Gilman & Ciocia, Inc. Business Information, Profile, and History

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History of Gilman & Ciocia, Inc.

Gilman & Ciocia, Inc. (G&C) is a Poughkeepsie, New York-based public company providing tax preparation and financial planning services from more than 30 offices located in New York, New Jersey, Connecticut, Florida, Maryland, and Colorado. Although it started out as a single tax preparation shop, and continues to handle local, state, and federal tax preparation, G&C now generates nearly 90 percent of its revenues from financial planning services, which include insurance, mortgage services, estate planning, pensions, and securities brokerage services. A large amount of G&C's financial planning business comes from tax return clients who come to realize the need for financial planning services to minimize their tax liability. A high-flying company in the 1990s, G&C expanded too quickly and took on too much debt, leading to retrenchment in the new century.

Company Roots Dating to the Late 1970s

The men behind the Gilman & Ciocia name were Thomas Gilman, a former New York City policeman, and James Ciocia. In 1978, shortly after graduating from St. John's University with an undergraduate accounting degree, Ciocia teamed up with Gilman to launch a small tax preparation shop in Great Neck, New York, on Long Island. They incorporated the business in 1981, and although the business was doing well, growing through client referrals and their direct mail marketing efforts, the partners came to believe that in the course of their tax preparation work they were giving away financial advice. In 1983 they decided to add financial planning services to not only increase their profits but to better serve their clients. Thus G&C acquired licenses to deal in securities and sell life and health insurance policies. To announce its new capabilities and drum up business, the firm invested in a major marketing campaign, which was so successful that G&C was able to open a second office in 1983.

From 1984 to 1989, G&C expanded at a gradual pace, adding another six offices. It was taking steps to make a significant expansion push when in March 1989 Gilman was killed in an automobile accident. To help lead the company through this difficult period, Ciocia leaned heavily on Tom Povinelli, a longtime friend and G&C's chief operating officer. Holding a degree in accounting from Iona College, Povinelli had joined the company in 1983 as an accountant and became an executive officer a year later. After taking off a year, the firm renewed its expansion efforts in 1991, with Povinelli overseeing the opening of all new offices, achieved primarily through acquisitions. The firm targeted practices that were mostly involved in the preparation of 1040s, in keeping with G&C's expertise, and those whose owners were interested in staying on. In this way G&C could bring to bear economies of scale while maintaining relationships with existing customers. To fuel its growth G&C then initiated plans to take the company public by reincorporating in Delaware in September 1983. The business was beefed up with the opening of 15 offices in early 1994, leading to a stock offering at the end of the year, netting the firm more than $3 million.

Following the initial public offering G&C pursued a goal of establishing a nationwide branch office network composed of 200 to 250 offices by the end of 1997. In January 1995 the firm opened 22 offices, in time to do work on 1994 tax returns, bringing the total number of operations to 79, located in 11 states. At the end of the year, G&C opened another 41 offices in ten states. It also acquired some equipment from a liquidated company in 1995 to launch a direct-mail operation called Progressive Mailing, primarily to take care of G&C's direct-mail marketing, the firm's primary advertising effort, but also intended to service outside clients as well. By the end of fiscal 1996, which ended on June 30 of that year, G&C had a total of 118 offices, with 43 located in New York; 16 in New Jersey; nine each in Arizona, Florida, and Ohio; eight in Maryland; seven in both Connecticut and Washington; five in Nevada; two each in California and Pennsylvania; and a single office in Kentucky. In fiscal 1996 revenues approached $21 million and the firm recorded net income of nearly $535,000. G&C's expansion pace fell off slightly in 1997, with eight new offices opening in January of that year. The firm also acquired ten customer lists, helping to spur sales, which improved to $24.6 million in fiscal 1997, while net income grew to $876,000.

Strong Growth in the Late 1990s

The final years of the 1990s saw G&C make advances on a number of fronts. In fiscal 1998 the firm added offices through several acquisitions, at a cost of $4 million, bringing the total number to 127, located in 16 states. As a result, revenues improved to $28.5 million and net income topped the $2 million. Moreover, G&C reached the 100,000 mark in clients. In fiscal 1999 G&C added eight local offices through acquisitions, but, just as important, it added capabilities through acquisitions and joint ventures. In November 1998 it bought North Ridge Securities Corporation, a securities broker-dealer, for $5.25 million. In February 1999 it acquired an online tax preparation business to serve as a foundation for a new Web-based business called e.1040.com. Also in that month G&C forged an alliance with Houston-based InsurMark, whereby InsurMark helped G&C to recruit and train annuity, life, and long-term care representatives. In addition, the G&C reps would market and sell InsurMark's insurance products, while G&C also sought to hook up with some of InsurMark's 3,500 representatives to establish tax preparation offices in their local markets. Next, in the spring of 1999 G&C completed its largest acquisition, buying Prime Capital Services, a Poughkeepsie broker-dealer with $17 million in annual revenues and 28 offices. As a result, the number of offices increased to 156, the client base surpassed 150,000, and the size of the sales force increased to nearly 550. The Prime Capital deal was also significant because its online trading capabilities complemented the new e1040.com business, and more important, in combination with the North Ridge acquisition, G&C was able to terminate its arrangement with Royal Alliance Associates, Inc., a broker-dealer to which G&C had previously referred clients. Now the business would be referred to either a Prime or North Ridge representative and the commission formerly paid to Royal Alliance would now stay in the coffers of G&C. The firm also made inroads in the insurance business in 1999 with the establishment of a joint venture with Garden City, New York-based Career Brokerage called GTAX/Career Brokerage. Career Brokerage now became the exclusive agent of life and long-term care insurance and annuities, a portfolio of products from 40 insurance companies. In return for bringing in new business for Career Brokerage, G&C received half the brokerage commission--without taking on additional staff. Also in 1999 G&C became directly involved in mortgage banking for the first time, acquiring Mortgage Line Financial Corp., a Ronkonkoma, New York-based company licensed to mortgage online in the states where G&C maintained operations. The firm was growing at such a rapid clip that one of its major problems at this time was in attracting qualified employees. Because it was getting a better response from applicants in Westchester County than from those in Long Island, in the fall of 1999 G&C elected to move its corporate offices from Great Neck to White Plains, the Westchester County seat and home to many major corporations. Far from severing its ties to Long Island, the firm retained its Great Neck facility for tax preparation and financial planning and continued to operate 30 financial services offices on Long Island.

Due to the addition of offices and services, G&C experienced a sharp increase in revenues, which topped the $50 million mark in fiscal 1999 and approached $90 million a year later. The company posted net income of $2.2 million in 1999, but despite the significant increase in sales the next year, G&C suffered a net loss of more than $4 million in fiscal 2000, primarily because of the costs involved in launching e1040.com. Although G&C continued to add offices and increase sales, in some ways it had already reached a high watermark. Nevertheless, the firm continued to project an air of confidence in November 2000 when it made some changes in senior management. Although he retained the chairmanship, Ciocia turned over the chief executive post to Povinelli. In addition, Michael P. Ryan was named Povinelli's replacement as COO. Ryan had cofounded Prime Capital Services and after G&C acquired the business stayed on as president. That management was somewhat concerned about the future, however, was implied in the firm's new acquisition model. Historically, it took about three years for a new G&C practice to become profitable. Going forward, management wanted an acquired office to meet a target level of profitability in the first year, and if it was not met future purchase payments to the principals of the acquired practice would be reduced.

Problems Emerging in the Early 2000s

The early months of 2001 saw G&C add another dozen small accounting firms, including two in its traditional home market of Long Island, a strategy of growing into prosperity adopted by Povinelli and his chief lieutenant, Chief Financial Officer David Puyear. But the company continued to post losing quarters. In addition to overexpansion and the cash-burning propensity of e1040.com, the firm suffered from poor internal controls. As a result of these problems, G&C saw its stock lose 80 percent of its value from the time Povinelli was named CEO until June 2002, when shares were trading around the $1 mark. The firm also was having trouble with the NASDAQ, being forced to restate its fiscal 2001 results and failing to file a report for the quarter that ended March 31, 2002. Moreover, G&C was casting about for a $2.5 million infusion of capital from a private equity group. In April 2002 the company announced a restructuring plan that called for job cuts and the elimination of e1040.com, in the hope of trimming $2 million a year in overhead. Despite these moves, management now split into warring camps, with Ryan resigning in July 2002--his departure not "voluntary," according to press accounts. He subsequently headed a group of dissident stockholders, who then demanded the resignation of Povinelli and Puyear. Ryan was a proposed replacement for Povinelli as CEO, and the group also wanted to install its own slate of nominees on the G&C board. Curiously enough, Jim Ciocia, the firm's founder and chairman, was a member of the self-named Concerned Stockholders group. The dissenters arranged a meeting with Povinelli to propose a plan to cut costs, including the closing of some 20 offices and the White Plains headquarters. In the first year alone, the group claimed, these steps could save the company $4.2 million.

G&C appeared to be headed for a contentious proxy fight, with the dissidents retaining the services of McKinsey Partners, Inc., a New York City proxy solicitation and consulting firm. After Concerned Stockholders filed its intent to call for a solicitation of written consents in early August, within a week the two sides reached an agreement to settle the matter. Ryan was named president and set to replace Povinelli as CEO when the latter subsequently resigned. In exchange, Povinelli and Puyear were given an option to purchase some of G&C's offices. Several weeks later a company they controlled, Pinnacle Taxx Advisors LLC, paid approximately $4.7 million to acquire 47 offices, representing $17.6 million in revenues. G&C sold another 16 offices to other parties. G&C also closed down its White Plains headquarters and relocated to the company's Poughkeepsie operations center. But none of these moves could prevent the company's stock from being delisted by the NASDAQ in August 2002. Shares were now relegated to Pink Sheets status, trading over the counter.

Ryan also had to placate lenders. In September 2002 G&C was notified by Travelers Insurance Company that it was in default because of nonpayment of a $100,000 penalty for failing to meet a stipulated level of sales. G&C also had to deal with Wachovia Bank, and in November the partners agreed to a forbearance agreement. Wachovia allowed G&C to sell agreed-upon offices as long as the proceeds were then used to pay down the firm's scheduled principal payments. Ryan also had to contend with a formal Securities and Exchange Commission (SEC) investigation that was launched in March 2003, concerning the firm's restatement of financial results and other matters. The firm continued to shed offices, and in January 2004 agreed to sell North Ridge Securities and North Shore Capital Management Corp. for $1.1 million. By the end of fiscal 2004, G&C was reduced to just 30 offices in six states, and revenues had dipped below $60 million. The firm's net loss was reduced to $5 million, an improvement over the $14 million lost in fiscal 2003 and $22.3 million a year before that. Whether the firm had yet turned the corner remained very much an unanswered question, however.

Principal Subsidiaries: Asset & Financial Planning, Inc.; G&C Mortgage Line Inc.; GTAX/Career Brokerage Inc. (50%); Prime Financial Services, Inc.; Prime Capital Services, Inc.; GC Capital Corporation.

Principal Competitors: H&R Block, Inc.; H.D. Vest, Inc.; Intuit Inc.

Chronology

• Key Dates:
• 1978: Thomas Gilman and James Ciocia start a 1040 shop.
• 1981: The business is incorporated.
• 1989: Gilman dies in an automobile accident.
• 1994: The company is taken public.
• 1999: Prime Capital Services is acquired.
• 2000: Ciocia turns over the CEO post to Tom Povinelli.
• 2002: Povinelli is ousted, replaced by Michael Ryan.