337,566
------------- ------------ ------- ------------ ----------
Direct Costs 409,399 10,724,053 22,659 11,156,111
Depreciation and Amortization 132,362 509,880 - 642,242
General Corporate Expenses 2,981,800 2,030,506 110,263 5,122,569
------------- ------------ ------- ------------ ----------
Operating loss (3,103,682) 642,236 (121,909) (2,583,356)
------------- ------------ ------- ------------ ----------
Interest Expense 49,618 136,999 - 186,617
Identifiable assets 13,087,283 47,818,781 947,329 (20,066,390) 41,787,003
Capital expenditures 661,375 116,933 44,397 822,705
Direct costs consist of
the following:
Direct mail costs 15,386 15,386
Advertising 22,446 579,262 - 601,708
Rent 265,457 598,061 1,840 865,358
Salaries and commissions 106,110 9,546,730 20,819 9,673,659
------------- ------------ ------- --------------- ------------
Total Direct Costs 409,399 10,724,053 22,659 - 11,156,111
------------- ------------ ------- --------------- ------------
SEGMENT REPORTING: Tax Financial
(continued) Preparation Planning e1040.com Eliminations Consolidation
- ------------------ -------------------------------------------------------------------------
Six Months ended December 31, 2000
- --------------------------------
Revenues $3,129,910 $37,593,851 $65,309 $40,789,070
---------- ----------- ------- ------------- -----------
Direct Costs 2,904,632 30,465,337 300,348 33,670,317
Depreciation and Amortization 313,278 1,206,800 90,137 1,610,215
General Corporate Expenses 5,039,786 4,406,617 39,325 9,485,728
------------ ----------- ------- ------------- -----------
Operating Income (loss) (5,127,786) 1,515,097 (364,501) (3,977,190)
------------ ----------- -------- ------------- -----------
Interest Expense 23,901 185,910 357,926 567,737
Capital expenditures 313,709 95,603 184,843 594,155
Direct costs consist of
the following:
Direct mail costs 243,548 243,548
Advertising 82,307 557,493 66,028 705,828
Rent 788,510 1,625,111 8,862 2,422,483
Salaries and commissions 1,790,267 28,282,733 225,458 30,298,458
--------- ---------- ------- ------------ ----------
Total Direct Costs 2,904,632 30,465,337 300,348 - 33,670,317
--------- ----------- ------- ------------ ----------
Six Months ended December 31, 1999
- ----------------------------------
Revenues $ 1,031,965 $ 26,006,815 $ 35,515 $ 27,074,295
------------- ------------ ------- ------------ ----------
Direct Costs 1,203,343 20,831,431 42,564 22,077,339
Depreciation and Amortization 239,950 941,219 4,385 1,185,554
General Corporate Expenses 5,593,299 3,602,847 127,541 9,323,687
------------- ------------ ------- ------------ ----------
Operating loss (6,004,628) 631,318 (138,975) (5,512,285)
------------- ------------ ------- ------------ ----------
Interest Expense 61,882 186,378 - 248,259
Capital expenditures 953,378 199,755 53,643 1,206,776
Direct costs consist of
the following:
Direct mail costs 113,972 113,972
Advertising 69,008 1,128,344 5,174 1,202,526
Rent 481,165 1,154,499 3,220 1,638,884
Salaries and commissions 539,198 18,548,590 34,169 19,121,957
------------- ------------ ------- --------------- ------------
Total Direct Costs 1,203,343 20,831,432 42,563 - 22,077,339
------------- ------------ ------- --------------- ------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information contained in this Form 10-Q and the exhibits hereto may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are based upon current information, expectations, estimates and
projections regarding the Company, the industries and markets in which the
Company operates, and management's assumptions and beliefs relating thereto.
Words such as "will," "plan," "expect," "remain," "intend," "estimate,"
"approximate," and variations thereof and similar expressions are intended to
identify such forward-looking statements. These statements speak only as of the
date on which they are made, are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results could materially differ from
what is expressed, implied or forecast in such forward-looking statements. Such
differences could be caused by a number of factors including, but not limited
to, the uncertainty of laws, legislation, regulations, supervision and licensing
by federal, state and local authorities and their impact on the lines of
business in which the Company's subsidiaries are involved; unforeseen compliance
costs; changes in economic, political or regulatory environments; changes in
competition and the effects of such changes; the inability to implement the
Company's strategies; changes in management and management strategies; the
Company's inability to successfully design, create, modify and operate its
computer systems and networks; litigation involving the Company; and risks
described from time to time in reports and registration statements filed by the
Company and its subsidiaries with the Securities and Exchange Commission.
Readers should take these factors into account in evaluating any such
forward-looking statements. The Company undertakes no obligation to update
publicly or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Overview
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.
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.
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 that 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.
In Fiscal 1999, the Company formed its subsidiary e1040.com, which acquired
all of the assets of an existing on-line tax preparation business. 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 with brick and morter or other on-line entities which are looking
for consumer-oriented content and services like e1040.com has to offer.
Results of Operations
The Company's revenues for the three months ended December 31, 2000 were
$19,449,289 compared to $14,337,566 for the three months ended December 31,
1999, an increase of $5,111,723 or 36%. Revenues for the six months ended
December 31, 2000 were $40,789,070 compared to $27,074,295 for the six months
ended December 31, 1999, an increase of $13,714,775 or 51%. This increase is
attributed to an increase in financial planning services as well as increasing
revenue from tax and accounting practices, which were acquired in mid-Fiscal
2000.
The Company's total revenues for the three months ended December 31, 2000
consisted of $1,585,776 for tax preparation/accounting services and $17,863,513
for financial planning services. For the six months ended December 31, 2000
total revenues consisted of $3,195,219 for tax preparation/accounting services
and $37,593,851 for financial planning services. Tax preparation services
represented 8% and financial planning services represented 92% of the Company's
total revenues for the quarter and the six months ended December 31, 2001. The
Company's total revenues for the three months ended December 31, 1999 consisted
of $430,891 for tax preparation/accounting services and $13,906,675 for
financial planning services. For the six months ended December 31, 1999 total
revenues consisted of $1,067,480 for tax preparation/accounting services and
$26,006,815 for financial planning services. Tax preparation services
represented 8% and 4% and financial planning services represented 92% and 96% of
the Company's total revenues for the three months and six months in Fiscal 2000,
respectively.
The Company's operating expenses for the three months ended December 31,
2000 were $21,440,050, or 110% of revenues, an increase of $47,519,128, or 27%,
compared to $16,920,922, or 118% of revenues, for the three months ended
December 31, 1999. For the six months ended December 31, 2000 operating expenses
were $44,766,260, or 110% of revenues, an increase of $12,179,680, or 37%,
compared to $32,586,580, or 120% of revenues, for the six months ended December
31, 1999. The increase in operating expenses is the result of changes to the
following areas:
Salaries and Commissions increased $4,467,215, or 37%, for the three months
ended December 31, 2000 to $16,581,073 from $12,113,858 for the three months
ended December 31, 1999. For the six months ended December 31, 2000 the increase
was $11,919,761, or 51%, to $35,154,430 from $23,234,669 in the six months ended
December 31, 1999. The increase is primarily attributed to more commissions paid
to financial planners from the increased sales of financial planning services,
the additional head count in tax/accounting offices from acquisitions, and
adding corporate staff to manage the increased number of field offices.
Rent increased $371,095, for the three months ended December 31, 2000 to
$1,236,453 from $865,358 for the three months ended December 31, 1999. For the
six months ended December 31, 2000 the increase was $783,599, or 48%, to
$2,422,483 from $1,638,884 for the six months ended December 31, 1999. The
increase is primarily attributed to the inclusion of seventeen acquired offices
during Fiscal 2000 and the increase in rent associated with the Company's new
corporate office in White Plains, New York.
Depreciation and Amortization increased $144,240, or 22%, for the three
months ended December 31, 2000 to $786,482 from $642,242 for the three months
ended December 31, 1999. For the six months ended December 31, 2000 the increase
was $424,661, or 36%, to $1,610,215 from $1,185,554 for the six months ended
December 31, 1999. The increase is primarily attributed to additional purchases
of computer equipment and additional amortization associated with acquired
businesses during Fiscal 2000.
The Company's loss from operations for the three months ended December 31,
2000 was $1,990,761 as compared to a loss of $2,583,356 for the three months
ended December 31, 1999. This decrease represents an improvement of $592,595 or
23%. For the six months ended December 31, 2000, the loss from operations was
$3,977,190 compared to $5,512,285 for the six months ended December 31, 1999, an
improvement of $1,535,095 or 28%. This improvement is attributed to implementing
cost containment initiatives through consolidating and streamlining existing
offices and reduced media advertising campaigns. Advertising decreased $298,108,
or 50%, for the three months ended December 31, 2000 to $303,106 from $601,707
for the three months ended December 31, 1999. For the six months ended December
31, 2000 the decrease was $496,698, or 41%, to $705,828 from $1,202,526 in the
six months ended December 31, 1999. Adding to the reduction in loss from
operations is the significant growth in revenue in financial planning services
and the addition of more profitable year-round tax preparation business.
Offsetting the reduction in loss from operations was the increase to the
Company's allowance for doubtful accounts by $150,000 at December 31, 2000.
The Company's loss after the income tax benefit for the three months ended
December 31, 2000 was $927,251 compared to the loss of $1,505,776 for the three
months ended December 31, 1999. This decrease represents an improvement of
$578,525 or 38%. For the six months ended December 31, 2000 the loss after the
income tax benefit was $2,336,917 compared to $3,133,728 for the six months
ended December 31, 1999, an improvement of $796,811 or 25%. This improvement is
attributed to the operational improvements, highlighted above, and a higher
second quarter income tax benefit offset by an increase in interest expense in
Fiscal 2001. The increase in interest expense was $127,413, or 68%, in the three
months ended December 31, 2000 and $319,478, for the six months ended December
31, 1999. This increase in interest expense resulted from carrying more debt in
Fiscal 2001 over Fiscal 2000. The increase to the effective tax rate for the
three months ended December 31, 2000 of 57% from 43% for the three months ended
December 31, 1999, increased the Company's income tax benefit. This higher
effective tax rate is attributable to the affect of permanent timing differences
and higher projected profits in Fiscal 2001.
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 services. Since its
inception, the Company has utilized funds from operations and proceeds from
public offerings and bank borrowings to support operations, finance working
capital requirements and complete acquisitions. However, the significant recent
growth in financial planning revenue is expected to substantially increase
future operating cash flow in the current fiscal year.
The Company's cash flows used in operating activities totaled $3,403,120
and $2,712,341 for the six months ended December 31, 2000 and 1999,
respectively. The increase of $690,779 in cash used in operating activities is
due primarily to a decrease in amortization of deferred and other compensation
expense of $1,173,914, a decrease in accounts payable and accrued expenses of
$3,429,339 and an increase in advances to employees of $764,004. These increases
in cash flows used in operating activities were offset by a decrease in net loss
of $796,811, additional depreciation and amortization of $424,661, a decrease in
deferred tax benefit of $588,924, an income tax refund of $610,619 received
during the six months ended December 31, 2000, a decrease in prepaid expenses
and other current assets of $1,906,997, a decrease in accounts receivable of
$191,741 and a decrease in security deposits and other assets of $94,252.
Net cash used in investing activities totaled $503,331 and $1,235,832 for
the six months ended December 31, 2000 and 1999, respectively. The decrease of
$732,501 is primarily due to a decrease in capital expenditures of $228,552, a
decrease in cash payments for acquisitions of $220,780 and an increase in loan
repayments from related parties of $296,093.
Net cash provided by financing activities totaled $3,175,969 and $4,408,012
for the six months ended December 31, 2000 and 1999, respectively. The decrease
in net cash provided by financing activities of $1,232,043 is attributable to a
net decrease in loan proceeds of $332,094, additional purchase of treasury stock
of $602,999 and a decrease from the proceeds from the exercise of stock options
of $297,975.
The Company had a $10,000,000 credit facility with Merrill Lynch. This
facility consisted of three separate loans as follows: a line of credit of
$4,000,000 and two revolver loans totaling $6,000,000. The interest rate on the
line of credit was 2.9% plus the 30-day commercial paper rate. The interest rate
on the two revolver loans was 3.15% plus the 30-day commercial paper rate. The
terms of the two revolver loan facilities were sixty months, and the line of
credit facility expired on June 30, 2000. Both facilities were secured by a
pledge of all of the business assets of the Company and guaranteed by three
principal officers up to $1,750,000.
The credit facilities contained certain negative covenants that required
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, the
Company was not in compliance with these two covenants, and, accordingly,
classified all debt due to Merrill Lynch as a current liability at June 30,
2000. On June 15, 2000, Merrill Lynch elected to forbear from exercising its
remedies under the credit facilities 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 obligated the Company to make
various repayments. All payments were satisfactorily made by the Company. On
November 1, 2000, the Company closed an $11,000,000 financing with Travelers
Insurance Company and European American Bank and simultaneously paid Merrill
Lynch the entire balance owed it on the outstanding credit facility. At December
31, 2000, the outstanding principal and interest balance on the replacement
credit faciility was $11,118,283.
The Company continues to discuss possible strategic capital investments
with several sources of institutional capital regarding possible capital
investments 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.
PART II - OTHER INFORMATION
Item 1. 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).
In October 2000, in an action in New York Supreme Court, Nassau County to
determine the liability allocation between the two insurance companies that
settled with the estate, the other insurance company was ordered to pay the
complainants $857,000. This order is subject to appeal, but the payment should
reduce the principal amount of the complainant's indemnification claim against
the Company to an amount less than $900,000. In addition, in January 2001, the
legal action against the Company was dismissed on the Company's motion for
summary judgment based on the court's determination that the indemnification of
an insurance company in this situation would be against the public policy of New
York State. The complainant insurance company in the action against the Company
has filed a notice of appeal from the dismissal.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" in this Quarterly Report
on Form 10-Q above.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Registrant's Articles of Incorporation, as amended,
incorporated by reference to the like numbered
exhibit in the Registrant's Registration Statement on
Form SB-2 under the Securities Act of 1933, as
amended, File No. 33-70640-NY.
3.2. Registrant's 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 Regist-
ration Statement on Form SB-2 under the Securities
Act of 1933, as amended, File No. 33-70640-NY.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
PART II
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this Quarterly Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 14, 2001
GILMAN + CIOCIA, INC.
By: /s/ Thomas Povinelli
- -----------------------------------
Thomas Povinelli
Chief Executive Officer and President
By: /s/ David D. Puyear
- ------------------------------------
David D. Puyear
Chief Financial Officer