February 16, 2006
United States Securities and Exchange Commission
Division of Corporation Finance
100 F. Street N.E.
Washington, D.C. 20549-0406
Attention: Mr. Larry Spirgel
Assistant Director
RE: Gilman + Ciocia, Inc.
Form 10-K for Fiscal Year Ended June 30, 2005
Filed September 28, 2005
Form 10-Q for Fiscal Quarter Ended September 30, 2005
File No. 000-22996
Dear Mr. Spirgel:
This letter is being furnished in response to comments contained in the letter
dated January 10, 2006 (the "Letter") from Larry Spirgel, Assistant Director, of
the Staff (the "Staff") of the United States Securities and Exchange Commission
(the "Commission") to Dennis Conroy, Chief Accounting Officer of Gilman +
Ciocia, Inc. (the "Company") The comments of the Staff and the Company's
responses are set forth below and are keyed to the sequential numbering of the
comments and the headings used in the Letter.
Form 10-K for Fiscal Year Ended June 30, 2005
Report of Independent Registered Public Accounting Firm, page 32
1. Please have your auditor explain to you their consideration of SAS 59 in
determining not to include going concern modifications in their audit
report. In your response letter, please have your auditor explain how they
addressed the following in making their determination:
o Your working capital deficit and shareholders' deficit as of June
30, 2005
o Your operating loss for each of the previous three fiscal years.
o The fact that you were in default of substantially all of your debt
as of June 30, 2005.
Please see the enclosed letter from Radin, Glass & Co., LLP.
Consolidated Statements of Operations, page 34
2. Explain to us the nature of your Salaries, Brokerage Fees and Licenses,
Rent and Depreciation and Amortization line items and tell us your GAAP
basis for not including them as part of Cost of Sales. Otherwise, please
revise.
The Staff is supplementally advised that the Company has included as Cost
of Sales only its commission expense attributed to the revenues recorded,
since commission expense is the single largest direct variable cost
attributed to the sales recorded. Generally accepted accounting principles
do not define which expenses to include or exclude from Cost of Sales.
FASB Concepts Statement No. 3 - Elements of Financial Statements merely
explains revenues and expenses. SEC Rule 210.5-03(b)2 discusses "Costs and
expenses applicable to sales and revenues", with no clear definition of
what is to be included in such cost category. Management of the Company
determined that commission expense related to its revenues is the single
best tool for determining the Company's profitability, and accordingly
included in Cost of Sales commission expense only. The Company previously
surveyed other public company filings and found similar presentations of
Cost of Sales.
Alternatively, a majority of the public company filings of companies in
similar industries to the Company followed the [AICPA Broker Dealer
format], which included no Cost of Sales category. This presentation,
further supports there is no definitive rule as to which items to include
in the Cost of Sales category. [The Company had filed its financial
statements with the SEC using such presentation as suggested by the AICPA
Broker Dealer guide through March 31, 2004.]
The Company's tax preparation business is intended to generate leads for
its financial planning business and all tax returns are assessed for
potential sales opportunities. Commission expense related to the Company's
tax preparation business is included in the commission expense line.
During conversations with the Staff, the Company had been asked for
additional information regarding rent, salaries, and brokerage fees.
Rent expense for the Company is the expense related to the Company
headquarters location and each of its retail tax and financial planning
offices. The Company headquarters location processes transactions and
monitors data for its field office locations.
Salaries expense includes all headquarters staff, including senior
management and salary expense related to administrative field office
employees. Headquarters salaries expense is approximately $4.5 million per
fiscal year while field office administrative staff expense is
approximately $3.7 million per fiscal year.
Brokerage fees includes all fees charged to the firm for clearing and
processing transactions thru its clearing firm.
Based on the Company's conversations with the Staff, any changes to the
presentation will be carried out prospectively, effective with the Form
10Q for the quarter ended March 31, 2006.
Consolidated Statements of Cash Flows, page 36
3. Explain to us the nature of the line items Due from Office Sales and
Receivables from officers, shareholders and employees and tell us your
GAAP basis for including these line items in the operating activities
section of your cash flow statements.
The Staff is supplementally advised that, historically, the line item Due
from Office Sales, in Company financial statements, which currently only
represents receivables from office sales, was included in the line item
Receivables from officers, shareholders and employees. Historically, this
line item included receivables for loans given to new representatives as
hiring incentives as well as other general loans given to employees which
were clearly operational activities. The Company will revise future
filings to include the line item Due from Office Sales in investing
activities section of its cash flow statement.
Organization and Nature of Business, page 38
Advertising Expense, page 41
4. We note your statement in the middle of page 46, "Deferred expense
consists primarily of advertising and is being amortized straight line
over two years." Please tell us the nature of this advertising and explain
to us in detail your consideration of SOP 93-7 in deciding to defer these
costs and amortize them over a two year period.
The Staff is supplementally advised that the nature of the advertising
referred to is for a contract with the NY Mets for advertising rights for
2005 and 2006, which give the Company the right to advertise on signage at
Shea Stadium during this period. The contract is payable over the same
two-year period. In considering SOP 93-7, the Company concluded that this
advertising expense should be capitalized under this statement. Per
paragraph .44 of SOP 93-7, the cost of the advertising space should not be
reported as advertising expense before the space is used.
6. Goodwill, page 47
5. Please explain to us in detail how you tested your goodwill for impairment
for each period presented and tell us the specific GAAP guidance that you
followed to perform the impairment tests. In addition, tell us how many
reporting units you have for purposes of testing goodwill for impairment
and how you identified these reporting units under the guidance in SFAS
142. Further, explain to us the nature of PCS, Prime Financial Services,
Inc. and AFP and tell us how you considered them in your identification of
reporting units.
The Staff is supplentally advised that for each year presented, the
Company used an external valuation group, CBIZ, Inc., to test its goodwill
for impairment, of which none resulted in an impairment to be recorded.
The Company notes that the line item on the Consolidated Statements of
Operations, Goodwill Impairment, should read Intangible Impairment. The
scope of each valuation was to determine the fair value of the equity of
the reporting unit subject to the provisions of SFAS No. 142 ("Step One
Impairment Test").
A copy of the valuation the Company consulted for in Fiscal year 2005 is
attached.
For purposes of testing goodwill for impairment, the Company concluded
that it has a single reporting unit comprised of PCS, Prime Financial
Services, Inc. and AFP, all of which have similar economic
characteristics.
All of the Company's financial planners are employees or independent
contractors of the Company and registered representatives of Prime Capital
Services, Inc. ("PCS"), a wholly owned subsidiary of the Company. PCS
conducts a securities brokerage business providing regulatory oversight
and products and sales support to its registered representatives, who
provide investment products and services to their clients. PCS earns a
share of commissions from the services that the financial planners provide
to their clients in transactions for securities, insurance and related
products. PCS is a registered securities broker-dealer with the Securities
and Exchange Commission ("SEC") and a member of the National Association
of Securities Dealers, Inc. ("NASD"). The Company also has a wholly owned
subsidiary, Asset & Financial Planning, Ltd. ("AFP"), which is registered
with the SEC as an investment advisor. Almost all of the financial
planners are also authorized agents of insurance underwriters. The Company
is also a licensed mortgage broker. As a result, the Registrant also earns
revenues from commissions for acting as an insurance agent and a mortgage
broker. The Registrant has the capability of processing insurance business
through Prime Financial Services, Inc. ("PFS"), its wholly owned
subsidiary, which is a licensed insurance broker, as well as through other
licensed insurance brokers. Most of the Company's tax preparers are also
financial planners.
SFAS No. 142 defines two or more components of an operating segment shall
be aggregated and deemed a single reporting unit if the components have
similar economic characteristics. These entities were all purchased by the
Company from the same seller and all have similar economic
characteristics. Specifically they all produce their revenue largely from
the sale of investment products, share the same sales force and
operational support staff, including executive management.
6. Intangible Assets, page 47
6. We note your statement "the Company performed the fair value impairment
tests prescribed by SFAS No. 142 during the fiscal years ended June 30,
2005, 2004 and 2003. Given that these intangible assets are
definite-lived, clarify for us why you performed the fair value impairment
tests prescribed by SFAS 142. Explain to us in detail how you performed
the impairment tests on your intangible assets for each period presented.
In addition, tell us how you grouped your intangible assets for purposes
of impairment testing using the guidance of paragraph 10 of SFAS 144.
We supplementally advise the Staff that SFAS No. 142 states that
definite-lived intangible assets shall be reviewed for impairment in
accordance with SFAS No. 144 by applying the recognition and measurement
provisions in paragraphs 7-24 of that Statement. Paragraph 7 of SFAS No.
144 states that an impairment loss shall be recognized only if the
carrying amount of a long-lived asset is not recoverable and exceeds its
fair value. The carrying amount is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset.
The provisions of SFAS No. 144, Paragraph 8, state that long-lived assets
shall be tested for recoverability whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable.
The provisions of SFAS No. 144, Paragraph 10, state that, for purposes of
recognition and measurement of an impairment loss, a long-lived asset or
assets shall be grouped with other assets and liabilities at the lowest
level for which identifiable cash flows are largely independent of cash
flows of other assets and intangibles. The intangibles being tested by the
Company are customer lists acquired from the single purchase of PCS, AFP
and PFS, each of which generates identifiable cash flows independent of
other assets and intangibles.
At June 30, 2003, the Company identified several offices with
current-period cash flow loss and therefore calculated estimates of future
undiscounted cash flows expected to result at each of these offices. The
Company, in determining the estimates for future undiscounted cash flows,
considered factors such as the economic environment at the individual
office locations and the Company's future target market area.
As a result of this review, the Company recorded an impairment loss at
June 30, 2003 in the amount of $371,000.
7. Further, refer to page 40 of your filing and explain to us how you
determined the useful lives of your Customer lists and Independent
Contractor Agreements of 5-20 years and 15 years respectively. In your
response, please address how you considered the provisions of paragraph 11
of SFAS 142 in making these usefully life determinations.
The Staff is supplementally advised that the provisions of SFAS No. 142,
Paragraph 11, state that the useful life of an intangible asset to an
entity is the period over which the asset is expected to contribute
directly or indirectly to the future cash flows of that entity.
The useful life of the Company's Independent Contractor Agreements was
determined based on the historical longevity of the average Independent
Contractor's tenure with the Company, adjusted to discount for 80% of the
population who only produced 20% of the Company's revenue. Based on this
analysis, the Company deemed the Independent Contractor Agreements to have
a useful life of 15 years.
The useful life of Customer Lists is based on the historical life of
clients of the acquired tax practice at the time of acquisition with an
allowance for attrition based on individual acquisition factors, such as
whether or not the original owners would remain with the Company or not.
Based on these facts and analysis, the Company deemed Customer Lists to
have average useful lives of between 5 and 20 years.
The Company's management is aware that this testing was done in 1999 and
again in 2002, however, we have been unable to locate the report in time
to include it with the Company response to the Commission.
While no additional studies have been done, the Company's management
continues to believe that these lives are appropriate.
Item 9A. Controls and Procedures, page 57
8. We note the last sentence on page 58; however, it is unclear to us whether
your certifying officers concluded that your disclosure controls and
procedures were effective or ineffective. In accordance with Rule 13(a) -
15 (e) of the Exchange Act, please revise to clearly state whether your
certifying officers concluded that your disclosure controls and procedures
were effective or ineffective as of the end of the period covered by this
annual report. If your certifying officers concluded that your disclosure
controls and procedures were effective, please explain to us in detail how
they came to this conclusion given the material weakness identified by
your auditors.
The following is the Company's proposed revised controls and procedures
disclosure section of the Company's Form 10K.
In performing its audit of our Consolidated Financial Statements for
Fiscal 2004, our independent auditors, Radin Glass, notified our Board of
Directors of several reportable conditions in internal controls under
standards established by the American Institute of Certified Public
Accountants. Reportable conditions involve matters coming to the attention
of our auditors relating to significant deficiencies in the design or
operation of internal controls that, in their judgment, could adversely
affect our ability to record, process, summarize, and report financial
data consistent with the assertions of management in the consolidated
financial statements. Radin Glass stated that, while none of the items
identified by them individually are individually a material weakness, the
combined effect of these issues and the inability to produce timely
accurate financial statements is a material weakness.
Although Radin Glass noted significant improvements in the structure of
the accounting department, and designed its audit procedures to address
the matters described below in order to obtain reasonable assurance that
the financial statements are free of material misstatement and to issue an
unqualified audit report, certain of the internal control deficiencies
noted by Radin Glass had been noted in their internal control letter
regarding the Company's Consolidated Financial Statements for Fiscal 2003.
These significant deficiencies in the design and operation of our internal
controls include the needs to hire additional staffing and change the
structure of the finance/accounting department, to provide better
coordination and communication between the legal and finance/accounting
departments and to provide training to existing and new personnel in SEC
reporting requirements; the lack of integration of the general ledger
system with other recordkeeping systems, and the need for formal control
systems for journal entries and closing procedures; the need to document
internal controls over financial reporting; the needs to form an
independent audit committee, to form an internal audit department and to
implement budget and reporting procedures; and the need to provide
internal review procedures for schedules, SEC reports and filings prior to
submission to the auditors and/or filing with the SEC.
Management believes that such deficiencies represent a material weakness
in internal control over financial reporting that, by themselves or in
combination, result in a more likelihood that a material misstatement in
our financial statements will not be prevented or detected by our
employees in the normal course of performing their assigned functions.
The Company continues its efforts to remediate these conditions and has
and will continue to implement enhanced procedures to accelerate
improvement of its internal controls. For example, (a) the Company
continues to implement specific changes in its internal controls with more
formalized, structured and timely review and analysis of journal entries,
accounting data and reports prepared, (b) has submitted SEC filings within
the prescribed due dates for the last eight quarters, (c) hired a new
General Counsel with SEC significant knowledge, replaced accounting staff
and hired a Controller with SEC significant knowledge.
A material weakness is defined as a reportable condition in which the
design or operation of one or more of the internal control components does
not reduce to a relatively low level the risk that misstatements caused by
error or fraud in amounts that would be material in relation to the
financial statements being audited may occur and not be detected within a
timely period by employees in the normal course of performing their
assigned functions. While the Company did implement specific changes in
its internal controls during the fourth quarter of Fiscal 2004, such as
improvement in recording commissions earned and tax return billings, and
regulatory filings now being filed within the prescribed due dates, such
improvements were partially offset by declines in other areas.
The Company's senior management is responsible for establishing and
maintaining a system of disclosure controls and procedures (as defined in
Rule 13a-15 and 15d-15 under the Exchange Act) designed to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Act is accumulated and communicated to the issuer's management, including
its principal executive officer or officers and principal financial
officers, to allow timely decisions regarding required disclosure.
The Company has carried out an evaluation under the supervision and with
the participation of the Company's management, including its Chief
Executive Officer and Chief Accounting Officer, of the disclosure controls
and procedures of the Company as defined in Exchange Act Rule 13(a)-15(e).
In designing and evaluating disclosure controls and procedures, the
Company and its management recognize that any disclosure controls and
procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving the desired control objective. Due to
the material weakness in internal control over financial reporting
previously noted and insufficient passage of time to test the enacted
changes to determine if such changes are effective as at and prior to June
30, 2005, hence management concludes that the Company's disclosure
controls and procedures are ineffective.
Prospectively, the Company will modify its disclosure controls and
procedures section as indicated in the revisions above or until such
internal control remedies make the disclosure controls and procedures
effective, or unless the Commission deems these changes significant for
the Company to file an amended Form 10K.
Form 10-Q for the quarter ending September 30, 2005
1. Organization and Nature of Business, page 7
Stock-based Compensation, page 9
9. Please explain to us your consideration of SFAS 123(R) in the 1st quarter
of your fiscal year 2006. Please note that SFAS 123(R) requires that
compensation cost be recognized on or after the required effective date
for the portion of outstanding awards for which the requisite service has
not yet been rendered. In this regard, we note from page 53 of your 2005
10-K that you had unvested options outstanding as of June 30, 2005.
The Staff is supplementally advised that, upon reviewing the option
agreements relating to the unvested options outstanding at June 30, 2005,
the Company has found that 140,000 options had actually vested by February
21, 2005. Additionally, by September 30, 2005, 125,000 options expired and
10,000 options were cancelled. Compensation expense related to the 10,000
options would have been less than $1,000 at September 30, 2005.
Prospectively, the Company will record compensation expense and will
improve its SFAS 123-R disclosure, to disclose the use of the
Straight-Line Attribution method relating to these options vesting.
4. Commitments and Contingencies, page 10
Commitments, page 10
10. Please explain to us the nature of the clearing agreement that you renewed
in September 2005, the amount that you paid for the clearing agreement,
and your GAAP basis for capitalizing this amount.
The Staff is supplementally advised that the Company did not pay cash for
the clearing agreement. The Company entered into an agreement to clear
securities on an introductory basis for a period of five years. In
exchange for this long-term contract, the clearing firm provided the
Company with several months of free transactions and business development
credits. The capitalized amount is the sum of these transactions and
credits and is being amortized over the life of the contract which is five
years.
Item 4. Controls and Procedures, page 20
11. We note the 1st full paragraph on page 21; however, it is unclear to us
whether your certifying officers concluded that your disclosure controls
and procedures were effective or ineffective. In accordance with Rule
13(a) - 15 (e) of the Exchange Act, please revise to clearly state whether
your certifying officers concluded that your disclosure controls and
procedures were effective or ineffective as of the end of the period
covered by this quarterly report. If your certifying officers concluded
that your disclosure controls and procedures were effective, please
explain to us in detail how they came to this conclusion given the
material weakness identified by your auditor as part of their fiscal year
2005 audit.
The following is the Company's proposed revised controls and procedures
disclosure section of the Company's Form 10Q.
In performing its audit of our Consolidated Financial Statements for
Fiscal 2005, our independent auditors, Radin Glass & Co., LLP ("Radin
Glass"), notified our Board of Directors of several reportable conditions
in internal controls under standards established by the American Institute
of Certified Public Accountants. Reportable conditions involve matters
coming to the attention of our auditors relating to significant
deficiencies in the design or operation of internal controls that, in
their judgment, could adversely affect our ability to record, process,
summarize, and report financial data consistent with the assertions of
management in the consolidated financial statements. Radin Glass stated
that, while none of the items identified by them individually are
individually a material weakness, the combined effect of these issues and
the inability to produce timely and accurate financial statements is a
material weakness.
Although Radin Glass noted significant improvements in the structure of
the accounting department, and designed its audit procedures to address
the matters described below in order to obtain reasonable assurance that
the financial statements are free of material misstatement and to issue an
unqualified audit report, certain of the internal control deficiencies
noted by Radin Glass had been noted in their internal control letter
regarding the Company's Consolidated Financial Statements for Fiscal 2004.
In Fiscal 2005, Radin Glass, while noting some improvements have been made
in the Company's internal controls, still identified a number of internal
control deficiencies and the Company continues to work to remedy those
deficiencies.
These significant deficiencies in the design and operation of our internal
controls included (i) the need to hire additional staffing and change the
structure of the finance/accounting department in order to provide better
coordination and communication between the legal and finance/accounting
departments; (ii) the need to provide training to existing and new
personnel in SEC reporting requirements; (iii) the lack of integration of
the general ledger system with other recordkeeping systems; (iv) the need
for formal control systems for journal entries and closing procedures; (v)
the need to document internal controls over financial reporting; and (vi)
the needs to form an independent audit committee, an internal audit
department and to provide internal review procedures for schedules, SEC
reports and filings prior to submission to the auditors and/or filing with
the SEC.
Management believes that such deficiencies represent a material weakness
in internal control over financial reporting that, by themselves or in
combination, result in a more likelihood that a material misstatement in
our financial statements will not be prevented or detected by our
employees in the normal course of performing their assigned functions.
The Company continues its efforts to remediate these conditions and has
and will continue to implement enhanced procedures to accelerate
improvement of its internal controls. For example, (a) the Company
continues to implement specific changes in its internal controls with more
formalized, structured and timely review and analysis of journal entries,
accounting data and reports prepared, (b) has submitted SEC filings within
the prescribed due dates for the last eight quarters, (c) hired a new
General Counsel with SEC significant knowledge, replaced accounting staff
and hired a Controller with SEC significant knowledge.
The Company's senior management is responsible for establishing and
maintaining a system of disclosure controls and procedures (as defined in
Rule 13a-15 and 15d-15 under the Exchange Act) designed to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive officer or officers and principal
financial officers, to allow timely decisions regarding required
disclosure.
The Company has carried out an evaluation as of the end of the quarter
ended September 30, 2005 under the supervision and with the participation
of the Company's management, including its Chief Executive Officer and
Chief Accounting Officer, of the disclosure controls and procedures of the
Company as defined in Exchange Act Rule 13(a)-15(e). In designing and
evaluating disclosure controls and procedures, the Company and its
management recognize that any disclosure controls and procedures, no
matter how well designed and operated, can only provide reasonable
assurance of achieving the desired control objective. Due to the material
weakness in internal control over financial reporting previously noted and
insufficient passage of time to test the enacted changes to determine if
such changes are effective as at and prior to September 30, 2005, hence
management concludes that the Company's disclosure controls and procedures
are ineffective.
Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley"), and newly enacted SEC regulations have created
additional compliance requirements for companies such as ours. We are
committed to maintaining high standards of internal controls over
financial reporting, corporate governance and public disclosure. As a
result, we intend to invest appropriate resources to comply with evolving
standards, and this investment may result in increased general and
administrative expenses and a diversion of management time and attention
from revenue-generating activities to compliance activities. In
particular, a great deal of management time and attention will be required
to comply on a timely basis with the internal control requirements of
Section 404 of Sarbanes-Oxley, and without significant additional staff or
resources it will be difficult to achieve timely compliance.
Except as described above, no change occurred in the Company's internal
controls concerning financial reporting during the quarter ended September
30, 2005 that has materially affected or is reasonably likely to
materially affect the Company's internal controls over financial
reporting.
Prospectively, the Company will modify its disclosure controls and
procedures section as indicated in the revisions above or until such
internal control remedies make the disclosure controls and procedures
effective, or unless the Commission deems these changes significant for
the Company to file an amended Form 10Q.
The Company acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action with
respect to the filings; and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
If you have any questions regarding our responses above, please feel free to
contact me at 845-471-4457.
Sincerely,
Dennis Conroy
Chief Accounting Officer
Gilman + Ciocia, Inc.
cc: Adam Washecka, Staff Accountant, US Securities and Exchange Commission
Carlos Pacho, Senior Assistant Chief Accountant, US Securities and Exchange
Commission
Michael P. Ryan, President Gilman + Ciocia, Inc.
Laurie A. Cerveny, Bingham McCutchen LLP
Carlton Vogt, Sherb & Co
-----------------------
Radin, Glass & Co., LLP
-----------------------
Certified Public Accountants
rg 360 Lexington Avenue
New York, NY 10017
www.radinglass.com
212.557.7505
Fax: 212.557.7591
January 19, 2006
Mr. Dennis Conroy, Chief Accounting Officer
Gilman + Ciocia, Inc.
11 Raymond Avenue
Poughkeepsie, NY 12603
Re: Securities and Exchange letter January 10, 2006
Dear Dennis:
As you know, after consultations with you, Michael Ryan, and company counsel for
both years ended June 30, 2004 and 2005, we did not require a modification in
our report as to whether there was substantial doubt as to the ability of Gilman
+ Ciocia, Inc. (the "Company") to continue as a going concern. We also discussed
the change with the Board of Directors. We had such a modification in our audit
for the year ended June 30, 2003. After considering the following we determined
that such a modification was no longer appropriate:
1. While the Company's financial statements show a large deficit in
both working capital and net worth, approximately one-half of the
liabilities did not have to be paid in the twelve months from the
balance sheet date. As indicated in Note 9 to the Financial
Statements, the Travelers debt, of $4,709,387, and the related
interest, can not be called as long as there is a default on the
Wachovia debt. There is a Forbearance Agreement on collection of the
$2,118,573 Wachovia debt, which agreement is described in the Notes
to the Financial Statements. Other current liabilities, including
accrued bonuses of $1,033,368, accrued interest of $1,278,943, due
to related parties of $1,568,809, among others, are not anticipated
to be paid in the twelve months from the balance sheet date.
Further, the receivables are collected fairly quickly while there is
a natural lag on payments for expenses, especially commissions.
Giving effect to these items, there is only a small deficiency in
working capital. We do not believe that the shareholders' deficit,
in and of itself, indicates a substantial doubt as to the ability of
the Company to continue as a going concern.
2. While the Company has had operating losses in the last three years,
an evaluation of such losses indicates that such historical losses
in themselves do not result in a substantial doubt as to the ability
of the Company to continue as a going concern. The loss of
$7,834,173 for the fiscal year ended June 30, 2003 was in a period
of transition during which new management had only recently come
into control. Subsequent history indicates that losses of that
magnitude have not continued. The loss of $1,036,690 for the fiscal
year ended June 30, 2004 was net of $1,536,570 of depreciation and
amortization, indicating that there was a small positive cash flow.
For that year, the Statement of Cash Flows reported a negative cash
flow of $3,094,452 primarily as a result of the paydown of accrued
expenses from cash available from the settlement of sale of
discontinued operations. The loss of $1,825,576 for the fiscal year
ended June 30, 2005 was net of depreciation and amortization of
$1,171,862. The cash flow from operations for that year was
positive.
3. We included in our evaluation the fact that the Company is a
broker/dealer building up a significant portfolio under management
(see Management's Discussion and Analysis of Financial Condition and
Results of Operations - Item 7 of the Form 10-K). Those assets under
management create on-going, recurring fees, which assets have a
significant value in the market. The benefit of such assets is
indicated by the new clearing agreement discussed below.
4. At the time of the completion of our audit for the year ended June
30, 2005 the Company had finalized a new, multi-year clearing
agreement, resulting in an up front payment, a short term reduction
in fees, and an over all reduction in clearing fees. This agreement
supported our belief that there was not a substantial doubt as to
the ability of the Company to continue as a going concern in two
ways: (a) the up front payment and clearing fee reduction indicated
that a very knowledgeable supplier expected the Company to be
sustainable over a long term, and (b) the agreement gave additional
financing to the Company by a temporary reduction in clearing fees.
The initial payment and short term fee reductions are both being
amortized over the life of the clearing agreement.
5. We received projections for the year ending June 30, 2006. As the
projections were based on the new budgeting system that was intended
only for the branches and not the home office, it contained a number
of errors that we discussed with you at the time and included in our
comments in our management letter. Using that projection, and
correcting for the known errors and items not included, we concluded
that, over the twelve months following the balance sheet date
operations would break even, after payment of the required amount to
Wachovia.
6. Management has indicated both the willingness and ability to provide
additional financing when needed. We verbally confirmed that in a
meeting with Mr. Michael Ryan at the conclusion of the audit. A
portion of such financing was in place by September 30, 2005.
7. We have considerable faith in the ability of management to weather
storms that may occur. These are by their nature not predictable but
occur in any business. [For example, as a result of the hurricane in
Florida in the first quarter of the year ended June 30, 2005, there
was a significant temporary drop in revenues which the Company
weathered appropriately.] At the time of our audit, we had been
auditors for approximately two years, but I had been acquainted with
the Company previously. I have developed faith in management's
ability to deal with the problems that arise in the business. While
this belief cannot be quantitatively expressed, it is important in
the evaluation of whether there is a substantial doubt as to the
ability of the Company to continue as a going concern. For example,
in the past the Company has been able to sell individual branches.
Branches could be sold to alleviate a cash crunch, although it would
reduce the operations in the future.
Taking all of the above into consideration, we concluded that there was not a
substantial doubt as to the ability of the Company to continue as a going
concern.
We appreciate that this letter will be part of the Company's submission to the
Securities and Exchange Commission as part of the response to the Staff's letter
dated January 10, 2006. If you need any further information, please feel free to
contact me.
Very truly yours,
Arthur J. Radin
================================================================================
A VALUATION OF
THE PRIME CAPITAL REPORTING UNIT
OF
GILMAN + CIOCIA, INC.
as of
JUNE 30, 2005
PRIVILEGED AND CONFIDENTIAL
www.cbizvaluation.com [LOGO] info@cbizvaluation.com
CBIZ VALUATION GROUP, LLC
VALUATION, FINANCIAL ADVISORY & LITIGATION SUPPORT
Atlanta Chicago Dallas Princeton
Copyright(C) 2006 by CBIZ Valuation Group, LLC
================================================================================
[LETTERHEAD OF CBIZ VALUATION GROUP, LLC]
PRIVILEGED AND CONFIDENTIAL
January 27, 2006
Ms. Karen Fisher
Controller
Gilman + Ciocia, Inc.
11 Raymond Avenue
Poughkeepsie, NY 12603
Dear Ms. Fisher:
In accordance with your request, we are pleased to submit this report presenting
our estimation of the fair value of the Prime Capital Reporting Unit ("Prime" or
the "Reporting Unit") of Gilman + Ciocia, Inc. ("Gilman" or the "Company"). We
understand that this valuation will be used to assist Gilman in complying with
the provisions of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets (the Statement) for financial reporting purposes.
The effective date of this valuation is June 30, 2005 (the "Valuation Date").
PREMISE OF VALUE
The premise of value is fair value, which is defined as "the amount for which an
asset (or liability) could be exchanged in a current transaction between
knowledgeable, unrelated willing parties when neither party is acting under
compulsion."
PURPOSE AND SCOPE
As part of adopting the Statement, an impairment test is required for each of a
company's reporting units. The first step used to identify a potential
impairment compares the fair value of a reporting unit to its carrying amount
including goodwill. To facilitate this test, the scope of this valuation is the
preparation, performance and documentation of the determination of the fair
value of the equity of the Reporting Unit subject to the provisions of the
Statement (the "Step One Impairment Test"). The scope of this valuation does not
include the performance of any work beyond this fair value determination.
In conducting the valuation, our study included an analysis of the Reporting
Unit's historical operating results, a review of the financial services
industry, research of guideline companies and the Reporting Unit's expectation
of future business operations.
For the purpose of this valuation, the Company management ("Management")
provided us with unaudited financial statements of the Company for the periods
ended June 30, 2002 through June 30, 2005. Furthermore, Management provided us
with a projection of operations for the periods ending June 30, 2006 through
June 30, 2010. The financial information provided is presented on an accrual
[LOGO] (R) Ms. Karen Fisher
January 27, 2006
Page 2
basis. We accepted these documents without further investigation as proper
representations of the Company's operations. We have not independently
investigated the accuracy or completeness of the data provided to us and express
no opinion or other form of assurance regarding the accuracy or completeness of
the data.
We utilized other sources of information including, but not limited to,
economic, financial and industry data as published in Mercer Capital's National
Economic Review, the Federal Reserve Statistical Release and business and trade
journals. Other information was referenced from sources including Standard &
Poor's (S&P) Research Insight database, Risk Management Associates (RMA) Annual
Statement Studies and other sources.
BUSINESS ENVIRONMENT
Gilman, organized in 1981 and reorganized in 1993, provides federal, state and
local tax preparation and financial planning services to individuals
predominantly in the middle and upper income brackets. Gilman currently has over
30 offices operating in 6 states. To compliment its tax preparation services,
Gilman 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.
FINANCIAL REVIEW
For the purpose of this valuation, we interviewed Company and Reporting Unit
management, have examined Company and Reporting Unit documents and have analyzed
the information provided in order to identify and thereby adjust items which can
be deemed nonrecurring or extraordinary in nature. No adjustments were made to
the comparative balance sheets and comparative statements of income.
Comparative balance sheets and comparative statements of normalized income are
presented in Exhibits F and G, respectively.
VALUATION APPROACHES
Paragraphs 23 through 25 of the Statement provide guidance on performing the
fair value test, i.e., "Best Methods." According to paragraph 23, quoted market
prices are the best evidence of fair value and should be used as the basis for
measurement, if available and representative of the fair value of the Reporting
Unit. This paragraph also recognizes that the quoted stock market value of the
Company (of which the Reporting Unit is a part) may not be the best indicator of
the fair value of a reporting unit. Accordingly, the Statement also allows for
the use of market multiples (paragraph 25) and present value techniques
(paragraph 24), even indicating that a present value technique is "often the
best available technique."
In determining the fair value of a particular reporting unit, especially one
comprised solely of an acquired business, another reasonable method of computing
fair value would be that of the original purchase analysis.
[LOGO] (R) Ms. Karen Fisher
January 27, 2006
Page 3
In considering this guidance, there are three conventional approaches to value:
the income approach, the market approach and the cost approach. These three
principal approaches to estimate fair value are summarized as follows:
The income approach: is a general way of determining a value indication of
a business, business ownership interest, security or asset using one or
more methods that convert anticipated economic benefits into value. Under
the income approach, value is measured as the present worth of anticipated
future net cash flows generated by a business or asset.
The market approach: is a general way of determining a value indication of
a business, business ownership interest, security or asset by using one or
more methods that compare the subject to similar businesses, business
ownership interests, securities or assets that have been sold. The market
approach is based on the principle of substitution, which reflects the
premise that an informed investor would pay no more for a security or
asset than he/she could pay for another security or asset of equal
utility.
The cost approach: is a general way of determining a valuation indication
of a business, business ownership interest, security or asset using one or
more methods based on the discrete cost of reproducing specific assets and
liabilities. The cost approach is based on the assumption that a prudent
investor would pay no more for a security or asset than the amount at
which it could be replaced or reproduced.
Considering the guidance provided in the Statement and conventional valuation
techniques, the income approach and the market approach were used. The cost
approach was not appropriate and was not utilized.
INCOME APPROACH
The income approach is applicable in the determination of the fair value of an
asset when future earnings derived from the manufacture and marketing of
products or the provision of services are the main determinants of value, as is
the case with the Reporting Unit. The income approach is based upon the present
value of expected earnings.
For the purpose of this analysis, we utilized the discounted cash flow method.
The discounted cash flow method is based upon converting expected cash flows to
present value. Annual cash flows are estimated for each year of a defined
multiyear period until the growth pattern becomes stable. The expected interim
cash flows during this projection period are then discounted to present value.
The value of the cash flows expected after the growth pattern becomes stable is
calculated using an appropriate capitalization technique and then discounted.
The estimate of cash flows utilized in this analysis was prepared by Management
and is presented on an unleveraged, debt-free basis with no deductions for
interest or debt principal. This measure presents the cash flow available to
both debt and equity investors. The discount rate applied to the cash flows is,
therefore, based upon a market derived weighted average cost of capital (WACC)
which takes into account the required rate of return for both debt and equity
investors.
[LOGO] (R) Ms. Karen Fisher
January 27, 2006
Page 4
The derivation of the Reporting Unit's WACC is presented in Exhibit B. As the
Reporting Unit's cash flows are generated throughout the year, the discount
factor applied to cash flows has been calculated based upon a midyear
convention.
Based upon the application of the income approach, as presented in Exhibit C,
the indicated fair value of the equity of the Reporting Unit, as of June 30,
2005, is $16,700,000 (rounded).
MARKET APPROACH
The market approach is a general way of determining a value indication of a
business, business ownership interest or security using one or more methods that
compare the subject to similar businesses, business ownership interests and
securities that have been sold. Examples of method considered in this approach
include the prior or expected transaction method, the quoted price method, the
merger and acquisition method and the public company method.
Prior or Expected Transaction Method
The prior or expected transaction method involves the analysis of the valuation
approach used and implied value multiples indicated when a company either buys
or is expected to sell a reporting unit or a significant component of a
reporting unit.
The Company has not completed any timely transactions that would provide a
meaningful indication of the value of the Reporting Unit, nor does the Company
expect to sell the Reporting Unit in the foreseeable future. As such, we have
not employed this method.
Quoted Price Method
The quoted price method is based upon the market value of the publicly-traded
shares of the Company (of which the Reporting Unit is a part). The Company has
three reportable segments, which differ from each other considerably with regard
to their economic and operational characteristics. As such, the publicly-traded
value of Company may not be the best indicator of fair value of the Reporting
Unit. Additionally, the Company's stock is thinly traded, further reducing the
reliability of the Company's publicly-traded value. Given these factors, we did
not utilize the quoted price method in our analysis.
Merger and Acquisition Method
In the application of this method, we researched mergers and acquisitions of
guideline publicly-held and privately-held companies.
Our research identified several recent transactions in the financial services
industry that encompassed acquisitions of companies engaged in brokerage
operations. Unfortunately, further specific financial details of the individual
transactions were often not disclosed.
In applying relevant market multiples to the Reporting Unit, the median deal
value to sales multiple for transactions occurring in 2003 up to the Valuation
Date exhibited by the acquisition data provides the most reasonable comparison.
However, we applied a multiple slightly below the median to the Reporting Unit
based upon our informed judgment and given the fact that the Reporting Unit's
profitability was inferior to that of the median acquired company.
[LOGO] (R) Ms. Karen Fisher
January 27, 2006
Page 5
Based upon the application of the merger and acquisition method, as presented in
Exhibit D, the indicated fair value of the equity of the Reporting Unit, as of
June 30, 2005, is $18,800,000 (rounded).
Public Company Method
This method is based upon transactions of minority-interests in publicly-traded
companies (guideline companies) engaged in a line (or lines) of business similar
to the Reporting Unit. The guideline companies considered in this analysis are
American Express, CBIZ, Charles Schwab, H&R Block, NewMarket Corp. and Stifel
Financial Corp. As the quoted price method has not been employed separately,
Gilman was considered as a guideline company but was excluded from the analysis
due to extremely thin trading volume.
Although the selected guideline companies differ in some respects from the
Reporting Unit, they are generally influenced by similar business and economic
conditions and are considered to offer alternative investment opportunities.
The financial statements of these guideline companies were analyzed and the
financial ratios for the guideline companies indicating levels of liquidity,
profitability, leverage and growth were compared to those of the Reporting Unit.
After this comparative data was compiled, it was reduced to value indicators.
In applying relevant market multiples to the Reporting Unit, the low market
value of invested capital (MVIC) to sales and MVIC to earnings before interest,
taxes, depreciation and amortization (EBITDA) multiples exhibited by the
guideline companies provide the most reasonable comparisons. However, we applied
lower multiples to the Reporting Unit based upon our informed judgment and the
following factors:
o The guideline companies are more diversified with respect to
business segments, product lines and geographic dispersion of
customer base.
o The financial performance of the Reporting Unit is inferior to that
of the guideline companies.
o The Reporting Unit is significantly smaller than the guideline
companies.
Based upon the application of the public company method of the market approach,
as presented in Exhibit E, the indicated fair value of the equity of the
Reporting Unit, as of June 30, 2005, is $12,000,000 (rounded).
[LOGO] (R) Ms. Karen Fisher
January 27, 2006
Page 6
PREMIUM FOR CONTROL
Consistent with footnote 16 to paragraph 23 of the Statement and since Gilman
maintains a controlling interest in the Reporting Unit, we must consider the
application of a premium for control. This is appropriate because the income
approach and market approach methods considered in this report may potentially
indicate values on a minority-interest basis.
Premiums for control reflect the fact that a unit holder who owns a controlling
interest in an entity can control day-to-day or long-range managerial decisions,
impact future earnings, control efforts for growth potential, acquire or
liquidate assets, control distributions or establish executive compensation.
Premiums for control represent the additional value that an investor is willing
to pay to receive the benefits of control.
To determine the premium for control applicable to the Reporting Unit, we relied
on indications of such premiums from data on acquisition transactions. Although
the underlying assets of the entities examined may differ from the underlying
assets of the Reporting Unit, the relationship between the value of the
interests with and without control can be used as an indication of the
adjustment that is required to reflect the lack of control associated with the
subject interest.
The public markets provide information on control premiums through acquisition
transactions. When a publicly-traded company is acquired by another company or
is taken private, the purchaser normally pays a premium for a controlling
interest above the freely-traded, noncontrolling interest share price. This
premium is referred to as a control premium.
Based upon the data analyzed as well as a comparison of the performance of the
Reporting Unit relative to the guideline companies, we have determined that a
premium for control of 5% is appropriate to apply to the public company method.
The transactions utilized in the merger and acquisition method involved
controlling-interests, so no premium is required. Lastly, based on the elements
of control incorporated into the Reporting Unit's projections, no control
premium has been applied to the conclusion of value indicated by the discounted
cash flow method.
FAIR VALUE CONCLUSION
Three methods were utilized to value the Reporting Unit. In regard to weighing
the conclusions rendered by the methods utilized, we considered the quality and
the reliability of the data underlying each indication of value. The discounted
cash flow method and the public company method provide more reliable indications
of value and we have, therefore, placed greater emphasis upon the conclusion as
rendered by these methods.
Based upon our analysis as presented in Exhibit A, the fair value of the equity
of the Prime Capital Reporting Unit of Gilman, as of June 30, 2005, is
reasonably represented in the rounded amount of:
$15,000,000
FIFTEEN MILLION DOLLARS
[LOGO] (R) Ms. Karen Fisher
January 27, 2006
Page 7
We are independent of the Reporting Unit and the Company and have no current or
prospective interest in the subject assets. Our compensation for this valuation
is not based or contingent on the values determined.
This analysis is intended to comply with generally accepted valuation methods as
promulgated by the Uniform Standards of Professional Appraisal Practice (USPAP)
and the American Society of Appraisers. This report presents only summary
discussions of the data, reasoning and analyses used in the valuation process to
develop our opinion(s) of value and is expressly subject to the Terms and
Conditions included in our engagement letter and the Assumptions and Limiting
Conditions contained in this report.
Thank you for this opportunity to be of service to you.
Respectfully submitted,
/s/ CBIZ VALUATION GROUP, LLC
CBIZ VALUATION GROUP, LLC
[LOGO] (R) ASSUMPTIONS AND LIMITING CONDITIONS
ASSUMPTIONS AND LIMITING CONDITIONS
This valuation by CBIZ Valuation Group, LLC ("CBIZ") is subject to and governed
by the following Assumptions and Limiting Conditions and other terms,
assumptions and conditions contained in the engagement letter.
LIMITATION ON DISTRIBUTION AND USE
The report, the final estimate of value, and the prospective financial analyses
included therein are intended solely for the information of the person or
persons to whom they are addressed and solely for the purposes stated; they
should not be relied upon for any other purpose, and no party other than the
Company may rely on them for any purpose whatsoever. Neither the valuation
report, its contents, nor any reference to the appraiser or CBIZ may be referred
to or quoted in any registration statement, prospectus, offering memorandum,
sales brochure, other appraisal, loan or other agreement or document given to
third parties without our prior written consent. In addition, except as set
forth in the report, our analysis and report are not intended for general
circulation or publication, nor are they to be reproduced or distributed to
third parties without our prior written consent; provided, however, that if CBIZ
fails to inform the Company whether CBIZ will provide such consent within five
(5) business days after receiving the Company's request thereof, then CBIZ's
consent shall be deemed conclusively to have been provided without any further
action by the Company or CBIZ.
As required by new U.S. Treasury rules, we inform you that, unless expressly
stated otherwise, any U.S. federal tax advice contained in this report,
including attachments, is not intended or written to be used, and cannot be
used, by any person for the purpose of avoiding any penalties that may be
imposed by the Internal Revenue Service.
NOT A FAIRNESS OPINION
Neither our opinion nor our report are to be construed as an opinion of the
fairness of an actual or proposed transaction, a solvency opinion, or an
investment recommendation, but, instead, are the expression of our determination
of the fair value between a hypothetical willing buyer and a hypothetical
willing seller in an assumed transaction on an assumed valuation date where both
the buyer and the seller have reasonable knowledge of the relevant facts.
OPERATIONAL ASSUMPTIONS
Unless stated otherwise, our analysis (i) assumes that, as of the valuation
date, the Company and its assets will continue to operate as configured as a
going concern, (ii) is based on the past, present and future projected financial
condition of the Company and its assets as of the valuation date, and (iii)
assumes that the Company has no undisclosed real or contingent assets or
liabilities, other than in the ordinary course of business, that would have a
material effect on our analysis.
[LOGO] (R) ASSUMPTIONS AND LIMITING CONDITIONS
COMPETENT MANAGEMENT ASSUMED
It should be specifically noted that the valuation assumes the property will be
competently managed and maintained over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
NO OBLIGATION TO PROVIDE SERVICES AFTER COMPLETION
Valuation assignments are accepted with the understanding that there is no
obligation to furnish services after completion of this engagement. If the need
for subsequent services related to a valuation assignment (e.g., including
testimony, preparation for testimony, other activity compelled by legal process,
updates, conferences, reprint or copy services, document production or
interrogatory response preparation, whether by request of the Company or by
subpoena or other legal process initiated by a party other than the Company) is
requested, special arrangements for such services acceptable to CBIZ must be
made in advance. CBIZ reserves the right to make adjustments to the analysis,
opinion and conclusion set forth in the report as we deem reasonably necessary
based upon consideration of additional or more reliable data that may become
available.
NO OPINION IS RENDERED AS TO LEGAL FEE OR PROPERTY TITLE
No opinion is rendered as to legal fee or property title. No opinion is intended
in matters that require legal, engineering or other professional advice that has
been or will be obtained from professional sources.
LIENS AND ENCUMBRANCES
We will give no consideration to liens or encumbrances except as specifically
stated. We will assume that all required licenses and permits are in full force
and effect, and we make no independent on-site tests to identify the presence of
any potential environmental risks. We assume no responsibility for the
acceptability of the valuation approaches used in our report as legal evidence
in any particular court or jurisdiction.
INFORMATION PROVIDED BY OTHERS
Information furnished by others is presumed to be reliable; no responsibility,
whether legal or otherwise, is assumed for its accuracy and cannot be guaranteed
as being certain. All financial data, operating histories and other data
relating to income and expenses attributed to the business have been provided by
management or its representatives and have been accepted without further
verification except as specifically stated in the report.
[LOGO] (R) ASSUMPTIONS AND LIMITING CONDITIONS
PROSPECTIVE FINANCIAL INFORMATION
Valuation reports may contain prospective financial information, estimates or
opinions that represent reasonable expectations at a particular point in time,
but such information, estimates or opinions are not offered as forecasts,
prospective financial statements or opinions, predictions or as assurances that
a particular level of income or profit will be achieved, that events will occur
or that a particular price will be offered or accepted. Actual results achieved
during the period covered by our prospective financial analysis will vary from
those described in our report, and the variations may be material.
Any use of management's projections or forecasts in our analysis will not
constitute an examination, review or compilation of prospective financial
statements in accordance with standards established by the American Institute of
Certified Public Accountants (AICPA). We will not express an opinion or any
other form of assurance on the reasonableness of the underlying assumptions or
whether any of the prospective financial statements, if used, are presented in
conformity with AICPA presentation guidelines.
GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of Ohio, without regard to conflicts of law principles. The parties
hereby irrevocably submit to the jurisdiction of the federal or state courts in
the State of Ohio, specifically and exclusively in the Cuyahoga County Court of
Common Pleas or the Federal District Court for the Northern District of Ohio,
over any dispute or proceeding arising out of this Agreement and agree that all
claims in respect of such dispute or proceeding shall be heard and determined in
such court. The parties to this Agreement hereby irrevocably waive, to the
fullest extent permitted by applicable law, any objection that they may have to
the venue of any such dispute brought in such court or any defense of
inconvenient forum for the maintenance of such dispute.
[LOGO] (R) SUMMARY OF EXHIBITS
CORRELATION AND CONCLUSION OF VALUE.......................................... A
INCOME APPROACH
DETERMINATION OF WEIGHTED AVERAGE COST OF CAPITAL....................... B
DISCOUNTED CASH FLOW METHOD............................................. C
MARKET APPROACH
MERGER & ACQUISITION METHOD............................................. D
PUBLIC COMPANY METHOD................................................... E
FINANCIAL REVIEW
COMPARATIVE BALANCE SHEET............................................... F
COMPARATIVE STATEMENTS OF INCOME........................................ G
[LOGO] (R)
EXHIBIT A
CORRELATION AND CONCLUSION OF VALUE
[LOGO] (R)
- --------------------------------------------------------------------------------
EXHIBIT A
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
CORRELATION AND CONCLUSION
- --------------------------------------------------------------------------------
Equity Premium for Indicated Contributed
Approach Value X Control = Value X Weighting = Value
- ----------------------------- ----------- ------------ ----------- ------------ -----------
INCOME APPROACH
Discounted Cash Flow Method $16,700,000 0% $16,700,000 50% $ 8,350,000
MARKET APPROACH
Merger & Acquisition Method 18,800,000 0% 18,800,000 5% 940,000
Public Company Method ..... 12,000,000 5% 12,600,000 45% 5,670,000
------------ -----------
EQUITY VALUE 100% 14,960,000
ROUNDED EQUITY VALUE $15,000,000
===========
[LOGO] (R)
EXHIBIT B
INCOME APPROACH
DETERMINATION OF WEIGHTED AVERAGE COST OF
CAPITAL
[LOGO] (R)
- --------------------------------------------------------------------------------
EXHIBIT B
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
INCOME APPROACH
DISCOUNT RATE
WEIGHTED AVERAGE COST OF CAPITAL
- --------------------------------------------------------------------------------
CAPITAL STRUCTURE
EQUITY PERCENT (E) 85.0%
DEBT FINANCING (D) 15.0% (1)
DEBT RATE DERIVATION (Kd)
Kd=Kb*(1-T)
Borrowing Debt Rate (Kb) 8.80% (2)
Effective Tax Rate (T) 39.0% (3)
Tax Affected Debt Rate(Kd)
----------------
Kd= Kb*(1-T) 5.4%
----------------
EQUITY DISCOUNT RATE DERIVATION (Ke)
Ke=Kf+B(Kmp) +Ku
Safe Rate (Kf) - 20 year Constant Maturities 4.3% (4)
Beta (B) 0.7 (5)
times Market Premium (Kmp) 5.0% (6)
----------------
B(Kmp)= 3.3%
Business-Specific/Unsystemmatic Risk Premium (Ku) 12.0% (7)
EQUITY DISCOUNT RATE (Ke)
----------------
Ke=Kf+B(Kmp)+Ku 19.6%
----------------
WEIGHTED AVERAGE COST OF CAPITAL
Required Capital Weighted
Rate of Return Structure Rate of Return
-------------- --------- ----------------
EQUITY 19.6% 85.0% 16.7%
DEBT 5.4% 15.0% 0.8%
WACC ((D)(Kd)+(Ke)(E)) 17.5%
----------------
ROUNDED 17.0%
----------------
TERMINAL VALUE CAPITALIZATION RATE
WACC 17.0%
MINUS;
Long-Term Growth Rate 3.0% (8)
----------------
CAPITALIZATION RATE (Rounded) 14.0%
================
[LOGO] (R)
- --------------------------------------------------------------------------------
EXHIBIT B
continued
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
INCOME APPROACH
DISCOUNT RATE
WEIGHTED AVERAGE COST OF CAPITAL NOTES
- --------------------------------------------------------------------------------
(1) The industry capital structure was determined as follows:
Source: % Debt
---------------------- --------------
Ibbotson Associates Data: (5-year averages)
SIC 7200 Median 40.4%
SIC 7200 SIC Composite 27.9%
SIC 6211 Median 29.4%
SIC 6211 SIC Composite 85.3%
Guideline Company Data:
Low 8.5%
Median 23.2%
High 43.0%
Conclude 15.0%
(2) The cost of debt for the Company was considered equivalent to the
current Baa bond rate plus additional risk.
Baa rate (A) 5.81%
Risk Premium (B) 3.0%
----------------
Total (Rounded) 8.80%
(A) From Federal Statistical Release dated 7/5/2005, as of 6/30/2005
(B) Based on incremental credit risk.
(3) Represents the average total tax rate for the Company including
state and federal graduated rates 39.0%
As the interest on debt is tax deductible, the cost of debt in (2)
will be tax affected by the overall tax rate
(4) Risk-free Rate
20-year U.S. Treasury Constant Maturities C 4.28%
(C) represents yield on actively traded securities adjusted to
constant maturity of 20 years from Federal Statistical
Release dated 7/05/2003, as of 6/30/2005
[LOGO] (R)
- --------------------------------------------------------------------------------
EXHIBIT B
continued
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
INCOME APPROACH
DISCOUNT RATE
WEIGHTED AVERAGE COST OF CAPITAL NOTES
- --------------------------------------------------------------------------------
(5) Beta
This is a statistical measure that measures the systematic
risk of a particular security relative to the systematic risk
of a market portfolio.
Unlevered Beta
Source:
----------------------
Ibbotson Associates Data:
SIC 7200 Median 0.4
SIC 7200 SIC Composite 0.4
SIC 6211 Median 0.8
SIC 6211 SIC Composite 0.3
Ibbotson Decile Beta 10th Decile 1.4
Ibbotson Quartile Beta Micro-Cap 9-10th Deciles 1.4
Guideline Company Data:
Low 0.2
Median 0.7
High 1.8
Concluded Unlevered Beta (UB) 0.6
Relevered Beta (B)
Concluded Unlevered Beta (UB) 0.6
Concluded Tax Rate (T) 39.0%
Concluded Debt/Equity Ratio (D/E) 17.6%
Concluded Beta (B) (B= UB*[1+(1-T)*(D/E)]) 0.7
(6) The Equity Risk Premium selection is based upon a number of factors
such as (i) a study at the University of Chicago by James H. Lorie
and Lawrence Fisher, "Rates of Return on Investments in Common
Stock" 1964, (ii) the work done by Ibbotson Associates, Inc. in the
widely published, "Stocks, Bonds, Bills and Inflation 2005
Yearbook," (iii) other published studies; and (iv) our informed
judgement. 5.0%
(7) Business specific risk addresses the business or unsystematic risk
premium associated with the Company. The following factors were
considered:
Company is smaller than Ibbotson Small Company Decile 10
Growth
Capital Access
Confidence in Financials
Track Record
Total business specific risk, based on our informed judgment, is estimated to be: 12.0%
(8) Represents the expected long-term sustainable growth rate for the Company 3.0%
[LOGO] (R)
EXHIBIT C
INCOME APPROACH
DISCOUNTED CASH FLOW METHOD
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EXHIBIT C
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
INCOME APPROACH
DISCOUNTED CASH FLOW METHOD
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P r o j e c t e d
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12 Months 12 Months 12 Months 12 Months 12 Months
Ending Ending Ending Ending Ending
06/30/06 06/30/07 06/30/08 06/30/09 06/30/10
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TOTAL REVENUES $53,943,800 $59,338,180 $65,271,998 $69,841,038 $73,333,090
OPERATING EXPENSES 53,482,844 54,887,817 60,376,598 64,602,960 67,833,108
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OPERATING INCOME 460,956 4,450,364 4,895,400 5,238,078 5,499,982
OTHER INCOME (EXPENSE)
Interest Income -- -- -- -- --
Interest Expense (Short-term) -- -- -- -- --
Depreciation (40,000) (105,200) (146,756) (174,199) (202,465)
Amortization (234,000) (234,000) (234,000) -- --
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TOTAL OTHER INCOME (EXPENSE) (274,000) (339,200) (380,756) (174,199) (202,465)
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EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION (EBITDA) 460,956 4,450,364 4,895,400 5,238,078 5,499,982
Long
INCOME BEFORE TAXES 186,956 4,111,164 4,514,644 5,063,879 5,297,517 Term
PROVISION FOR INCOME TAXES 64,716 1,601,298 1,758,454 1,972,381 2,063,383 Growth
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INCOME AFTER TAXES 122,240 2,509,865 2,756,190 3,091,498 3,234,134 3.0% $ 3,331,158
PLUS (MINUS):
Depreciation & Amortization 274,000 339,200 380,756 174,199 202,465 --
Debt-Free Working Capital Additions (1,720,300) (215,775) (237,353) (182,762) (139,682) (88,000)
Capital Expenditures (200,000) (206,000) (212,180) (218,545) (225,102) --
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NET CASH FLOW (1,524,060) 2,427,290 2,687,413 2,864,390 3,071,815 $ 3,243,159
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Divided by Capitalization Rate 14.0%
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Terminal Value $23,165,421
Discount Rate 17.0%
Years to Discount 0.50 1.50 2.50 3.50 4.50 4.50
Discount Factor 0.9245 0.7902 0.6754 0.5772 0.4934 0.4934
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Present Values (1,408,993) 1,918,045 1,815,079 1,653,326 1,515,634 11,429,819
Sum of Present Values of Interim
Cash Flows 5,493,089
Present Value of Terminal Value 11,429,819
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Business Enterprise Value 16,922,908
Minus: Capitalization Financing
(Term Debt) 185,870
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Equity Value 16,737,038
Rounded Equity Value $16,700,000
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The comments and assumptions contained in the report which this accompanies are
an integral part of this prospective financial analysis.
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EXHIBIT D
MARKET APPROACH
MERGER & AQUISITION METHOD
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EXHIBIT D
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
MARKET APPROACH
MERGER & ACQUISITION METHOD
CONCLUSION
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Indicated Indicated Contributed
Indicated Company Invested Capitalization Stockholders' Equity
Multiple X Performance = Capital - Financing = Equity X Weight = Value
---------- ----------- ----------- -------------- ------------- ----------- -----------
MARKET VALUE INVESTED CAPITAL (MVIC) MULTIPLES:
Revenues:
Current 0.4 $47,515,595 $19,006,238 $ 185,870 $ 18,820,368 100% $18,820,368
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Equity Value 100% $18,820,368
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Rounded Equity Value $18,800,000
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EXHIBIT E
MARKET APPROACH
PUBLIC COMPANY METHOD
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EXHIBIT E
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
MARKET APPROACH
PUBLIC COMPANY METHOD
CONCLUSION
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One minus Indicated
Selected Adjustment Indicated Company Invested
Multiple x Factor = Multiple x Performance = Capital
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MARKET VALUE INVESTED CAPITAL (MVIC) MULTIPLES:
Revenues:
Current 0.5 30.0% 0.3 $ 47,515,595 $ 14,254,679
EBITDA:
Current 5.0 10.0% 4.5 1,664,833 7,491,748
Indicated Contributed
Capitalization Stockholders' Equity
- Financing = Equity x Weight = Value
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Revenues:
Current $ 185,870 $ 14,068,809 70% $ 9,848,166
EBITDA:
Current 185,870 7,305,878 30% 2,191,763
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Equity Value 100% $ 12,039,929
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Rounded Equity Value $ 12,000,000
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EXHIBIT F
FINANCIAL REVIEW
COMPARATIVE BALANCE SHEET
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EXHIBIT F
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
COMPARATIVE BALANCE SHEETS
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Statement Type: Unaudited Unaudited Unaudited Unaudited
Basis: Accrual Accrual Accrual Accrual
As of As of As of As of
06/30/02 06/30/03 06/30/04 06/30/05
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ASSETS:
CURRENT ASSETS
Cash and Cash Equivalents $ 4,156 $ 1,352,482 $ 1,632,426 $ 732,549
Accts. Receivable 280,366 4,532,180 4,091,008 2,973,814
Inventories -- -- -- --
Loans Receivable 147,842 279,919 274,820 309,481
Prepaid Expenses 83,072 375,016 151,358 33,099
Income Tax Receivable 371,186 371,186 -- --
Other Current Assets -- -- -- --
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TOTAL CURRENT ASSETS 886,622 6,910,783 6,149,612 4,048,942
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PROPERTY, PLANT AND EQUIPMENT, Cost 1,544,328 1,544,328 -- 1,579,130
Less; Acc. Depreciation 685,823 685,822 -- 1,099,164
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PROPERTY, PLANT AND EQUIPMENT, Net 858,505 858,505 606,319 479,966
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OTHER ASSETS
L/T Debt 330,966 -- -- 221,599
Due from Subs 4,760,672 5,476,346 -- 6,682,305
Allowances for Doubtful Accounting (185,260) -- -- (244,080)
Amortizable Intangible Assets 460,337 2,991,198 2,631,120 2,397,014
Nonamortizable Intangible Assets & Goodwill 310,769 3,547,836 3,484,851 3,390,373
Other 79,818 225,523 5,360,007 41,393
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TOTAL OTHER ASSETS 5,757,303 12,240,903 11,475,978 12,488,603
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TOTAL ASSETS $ 7,502,430 $ 20,010,191 $ 18,231,909 $ 17,017,511
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LIABILITIES AND EQUITY:
CURRENT LIABILITIES
Current Portion of Long Term Debt $ 172,020 $ 434,954 $ 143,036 $ 50,420
Note Payable 85,767 -- -- 8,200
Accrued Liabilities 805,009 6,329,464 4,649,831 3,221,999
Trade Accounts Payable 311,180 -- -- 350,016
Contingent Client Settlements 81,025 -- -- --
Other Current Liabilities 791,483 20,000 20,000 31,275
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TOTAL CURRENT LIABILITIES 2,246,483 6,784,418 4,812,867 3,661,911
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LONG-TERM LIABILITIES
Long-Term Debt 207,087 207,087 127,250 127,250
Deferred Income Taxes -- -- -- --
Minority Interest -- -- -- --
Other Non-Current Liabilities -- -- -- --
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LONG-TERM LIABILITIES 207,087 207,087 127,250 127,250
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EQUITY
Preferred Stock -- -- -- --
Capital Stock (1,515) -- -- 0
Paid-in Capital 5,706,788 10,299,181 10,299,181 10,299,181
Retained Earnings, net (656,414) 2,719,505 2,992,611 2,929,169
Treasury Stock -- -- -- --
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TOTAL EQUITY 5,048,860 13,018,686 13,291,792 13,228,350
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TOTAL LIABILITIES AND
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STOCKHOLDERS' EQUITY $ 7,502,430 $ 20,010,191 $ 18,231,909 $ 17,017,511
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This schedule was compiled from financial information provided by the client or
outside sources. CBIZ Valuation Group assumes no responsibility for the accuracy
or completeness of such information.
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EXHIBIT G
FINANCIAL REVIEW
COMPARATIVE STATEMENTS OF INCOME
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EXHIBIT G
GILMAN + CIOCIA, INC. - PRIME CAPITAL REPORTING UNIT
COMPARATIVE STATEMENTS OF INCOME
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Statement Type: Unaudited Unaudited Unaudited Unaudited
Basis: Accrual Accrual Accrual Accrual
Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended
06/30/02 06/30/03 06/30/04 06/30/05
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TOTAL REVENUES $ 63,690,777 $ 51,408,371 $ 50,997,344 $ 47,515,595
OPERATING EXPENSES 64,842,198 49,461,528 38,466,356 33,629,006
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OPERATING INCOME (1,151,420) 1,946,842 12,530,989 13,886,589
OTHER INCOME (EXPENSE)
Interest Income 2,163,690 36,343 (86) 219
Interest Expense (78,660) (83,518) (98,636) (38,837)
Depreciation (275,209) (232,899) -- (126,354)
Amortization (361,352) (482,549) (710,051) (328,585)
Other Income (957,031) -- -- --
Management Fee (1,650,000) -- (12,077,377) (12,221,976)
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TOTAL OTHER INCOME (EXPENSE) (1,158,562) (762,623) (12,886,151) (12,715,531)
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EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION (EBITDA) (1,594,761) 1,983,186 453,525 1,664,833
INCOME BEFORE TAXES $ (2,309,983) $ 1,184,220 $ (355,162) $ 1,171,058
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This schedule was compiled from financial information provided by the client or
outside sources. CBIZ Valuation Group assumes no responsibility for the accuracy
or completeness of such information.