================================================================================
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 September 30, 2001.
[ ] 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)
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 November
6, 2001, 8,586,277 shares of the issuer's common equity were outstanding.
================================================================================
PART I-FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of September 30, 2001 3
and June 30, 2001
Consolidated Statements of Operations for the Three Months
Ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2001 and 2000 5-6
Consolidated Statements of Stockholders' Equity for the
Three Months Ended September 30, 2001 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial 13-16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risks 17
PART II-OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17-19
Gilman + Ciocia, Inc.
Consolidated Balance Sheets
ASSETS
September 30, 2001 June 30, 2001
Unaudited Audited
------------------ ---------------
Cash and cash equivalents $ 2,205,904 $ 5,413,674
Marketable securities 102,628 55,933
Accounts receivable, net of allowance for doubtful accounts of
$365,500 and $291,000 as of September 30, 2001 and June 30, 2001,
respectively 12,657,283 10,813,299
Receivables from officers, stockholders and employees, current portion
net of allowance for uncollectables of $50,000 and $0 as of
September 30, 2001 and June 30, 2001, respectively 1,349,608 1,379,378
Prepaid expenses and other current assets 746,140 1,228,359
Income taxes receivable 41,059 185,338
Deferred tax assets 2,226,275 170,275
---------- ---------
Total current assets 19,328,897 19,246,256
Property and equipment, net of accumulated depreciation of $4,828,065
and $ 4,700,147 as at September 30, 2001 and June 30, 2001, respectively 4,826,210 5,052,979
Goodwill 5,498,608 5,498,608
Other intangible assets, net of accumulated amortization of $4,383,916 and
$4,056,379 as at September 30, 2000 and June 30, 2000, respectively 19,274,290 19,118,602
Deferred tax assets, net of current portion 1,460,160 1,460,160
Other assets 1,979,172 2,054,290
----------- -----------
Total assets $ 52,367,337 $ 52,430,895
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 10,971,896 $ 9,831,363
Long-term debt, current portion 2,785,955 7,786,001
Deferred tax liability, current portion 414,567 414,567
-------------- ----------------
Total current liabilities 14,172,418 18,031,931
Long-term debt, net of current portion $ 10,355,748 $ 5,425,928
Deferred tax liability, net of current portion 697,603 697,603
--------------- ---------------
Total liabilities 25,225,769 24,155,462
--------------- ---------------
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;
8,796,666 shares and 8,654,829 shares issued and outstanding
as at September 30, 2001 and June 30, 2001, respectively 87,966 86,548
Paid-in capital 28,257,580 27,711,953
Retained earnings 160,197 1,911,027
--------------- ---------------
28,505,743 29,709,528
Less-treasury stock, at cost (1,259,175) (1,329,095)
Note receivable for shares sold (105,000) (105,000)
--------------- ---------------
Total stockholders' equity 27,141,568 28,275,433
--------------- ---------------
Total liabilities and stockholders' equity $ 52,367,337 $ 52,430,895
---------------- ---------------
---------------- ---------------
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 September 30,
2001 2000
--------------- -------------
Revenues:
Tax preparation fees $ 1,512,619 $ 1,289,023
Financial planning services 19,334,312 19,719,629
e1040.com 21,824 46,907
Direct mail services 153,635 275,594
--------------- -----------
Total revenues 21,022,390 21,331,153
--------------- -----------
Operating expenses:
Salaries and commissions 18,895,667 18,653,056
General and administrative expenses 2,593,821 2,067,301
Advertising 342,984 308,144
Brokerage fees & licenses 446,368 404,705
Rent 1,402,938 1,168,570
Depreciation and amortization 802,766 724,410
--------------- -----------
Total operating expenses 24,484,544 23,326,186
--------------- -----------
Operating loss (3,462,154) (1,995,033)
---------------- -----------
Other income /(expense):
Interest and investment income 70,050 68,218
Interest expense (467,430) (253,706)
Other income 52,704 1,747
---------------- ------------
Total other income (expense) (344,676) (183,741)
---------------- ------------
Loss before income taxes benefit (3,806,830) (2,178,774)
Income taxes benefit (2,056,000) (769,107)
---------------- ------------
Net Loss $ (1,750,830) $ (1,409,667)
---------------- ------------
---------------- ------------
Net loss per share, basic and diluted $ (0.21) $ (0.18)
Weighted average shares, basic and diluted 8,398,565 7,798,813
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended September 30,
2001 2000
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,750,830) $ (1,409,667)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 802,766 724,410
Amortization of debt discount 65,922 --
Deferred tax benefit (2,056,000) (769,107)
Gain on sale of mailing services business (186,718) --
Gain on sale of building (31,297) --
Amortization of deferred and other compensation expense 71,724 47,266
Loss on asset sale agreement 176,984 --
Changes in:
Accounts receivable, net (994,584) (491,323)
Prepaid expenses and other current assets 492,424 403,196
Other assets (19,960) (183,958)
Accounts payable and accrued expenses 511,642 664,578
Income taxes receivable 144,279 694,278
---------------- -----------------
Net cash used in operating activities (2,773,648) (320,327)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (291,389) (214,701)
Cash payments for acquisitions (216,250) (75,000)
Proceeds on sale of building 106,370 --
Marketable securities (46,695) 61,602
Loan repayments from officers, stockholders and employees 81,121 125,560
---------------- -----------------
Net cash used in investing activities (366,843) (102,539)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock (49,911) (356,345)
Reissuance of treasury stock 151,429 --
Proceeds from bank and other loans 292,302 7,335
Payments of bank, capital lease obligations and other loans (461,099) (549,900)
---------------- -----------------
Net cash used in financing activities (62,279) (898,910)
---------------- -----------------
Net decrease in cash (3,207,770) (1,321,776)
CASH, and cash equivalents at beginning of period 5,413,674 4,561,293
---------------- -----------------
CASH, and cash equivalents at end of period $ 2,205,904 $ 3,239,517
---------------- -----------------
---------------- -----------------
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows-Continued
For the Three Months Ended September 30,
2001 2000
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 245,584 $ 163,254
Income taxes -- 55,861
Noncash transactions:
Re-issuance of treasury stock at fair value 22,936 --
Issuance of common stock as consideration
in business combination 613,157 260,222
Capital leases 32,649 --
Receivable on sale of mailing services $ 347,000 $ --
Receivable on asset repurchase agreement $ 342,580 $ --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Details of business combinations:
Fair value of assets acquired $ 1,443,225 $ 335,222
Less: Liabilities assumed (613,818) (260,222)
Less: Stock issued (613,157) --
---------------- ------------------
Cash paid for acquisitions $ 216,250 $ 75,000
---------------- ------------------
---------------- ------------------
The accompanying notes are an integral part of these consolidated statements.
Gilman + Ciocia, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the three months ended September 30, 2001
Note
Receivable Total
Common Stock Paid-In Retained Treasury Stock For Shares Stockholders'
Shares Amount Capital Earnings Shares Amount Sold Equity
-------------------------------------------------------------------------------------------------
Balance at July 1, 2001 8,654,829 $86,548 $27,711,953 $1,911,027 337,519 $ (1,329,095) $ (105,000) $28,275,433
Re-issuance of treasury stock
to employee stock purchase plan 54,534 (54,368) 119,831 174,365
Issuance of common stock upon
business combinations 183,013 1,830 611,327 613,157
Rescindment of acquisition (41,176) (412) (120,234) (120,646)
Shares from employee stock
purchase plan returned to
treasury 14,596 (49,911) (49,911)
Net loss (1,750,830) (1,750,830)
---------------------------------------------------------------------------------------------------
Total comprehensive income (1,750,830) (1,750,830)
---------------------------------------------------------------------------------------------------
Balance at September 30, 2001 8,796,666 $87,966 $28,257,580 $ 160,197 297,747 $(1,259,175) $ (105,000)$27,141,568
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
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
------------------
Gilman + Ciocia, Inc. and subsidiaries (the "Company"), 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.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
--------------------
The Consolidated Balance Sheet as of September 30, 2001, the Consolidated
Statements of Operations for the three months ended September 30, 2001 and 2000,
and the Consolidated Statements of Cash Flows for the three months ended
September 30, 2001 and 2000 have been prepared by the Company. In the opinion of
management, all adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the financial position, results of
operations and cash flows at September 30, 2001 and for all periods
presented.
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, 2001 Annual
Report on Form 10-K.
Operating revenues are seasonal in nature with peak revenues occurring in the
months of January through April. Thus, this quarter's three-month results
include seasonal revenues and are not indicative of results to be expected
for the entire year.
3. NEW ACCOUNTING PRONOUNCEMENT
----------------------------
During the third quarter of 2001, the Financial Accounting Standards Board
issued SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No.
144, "Accounting for the Impairment and Disposal of Long-Lived Assets." These
new standards clarify and supersede the existing guidance for the reporting
and accounting for the asset impairments and asset retirements.
4. CONTINGENCIES
-------------
On August 21, 1998, Mercedes Benz Credit Corporation, Allianz Insurance Company,
and Allianz Underwriters, Inc. filed a complaint against the Company in the
New York Supreme Court, Nassau County. The complaint seeks indemnification in
the amount of up to approximately $3.5 million payment from Gilman + Ciocia,
Inc. The allegations in the complaint are based upon a $1.7 million payment
made by the plaintiffs in a settlement reached on October 3, 1996 with the
estate of Thomas Gilman in a wrongful death action, upon an additional
approximately $1.8 million payment made to the estate in the settlement for
which plaintiffs ultimately may be held liable. (An action is currently
pending in New York Supreme Court, Nassau County to determine the liability
allocation between the settlors with the estate). Gilman + Ciocia, Inc. served
its answer on September 18, 1998 asserting numerous defenses, which it believes,
are meritorious. On January 29, 1999, the plaintiffs filed a motion for
summary judgment and on February 19, 1999, the court granted the Company's
cross motion for summary judgment. However, the plaintiffs have appealed the
lower court's decision. In October 2001, the lawsuit was settled by the Company
for $140,000.
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.
5. DEBT
----
On November 1, 2000 ("effective date"), the Company closed an
$11,000,000 financing to replace its 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 ("EAB"). The interest rate on
the senior credit facility is either LIBOR plus 275 basis points or Prime plus
.75%. The term of the senior credit facility is twelve months and requires a
30-day clean-up period on the loan prior to its maturity on October 30, 2001.
The Company has received a 30 day extension on repayment terms while a
replacement senior credit facility is finalized. The interest rate on the
debt facility will range from Prime plus or minus 2.25% and has a term of
five years. The outstanding principal and interest balance at September
30, 2001 under the debt facility and senior credit facility was $5,468,973 and
$6,005,620, respectively.
As part of the debt facility financing with Travelers Insurance Company, the
Company issued warrants to purchase 725,000 shares of the Company's common
stock. Of this amount, 425,000 warrants were issued to purchase at $4.23 per
share, representing the average closing price for 20 days before the effective
date. The 425,000 warrants are exercisable between November 1, 2000 and May
2, 2003. The remaining warrants to purchase 300,000 shares of the Company's
common stock will be awarded based on a factor of the 20-day average trading
price on the first anniversary of the shares, and will have a term of thirty
months from the date of grant. The value as determined by an external
appraisal of these warrants at the date issued, was set at $800,000. The
warrant valuation was treated as a debt discount and amortized over the
five-year term of the debt facility under the interest rate method. The
amortization for the three months ended September 30, 2001 was $65,922.
The Company has signed on September 26, 2001 a commitment letter with another
commercial bank for a replacement senior credit facility, which will replace the
existing EAB senior credit facility. The new credit facility is expected to
close before the end of November 2001. The total new facility will be
$7,000,000 and will be structured as a $2,000,000 revolving loan with a two-year
term. The balance of $5,000,000 will be structured as a five-year fully
amortizing loan. The interest rate on the new credit facility will be LIBOR
plus 2.75%.
6. GOODWILL AND INTANGIBLE ASSETS
------------------------------
The Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS
142") - Goodwill and Other Intangible Assets, in Fiscal 2002. Under SFAS 142,
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed annually for impairment. All other intangibles with a finite
useful life continue to be amortized over their remaining useful life. Upon
initial application of this statement, management reassessed the fair value of
its reporting units, intangible assets and goodwill and determined that the fair
values exceed the carrying values and that the remaining amortization period of
its intangibles represents the remaining useful life. The Company intends to
complete a comprehensive impairment test of its reporting segments together with
an independent valuation firm by the end of the second quarter. Goodwill and
intangible assets consist of the following classes as of:
September 30, 2001
------------------------------------------------
Weighted average
Accumulated amortization
Carrying Costs Amortization Net period- in years
Customer Lists $ 15,068,206 $ 2,636,066 $12,432,140 9.32
Broker-Dealer Registration 200,000 26,990 173,010 20
Non-Compete Contracts 1,090,000 444,300 645,700 4.67
House Accounts 900,000 249,470 650,530 12.5
Administrative Infrastructure 700,000 261,597 438,403 7
Independent Contractor Agreements 5,700,000 765,493 4,934,507 20
Goodwill 6,333,980 835,372 5,498,608
-----------------------------------------------
$ 29,992,186 $ 5,219,288 $24,772,898
-----------------------------------------------
-----------------------------------------------
June 30, 2001
--------------------------------------------------------------------
Customer Lists $ 14,584,980 $ 2,491,739 $12,093,241 9.26
Broker-Dealer Registration 200,000 24,493 175,507 20
Non-Compete Contracts 1,090,000 382,327 707,673 5.5
House Accounts 900,000 226,970 673,030 12.5
Administrative Infrastructure 700,000 236,603 463,397 7
Independent Contractor Agreements 5,700,000 694,246 5,005,754 20
Goodwill 6,333,980 835,372 5,498,608
----------------------------------------------
$ 29,508,960 $ 4,891,750 $24,617,210
----------------------------------------------
----------------------------------------------
Amortization expense for intangible assets (other than goodwill) will
continue to be amortized on a straight-line basis over periods ranging from
five to twenty years and for the three months ended September 30, 2001 was
$327,537. The annual amortization expense for the next five fiscal years,
assuming no further acquisitions or dispositions will be:
2002 1,469,883
2003 1,412,886
2004 1,383,138
2005 1,310,950
2006 1,232,019
The Company has three reportable segments with goodwill (see note 6 segment
reporting). The carrying amounts of goodwill at September 30, 2001 and
June 30, 2001, are as follows:
Company Tax Broker Dealer
Offices Operations e1040.com
Balance as of September 30 and June 30, 2001 $ - $ 5,264,858 $233,750
The table below illustrates the Company's reported results after applying
SFAS No. 142 to the Company's three months ended September 30, 2001 and 2000.
For the three months ended September 30, 2001 2000
------------- --------------
Goodwill amortization $ - $ (82,807)
------------- --------------
------------- --------------
Reported net loss $ (1,750,830) $ (1,409,667)
Add back: Goodwill amortization - 82,807
------------- --------------
Adjusted net loss $ (1,750,830) $ (1,326,861)
------------- --------------
------------- --------------
Basic and diluted earnings per share:
Reported net loss $ (0.21) $ (0.18)
Add back: Goodwill amortization - 0.01
------------- --------------
Adjusted net loss $ (0.21) $ (0.17)
------------- --------------
------------- --------------
7. SEGMENTS OF BUSINESS
--------------------
The Company's reportable segments are strategic business units that offer
different products and services or are managed separately and have unique
and distinctly different business models. The Company has three reportable
segments including Company Tax Preparation and Financial Planning Offices,
Broker Dealer Operations and e1040.com.
Company Tax Preparation and Financial Planning Offices provide integrated
tax and financial services through Company managed offices. Included in this
segment was Progressive Mailing Services, the Company's in-house direct
mail provider. Effective September 2001, the Company sold the mailing
services division to focus on its core businesses, net proceeds of $347,000
were received in October 2001 and a gain of $186,718 was recorded in the three
months ended September 30, 2001.
The Company's Broker/Dealer Operations represent the financial planning and
securities business that clears through either PCS or North Ridge. All Company
employed Registered Representatives are licensed with either of these broker/
dealers.
e1040.com is an online tax preparation service that provides tax customers tax
return preparation under a fully automated option or with live tax preparer
assistance.
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.
The following table sets forth information covering the Company's operations
by reportable segment as of and for the quarters ended September 30, 2001 and
2000:
Revenues: 2001 2000
------------------- -------------- --------------
Company Tax Offices
Tax Preparation Business and
Third Party Direct Mail Services $ 1,666,255 $ 1,564,617
Financial Planning Business 9,360,628 8,490,177
------------- ------------
Total Company Tax Offices 11,026,882 10,054,794
Broker Dealer Operations 18,424,424 19,232,548
e1040.com 21,824 46,907
Intercompany revenue (8,450,739) (8,003,096)
-------------- -------------
Total revenue $ 21,022,390 $ 21,331,153
Income (loss) from operations:
------------------------------
Company Tax Offices $ (4,004,106) $ (2,036,733)
Broker Dealer Operations 875,956 164,617
e1040.com (334,004) (122,916)
-------------- --------------
Total income (loss) from operations $ (3,462,154) $ (1,995,033)
-------------- --------------
Interest expense:
-----------------
Company Tax Offices $ (306,190) $ (151,881)
Broker Dealer Operations (156,125) (99,002)
e1040.com (5,115) (2,822)
-------------- --------------
Total interest expense $ (467,430) $ (253,706)
-------------- --------------
Interest income:
-----------------
Company Tax Offices $ 19,008 $ 1,077
Broker Dealer Operations 51,683 54,266
e1040.com - -
-------------- --------------
Total interest income $ 70,692 $ 55,343
-------------- --------------
Other income (expenses):
------------------------
Company Tax Offices $ 51,738 $ 19,651
Broker Dealer Operations - (9,300)
e1040.com 324 4,271
-------------- --------------
Total other income (expenses) $ 52,062 $ 14,622
-------------- --------------
Income (loss) before taxes:
----------------------------
Company Tax Offices $ (4,239,550) $ (2,167,886)
Broker Dealer Operations 771,515 110,580
e1040.com (338,795) (121,468)
-------------- --------------
Total income (loss) before taxes $ (3,806,830) $ (2,178,774)
-------------- --------------
Depreciation and amortization:
------------------------------
Company Tax Offices $ 497,696 $ 418,249
Broker Dealer Operations 218,657 264,839
e1040.com 86,413 41,322
-------------- ---------------
Total depreciation and amortization $ 802,766 $ 724,410
-------------- ---------------
Identifiable assets:
---------------------
Company Tax Offices $ 45,177,917 $ 38,448,744
Broker Dealer Operations 21,371,808 22,150,149
e1040.com 767,522 721,775
Intercompany elimination (14,949,910) (18,799,268)
-------------- ---------------
Total identifiable assets $ 52,367,337 $ 42,521,400
-------------- ---------------
Capital expenditures:
---------------------
Company Tax Offices $ 191,528 $ 130,350
Broker Dealer Operations 99,861 28,674
e1040.com 0 55,677
-------------- ---------------
Total capital expenditures $ 291,389 $ 214,701
-------------- ----------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
For the three months ended September 30, 2001 and 2000, compared.
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 and its 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 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 investments, insurance, pension and estate
planning. The Company capitalizes on this situation by making financial
planning services available to clients. 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 and/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. The Company is also a licensed
mortgage broker. 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 the first quarter of Fiscal 2002, approximately 7% of the
Company's revenues were earned from tax preparation services, 92% were earned
from all financial planning and 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 is a necessary adjunct to its financial planning
activities. Neither segment would operate as profitably by itself and the two
segments leverage off each other improving profitability and client retention.
Results of Operations
The Company's revenues for the three months ended September 30, 2001
were $21,022,390 compared to $21,331,153 for the three months ended
September 30, 2000, a decrease of $308,763 or 1%. Of the total decrease,
$358,317 was attributable to a reduction in the Company's financial planning
business during the month of September, $121,959 was from a reduction in third
party direct mail business from the sale of the Progressive Mailing
division during Fiscal 2002 and $25,083 was from a reduction in e1040.com.
Offsetting these reductions, was $223,596 increase in tax preparation
services from the inclusion of the nine acquisitions made in Fiscal 2001 and
one in Fiscal 2002.
The Company's total revenues for the three months ended September 30,
2001 consisted of $1,512,619 for tax preparation/accounting services,
$19,334,312 for financial planning services, $21,824 for e1040.com and
$153,635 for third party direct mail services. Tax preparation services
represented 7.2%, financial planning services represented 92.0%, third
party direct mail services represented 0.7%, and e1040.com representing 0.1%
of the Company's total revenues for the first three months in Fiscal 2002. The
Company's total revenues for the three months ended September 30, 2000
consisted of $1,289,023 for tax preparation/accounting services, $19,719,629
for financial planning services, $46,907 for e1040.com and $275,594 for third
party direct mail services. Tax preparation services represented 6.0%,
financial planning services represented 92.4%, e1040.com represented 0.2%
and third party direct mail services represented 1.3% of the Company's total
revenues for the first three months in Fiscal 2001.
The Company's operating expenses for the three months ended September
30, 2001 were $24,484,544 or 117% of revenues, an increase of $1,158,358 or 5%,
compared to $23,326,186, or 109% of revenues for the three months ended
September 30, 2000. The increase in operating expenses was attributed to an
increase of $242,611 in salaries and commissions, $526,520 in general and
administrative expenses, $234,368 in rent, $41,663 in brokerage fees and
licenses, $34,840 in advertising and $78,356 in depreciation and
amortization. Of the total increase in operating expenses, $933,795 or 81% was
attributed to acquisitions made in Fiscal 2001 and the first quarter of Fiscal
2002.
Salaries and Commissions increased $242,611 or 1% in the three
months ended September 30, 2001 to $18,895,667, from $18,653,056 in the three
months ended September 30, 2000. Of the total increase, $741,916 was
attributed to acquisitions made in Fiscal 2001 and the first quarter of Fiscal
2002, $458,843 was attributed to the addition of corporate and field staff,
$214,562 was from the new telemarketing center and offsetting these
increases was primarily the reduction of commissions expense associated with the
reduction in financial planning fees.
General and administrative expenses increased $526,520 or 25% in the
three months ended September 30, 2001 to $2,593,821, from $2,067,301 in the
three months ended September 30, 2000. Of the total increase, $121,085
or 23% was attributed to acquisitions made in Fiscal 2001 and the first
quarter of Fiscal 2002, $157,510 or 30% was attributed to additional
communication costs from web enabling more of our offices, $50,406 or 10% was
attributed to the new telemarketing center, $150,000 or 28% was attributed to
an increase in reserves, $191,229 or 36% was primarily attributed to
additional third party legal, audit and tax services. These increases
were offset by a decrease in costs associated with seminar programs offered by
financial planners.
Rent increased $234,368 or 20% in the three months ended September
30, 2001 to $1,402,938, from $1,168,570 in the three months ended September
30, 2000. Of the total increase, $50,183 or 22% was attributed to acquisitions
made in Fiscal 2001 and the first quarter of Fiscal 2002, $7,282 or 3% from
the addition of the new telemarketing center and $25,085 or 12% for early
lease termination payments from merging several offices. The additional
increase of $151,818 or 11% of total rent was primarily attributable to rate
adjustments and additional office space taken by several existing offices.
Advertising increased $34,840 or 11% in the three months ended
September 30, 2001 to $342,984, from $308,144 in the three months ended
September 30, 2000. The increase is primarily attributed to new targeted
marketing campaigns from the Company's financial planners.
Depreciation and amortization increased $78,356 or 11% in the three
months ended September 30, 2001 to $802,766, from $724,410 in the three months
ended September 30, 2000. The adopting of SFAS 142 during the quarter, which
suspends amortization of goodwill, helped to reduce amortization by
$74,625. The overall increase in depreciation and amortization is from a
larger depreciable fixed asset base in Fiscal 2002 over Fiscal 2001.
The Company's loss from operations for the three months ending
September 30, 2001 was $3,462,154 as compared to a loss of $1,995,033 for the
three months ended September 30, 2000, an increase loss of $1,467,121 or
74%. Of the total increase loss, $432,258 or 31% was attributed to
acquisitions made in Fiscal 2001 and the first quarter of Fiscal 2001, $274,244
or 19% was from adding our telemarketing center, $211,087 or 15% from
e1040.com and $36,984 or 3% from Progressive Mailing, our division sold in
the September 2001.
The Company's loss before income tax benefit for the three months
ended September 30, 2001 was $3,806,830 compared to $2,178,774 for the three
months ended September 30, 2000. This increase loss of $1,628,056 or 75% was
attributed to the operating losses highlighted above and an increase in interest
expense of $213,724 or 84% in the three months ended September 30, 2001 to
$467,430, from $253,706 in the three months ended September 30, 2000. The
increased expense is the result of carrying more debt in Fiscal 2001 over
Fiscal 2000 as well as from the $65,922 amortization of the debt discount
relating to the Traveler's warrants. Offsetting the increase interest expense
was an increase in other income for the three months ended September 30, 2001
of $50,957 to $52,704, from $1,747 in the three months ended September 30,
2000. The increase is primarily the result of a $31,297 gain in the disposal
of a building owned by the Company, and a $186,718 gain on the sale of the
Company's Progressive Mailing division offset by a loss of $176,984 on the
rescission of an acquisition contract.
The Company's loss after income tax benefit for the three months
ended September 30, 2001 was $1,750,830 compared to $1,409,667 for the three
months ended September 30, 2000. This increased loss of $341,163 or 24% was
attributed to the operating losses highlighted above but offset by an increase
in the Company's effective tax rate to 54% for the three months ended
September 30, 2001 from 35% for the three months ended September 30, 2000,
which increased the Company's income tax benefit. The Company's effective tax
rate differs from the statutory rate because of the amortization of other
intangible assets not being deductible for income tax purposes, as well as the
inclusion of state income taxes and benefits.
Liquidity and Capital Resources
The Company's revenues have been partly seasonal and are expected to
continue to be somewhat seasonal. As a result, the Company must generate
sufficient cash during the tax season, in addition to its available bank
credit, 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. The Company believes that the resources available
will be sufficient to finance its operations.
The Company's cash flows used in operating activities totaled
$2,773,648 and $320,327 for the three months ended September 30, 2001 and
2000, respectively. The increase of $2,453,321 in cash used is due
primarily to an increase in net loss of $341,163 to $1,750,830 in September 30,
2001 from $1,409,667 in September 30, 2000, an increase in net accounts
receivables of $503,261, a gain recognized in the sale of Progressive Mailing
of $186,718, a gain on sale of building of $31,297, an increase in
deferred tax benefit of $1,286,893 and an increase in income taxes receivable
of $549,999. These increases in cash flow used in operating activities were
offset by an increase in the amortization of debt discount of $65,922, an
increase in depreciation and amortization expense of $78,356, a loss on the
rescission of an acquisition contract of $176,984 and a decrease in other
assets of $169,998.
Net cash used in investing activities totaled $366,843 and $102,539
for the three months ended September 30, 2001 and 2000, respectively. The
increase of $264,304 is primarily attributed to an increase in cash payments for
acquisitions of $141,250, a decrease in loan repayments from officers and
stockholders of $44,439 and an increase in capital expenditures of $76,688.
These increases in cash used in investing activities were offset by proceeds
received from the sale of a building of $106,370.
Net cash used in financing activities totaled $67,279 and $898,910
for the three months ended September 30, 2001 and 2000, respectively. The
decrease in cash used in financing activities of $831,631 is attributed to
an increase in proceeds of bank and other loans of $284,967, a decrease in the
acquisition of treasury stock of $306,434 and an increase in the proceeds from
the re-issuance of treasury stock of $151,429 and a decrease in the payments of
bank and capital lease obligations of $88,801.
The Company had a $10,000,000 credit facility with Merrill Lynch.
This facility consisted of three separate loans including: a line of credit
of $4,000,000 and two revolver loans totaling $6,000,000. On November 1,
2000, the Company closed an $11,000,000 financing with Travelers Insurance
Company ("Travelers") and European American Bank ("EAB") and simultaneously
paid Merrill Lynch the entire balance owed it on the outstanding credit
facility, terminating its lending relationship with Merrill Lynch.
The EAB senior credit facility totals $6,000,000 and is structured
as a line of credit for a term which expires on October 30, 2001. However,
the Company has received a 30-day extension while a replacement facility is
finalized. The interest rate on the facility is a fixed rate of interest
equal to the reserve adjusted LIBOR plus a margin of 275 basis points for
periods of 30, 60 or 90 days. The effective interest rate for Fiscal 2001 was
8.47%. The facility is secured by a pledge of all business assets of the
Company and guarantees by the four principal officers. The outstanding
principal and interest due as of September 30, 2001 was $5,973,175 and $32,445,
respectively.
The Company has signed on September 26, 2001 a commitment letter
with another commercial bank for a replacement senior credit facility, which
will replace the existing EAB senior credit facility. The new credit facility is
expected to close before the end of November 2001. The total new facility will
be $7,000,000 and will be structured as a $2,000,000 revolving loan with a
two-year term. The balance of $5,000,000 will be structured as a five-year
fully amortizing loan. The interest rate on the new credit facility will be
LIBOR plus 2.75%.
The Travelers loan is in the amount of $5,000,000 and has a term of
five years. In the first two years, the only debt service required is
interest in arrears on the first and second anniversary dates. Beginning in
November 2002, the loan begins the repayment of principal in the amount of
$138,889 per month, beginning on the last day of each month until repaid in
full. The interest due during the amortization period will be calculated on
the average loan balance outstanding and will continue to be paid in arrears
on the anniversary date of the loan. The interest rate on this loan will
range from Prime minus 2.25% to Prime plus 2.25%. The actual interest rate
will be determined based upon the level of Travelers financial products
distributed by the Company. The Travelers facility is secured, subordinate to
the EAB facility, by all assets of the Company and guaranteed by three
principal officers of the Company. As of September 30, 2001, the total
principal and interest due was $5,000,000 and $468,973, respectively.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Market risk and Sensitivity Analysis
There have been no material changes in market risk from those reported
at June 30, 2001.
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 company's that settled with the estate, the other insurance company
was ordered to pay the complainants $857,000. 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
filed a notice of appeal from the dismissal. In October 2001, the lawsuit was
settled by the Company for $140,000.
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 Registration
Statement on Form SB-2 under the Securities Act of 1934.
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 the
exhibit in the Registrant's Proxy Statement on Form
14-A under the Securities Exchange Act of 1934, as
amended, filed on June 22, 1999.
10.3 2000 Employee Stock Purchase Plan of the Registrant,
incorporated by reference to the exhibit in the Registrant's
Proxy Statement on Form14-A under the Securities Exchange
Act of 1934, as amended, filed 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 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
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 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 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
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 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 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 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
report on Form 8-K, dated April 5, 1999.
(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 Quarterly Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 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