- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
Commission File Number: 1-16349
INVESTORS CAPITAL HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3284631
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Broadway E.
Lynnfield, Massachusetts 01940
(Address of principal executive offices)
(781) 593-8565
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Number of shares outstanding of our only class of common stock as of August 11,
2005:
5,758,978
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, March 31,
2005 2005
------------ ------------
Assets
Current Assets
Cash and cash equivalents .................................... $ 8,215,956 $ 8,618,261
Deposit with clearing organization, restricted ............... 175,000 175,000
Accounts receivable .......................................... 3,293,926 3,361,509
Loans receivable from registered representatives(current) .... 278,207 173,875
Prepaid income taxes ......................................... 25,645 100,889
Marketable securities, at market value ....................... 250,731 330,380
Prepaid expenses ............................................. 300,918 247,421
------------ ------------
12,540,383 13,007,335
Property and equipment, net ....................................... 702,619 571,198
Long Term Investments
Loans receivable from registered representatives ............. 34,330 77,270
Equity investments, at cost .................................. 40,000 40,000
Investments .................................................. 143,064 142,816
------------ ------------
217,394 260,086
Other Assets
Other assets ................................................. 130,461 121,548
Deferred tax asset, net ...................................... 137,307 149,471
------------ ------------
267,768 271,019
TOTAL ASSETS ............................................ $ 13,728,164 $ 14,109,638
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable ............................................. $ 722,317 $ 1,045,314
Accrued expenses ............................................. 195,110 552,088
Notes payable ................................................ 2,386 9,433
Unearned revenues ............................................ 93,281 106,775
Commissions payable .......................................... 2,380,543 1,885,340
Securities sold, not yet purchased, at market value .......... 145,273 327,905
------------ ------------
3,538,910 3,926,855
TOTAL LIABILITIES ....................................... $ 3,538,910 $ 3,926,855
============ ============
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value, 10,000,000
shares authorized; 5,758,978 issued and 5,755,093 outstanding
in June 30,2005; 5,757,348 issued and 5,753,463 outstanding
in March 2005 ................................................ 57,590 57,573
Additional paid-in capital ................................... 8,706,423 8,691,566
Retained earnings ............................................ 1,455,376 1,463,779
less: Treasury stock, 3,885 shares at cost ................. (30,135) (30,135)
------------ ------------
Total stockholders' equity ............................ 10,189,254 10,182,783
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............. $ 13,728,164 $ 14,109,638
============ ============
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
-------------------------
2005 2004
Revenues ----------- -----------
Commission .............................................. $13,368,068 $12,795,813
Advisory fees ........................................... 1,155,982 799,509
Other fee income ........................................ 103,438 323,377
Marketing revenue ....................................... 435,224 304,779
Other income ............................................ 130,524 91,720
----------- -----------
Total Revenue ....................................... 15,193,236 14,315,198
Commission and advisory fees expenses ...................... 11,982,282 11,572,118
----------- -----------
Gross profit .................................... 3,210,954 2,743,080
----------- -----------
Operating expenses:
Advertising ............................................. 242,607 204,599
Communications .......................................... 155,508 131,575
----------- -----------
Total Selling Expenses .............................. 398,115 336,174
----------- -----------
Compensation and benefits ............................... 1,735,128 1,324,607
Regulatory, legal and professional ...................... 473,144 317,832
Occupancy ............................................... 154,091 137,789
Other administrative expenses ........................... 243,508 245,861
----------- -----------
Total Administrative Expenses ....................... 2,605,871 2,026,089
----------- -----------
Total Operating Expenses ............................ 3,003,986 2,362,263
----------- -----------
Operating income ................................ 206,968 380,817
----------- -----------
Other expense:
Interest expense ........................................ 3,334 16,157
----------- -----------
Total other expense ................................. 3,334 16,157
----------- -----------
Income before taxes ........................................ 203,634 364,660
Provision for income taxes ................................. 96,408 160,644
----------- -----------
Net income ...................................... $ 107,226 $ 204,016
=========== ===========
Earnings per common share:
Basic earnings per common share ......................... $ .02 $ .04
Diluted earnings per common share ....................... $ .02 $ .03
=========== ===========
Share data:
Weighted average shares used in basic earnings per
common share calculations ............................. 5,754,015 5,727,914
Incremental shares from assumed exercise of stock options 173,278 196,993
----------- -----------
Weighted average shares used in diluted earnings per
common share calculations ............................. 5,927,293 5,924,907
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
Accumulated
Additional Retained Other
Common Stock Paid-In Earnings Treasury Comprehensive
---------------------- Capital (Deficit) Stock Income (Loss) Total
Shares Amount
----------------------------------------------------------------------------------------
Balance at April 1, 2004........... 5,731,598 $57,316 $8,520,931 844,670 $(30,135) $12,157 $9,404,939
Stock based compensation........... 1,954 1,954
Exercise stock options............. 852 9 1,667 1,676
Comprehensive gain:
Net income...................... 204,016
Net unrealized gain on securities. 569
Comprehensive gain.............. 204,585
----------------------------------------------------------------------------------------
Balance at June 30, 2004............ 5,732,450 $57,325 $8,524,552 $1,048,686 $(30,135) $12,726 $9,613,154
========================================================================================
Balance at April 1, 2005........... 5,757,348 $57,573 $8,691,566 $1,463,779 $(30,135) -- $10,182,783
Stock based compensation........... 11,614 11,614
Exercise stock options............. 1,630 17 3,243 3,260
Net income...................... 107,226 107,226
Dividend payment to shareholders (115,629) (115,629)
----------------------------------------------------------------------------------------
Balance at June 30, 2005........... 5,758,978 $57,590 $8,706,423 $1,455,376 $(30,135) -- 10,189,254
========================================================================================
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
--------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net income........................................................... 107,226 $ 204,016
Adjustments to reconcile net income to net cash provided by (used
in)operating activities:
Depreciation and amortization........................................... 49,209 38,611
Change in deferred taxes................................................ 12,164 1,717
Stock option compensation............................................... 11,614 1,954
Change in marketable securities......................................... (102,983) (1,680)
Loss on investment...................................................... (248) (1,491)
Changes in operating assets and liabilities:
Decrease in accounts receivable............................................. 67,583 817,910
(Increase)Decrease prepaid expenses and other assets......................... (62,409) 59,436
Decrease in loans receivable from officers.................................. -- 9,005
Decrease in income taxes receivable......................................... 75,244 --
Increase in taxes payable................................................... -- (391,123)
(Decrease) increase in accounts payable...................................... (322,997) 134,160
(Decrease) increase in accrued expenses...................................... (356,978) (195,096)
Increase (decrease) in commissions payable.................................. 495,203 (430,093)
Payments on notes payable and NASD settlement............................... -- (46,757)
(Decrease) in unearned revenues.............................................. (13,494) --
----------- -----------
Net cash (used)provided by operating activities..................... (40,866) 200,569
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment......................................... (180,630) (60,726)
Loans receivable from registered representatives............................ (61,393) 19,306
----------- -----------
Net cash used in investing activities.................. (242,023) (41,420)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options ............................ 3,260 1,676
Principal payment notes payable...................................... (7,046) --
Payment of cash dividends..................... ...................... (115,630) --
----------- -----------
Net cash used in financing activities.................. (119,416) 1,676
----------- -----------
Net (decrease)increase in cash and cash equivalents................. (402,305) 160,825
Cash and cash equivalents, beginning of period...................... 8,618,261 8,112,567
----------- -----------
Cash and cash equivalents, end of period............................ $8,215,956 $ 8,273,392
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid.................................................. $3,334 $ 16,157
=========== ===========
Income taxes paid.................................................. $9,000 $ 550,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Incorporated in July 1995, Investors Capital Holdings, Ltd. ("ICH") is a
financial services holding company that operates through three of its
subsidiaries, Investors Capital Corporation ("ICC"), Eastern Point Advisors,
Inc. ("EPA") and ICC Insurance Agency, Inc., in two segments of the financial
services industry. These two segments provide for the offering of (1)
broker-dealer services in support of trading in corporate equity and debt
securities, U.S. Government securities, municipal securities, mutual funds,
variable annuities and variable life insurance, including provision of market
information, Internet on-line trading, portfolio tracking and records
management, and (2) investment advisory and asset management services, including
management of two retail mutual funds. These products and services are offered
throughout the United States primarily through our network of independent
registered representatives. Investors Capital Holdings Securities Corporation
("ICH Securities"), a new subsidiary, was formed in March 2005 to hold cash,
cash equivalents, interest income and dividend income for ICH.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Investors Capital Holdings, Ltd. and its subsidiaries (the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information and with the
instructions to Form 10-Q. In the opinion of management, these financial
statements contain all of the adjustments necessary for a fair presentation of
the results of these interim periods. Certain footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been
condensed or omitted, although the Company believes the disclosures in these
financial statements are adequate to make the information presented not
misleading. Operating results for the three-month period ending June 30, 2005
are not necessarily indicative of the results that may be expected for the year
ended March 31, 2006. The balance sheet at March 31, 2005 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by GAAP for complete financial statements.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Company's annual audited financial statements included in
the Company's Form 10-K for the fiscal year ended March 31, 2005 filed with the
Securities and Exchange Commission.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior periods have been reclassified to remain
consistent with the current fiscal year financial statement presentation.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company has established revenue recognition policies for each of the
following income item areas: Mutual Funds/Variable Annuities, Trading, Advisory
Fees, Administration Fees on Errors and Omissions ("E&O") and Renewals, and
Marketing Revenues on production and for regional and national events. A
description of the revenue recognition process related to each category is
presented below. The revenue recognition policy the Company maintains is in
compliance with SEC Staff Accounting Bulletin ("SAB") 104 "Revenue Recognition
in Financial Statements".
Mutual Funds/Variable Annuities. The Mutual Funds/Variable Annuity revenue is
recognized upon receipt of commissions related to the sale, which is generally
settled on the trade date. The earnings process is substantially complete at the
point that the respective fund company distributes payment to the Company.
Trading. The Company earns commissions through stock purchases and sale
transactions, mutual fund purchases, government and corporate bonds
transactions, fee-based managed accounts, and ticket charges. The Company also
earns revenue in the form of 12b1 fees and interest on account balances. The
earnings process is substantially complete at trade date in accordance with the
rules of the National Association of Securities Dealers ("NASD") and the
Securities and Exchange Commissions ("SEC").
The Company also receives credit adjustments for clearing charge adjustments
that are netted against any clearing charges the Company may incur for the
period. These adjustments are recognized as income in the period received unless
otherwise noted by the clearing firm.
Unrealized gains and losses are recorded at the time that the Company
reconciles its trading positions with the market value. The unrealized gains or
losses are adjusted to market until the position is settled or the trade is
cancelled.
Advisory Fees. Advisory fee income is recorded quarterly based on the amount
of money managed during the period per the agreement between the advisor and the
client. Any uncollected advisory fees billed on these managed accounts are
charged against earnings in the subsequent quarter.
Revenue is earned based on fees billed for assets managed during the period.
Other Advisory fees are recorded based on the average daily net assets of the
mutual funds as disclosed under the Advisory Agreement in the prospectuses.
These fees are recognized monthly based on the fund's administrative fee report
which reports the amounts that are earned for the period. The Company can elect
and has elected to waive certain fees to allow for the fund to maintain its
ceiling on administrative expenses. Based on the agreement, the waived fees have
a three-year recovery period. At the end of the recovery period, these fees are
charged against earnings if uncollected.
Administration Fees. Administration fees on renewals and E&O insurance are
recognized as revenue upon registration of the representative with NASD and
listing of the registered representative with the E&O insurance carrier. The
funds received from the registered representative are initially recorded as
unearned revenue. The
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
amounts, if any, collected in excess of the E & O insurance premium and/or fees
due NASD are recognized as revenue.
Marketing Revenue. Revenue from marketing associated with product sales is
recognized quarterly based on production levels. Marketing event revenues are
recognized at the commencement of the event offset by its costs.
Accounts Receivable - Allowance for Doubtful Accounts
Our policies for determining whether a receivable is considered uncollectible
are as follows.
Loans to representatives. In accordance with SFAS No. 5, we perform periodic
credit evaluations and provide allowance based on our assessment of specifically
identified unsecured receivables and other factors, including the
representative's payment history. Once it is determined that it is both probable
that the loan has been impaired and the amount of loss can reasonably be
estimated, then the loan balance is classified an uncollectible and written off.
Advisory fees from our mutual funds. As disclosed in the respective mutual
funds' prospectuses, the Company attempts to recoup all waived advisory service
fees within a three-year period. If management believes that the likelihood of
collecting that receivable within the three-year period is doubtful, then the
Company provides for an allowance in accordance with SFAS No. 5. Determinations
whether to write off such fees are made annually.
Trade receivables. As prescribed by the SEC, trade receivables usually settle
within three days. If a trade error results, then the Company will pursue
remedies to collect on that trade error. The Company does not record a
receivable resulting from a trade error that is in litigation or whose outcome
is otherwise not reasonably determinable. In such a case, the Company does apply
any proceeds from settlements or insurance against any trade losses incurred.
Income Taxes
The Company provides for income taxes at the end of each interim period based
on the estimated effective tax rate for the full fiscal year. Cumulative
adjustments to the tax provision are recorded in the interim period in which a
change in the estimated annual effective rate is determined.
NOTE 2. SEGMENT INFORMATION
The accounting policies of the segments are described in the summary of
significant accounting policies. The Company evaluates performance based on
profit and loss from operations after income taxes.
The Company accounts for intersegment services and transfers as if the
services or transfers were to third parties, that is, at current market prices.
The Company's reportable segments are strategic business units that offer
different services. They are managed separately because each business requires
different technology and marketing strategies.
The Company's reportable segments include investment services offered through
Investors Capital Corporation (ICC) and asset management services offered
through Eastern Point Advisors, Inc. (EPA). This investment services segment
includes securities, insurance, financial planning and related services. ICC
earns commissions as a broker for its customers in the purchase and sale of
securities on major exchanges. Asset management services generate recurring
annual revenue from fees received on the management of customer accounts. EPA
provides asset management and portfolio design services to a mutual fund and
money managed services to a variety of investors.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
NOTE 2. SEGMENT INFORMATION (CONTINUED)
The segment data presented includes the allocation of all corporate overhead
to each segment. Intersegment revenue and expense, and receivables and payables,
are eliminated between segments. Currently it is impractical to report segment
information using geographical concentration.
Assets are allocated among ICH and its subsidiaries based upon legal
ownership. Total year-end assets are in this Note 2 on a stand-alone basis,
i.e., without inter-company eliminations. Corporate items and eliminations are
presented in the following table for the purpose of reconciling the stand-alone
asset amounts to total consolidated assets.
Three Months Ended
June 30,
2005 2004
---------------- ----------------
Inter-company eliminations $ 2,501,849 $ 1,733,399
Deferred income taxes 45,561 44,986
Income Taxes (25,645) --
---------------- ---------------
Total Corporate items and eliminations $ 2,521,765 $ 1,778,385
We have changed our approach to segment reporting going forward as of the
prior period based on management's determination that only reportable segments,
as defined in SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), are to be shown on a stand-alone basis
without intercompany eliminations. Since ICH does not generate operating revenue
(other than interest income) and does not meet the quantitative tests under SFAS
131 as a reportable segment, going forward only ICH items required to reconcile
segment information with our consolidated financial statements (i.e.,
non-intercompany items) are reported when presenting segment information.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
NOTE 2. SEGMENT INFORMATION (CONTINUED)
Segment reporting is as follows:
Three Months Ended
June 30,
---------------------------
2005 2004
------------ ------------
Non-interest revenues:
ICC, investment services..................... $14,440,573 $13,736,735
EPA, asset management services............... 632,140 486,743
ICH investments (loss)gain (141) 1,491
------------ ------------
Total........................ $15,072,572 $14,224,969
============ ============
Revenues from transactions with other operating
segments:
ICC............................... $ 408,438 $ 336,605
EPA............................... 45,382 37,401
------------ ------------
Total........................ $ 453,820 $ 374,006
============ ============
Interest and dividend income,net:
ICC............................... $ 79,218 $ 52,295
ICH............................... 5,335 37,934
ICH Securities ................... 36,111 --
------------ ------------
Total........................ $ 120,664 $ 90,229
============ ============
Depreciation and amortization expense:
ICC............................... $ 46,650 $ 36,709
EPA............................... 2,559 1,901
------------ ------------
Total........................ $ 49,209 $ 38,610
============ ============
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
NOTE 2. SEGMENT INFORMATION (CONTINUED)
Three Months Ended
June 30,
---------------------------
2005 2004
------------ ------------
Income tax provision (benefit):
ICC............................... $ 139,488 $ 195,050
EPA............................... (55,800) (58,003)
ICH............................... 12,720 23,597
------------ ------------
Total........................ $ 96,408 $ 160,644
============ ============
Income (loss):
ICC............................... $ 279,220 $ 274,359
EPA............................... (200,569) (86,171)
ICH............................... (7,525) 15,828
ICH Securities.................... 36,100 --
------------ ------------
Total........................ $ 107,226 $ 204,016
============ ============
Period end total assets:
ICC............................... $ 9,686,174 $ 8,465,163
EPA............................... 791,597 460,290
ICH............................... 982,415 5,616,141
ICH Securities.................... $ 4,789,743 --
Corporate items and eliminations (2,521,765) (1,778,385)
------------ ------------
Total........................ $13,728,164 $12,763,209
============ ============
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
NOTE 3. LITIGATION
The Company is involved with various judicial, regulatory, and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. At June 30, 2005, the Company was the co-defendant in various
lawsuits. Management believes, based on currently available information, that
the results of such proceedings, in the aggregate, will not have a material,
adverse effect on the firm's financial condition. The Company has Errors and
Omissions ("E&O") insurance to protect itself from potential damages and/or
legal costs associated with the aforementioned lawsuits, and as a result, in the
majority of cases, the Company`s exposure is limited to between $75,000 and
$100,000 per case, subject to policy limitations and exclusions. In accordance
with Financial Accounting Standards Board ("FASB") Statement No. 5, "Accounting
for Contingencies", the Company had accrued expenses of approximately $258,000
for the quarter ended June 30, 2005 related to legal fees and estimated probable
settlement costs relating to the Company's defense in various lawsuits.
NOTE 4. STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock option plans. During the first quarter of fiscal 2005, the Company adopted
the disclosure provisions of SFAS No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure. The following table illustrates the
effect on net earnings and earnings per share, had the Company adopted the fair
value-based method of accounting for stock-based employee compensation for all
periods presented.
Three Months Ended
---------------------------
2005 2004
------------ ------------
Net income, as reported $ 107,226 $ 204,016
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for
all awards, net of related tax
effects -- --
------------ ------------
Pro forma net income $ 107,226 $ 204,016
============ ============
Earnings per share:
Basic- as reported .02 .04
Diluted-as reported .02 .03
Basic - pro forma .02 .04
diluted - pro forma .02 .03
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis reviews our consolidated financial
condition as of June 30, 2005 and March 31, 2005, the consolidated results of
operations for the three months ended June 30, 2005 and 2004 and, where
appropriate, factors that may affect future financial performance. The
discussion should be read in conjunction with the consolidated financial
statements and related notes, included elsewhere in the Form 10-Q. Unless
context requires otherwise, as used in this Management's Discussion and Analysis
(i) the "current period" means the fiscal quarter ended June 30, 2005, (ii) the
"prior period" means the fiscal quarter ended June 30, 2004, (iii) an increase
and decrease compares the current period to the prior period, and (iv) all
non-comparative amounts refer to the current period.
The statements, analyses, and other information contained herein relating to
trends in our operations and financial results, the markets for our products,
the future development of our business, and the contingencies and uncertainties
to which we may be subject, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend," "will,"
"should," "may," and other similar expressions, are "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. Such statements are
made based upon management's current expectations and beliefs concerning future
events and their effects on the Company and are subject to many risks and
uncertainties. Our actual results may differ materially from the results
anticipated in these forward-looking statements. Readers are directed to
discussions of risks and uncertainties that may be found in this report and
other documents filed by the Company with the United States Securities and
Exchange Commission. We specifically disclaim any obligation to update or revise
any forward-looking information, whether as a result of new information, future
developments or otherwise.
OVERVIEW
We are a financial services holding company that, through our subsidiaries,
provides investment advisory, insurance, financial planning and related
services. We operate in a highly regulated and competitive industry that is
influenced by numerous external factors such as economic conditions, marketplace
liquidity and volatility, monetary policy, global and national political events,
regulatory developments, competition, and investor preferences. Our revenues and
net earnings may be either enhanced or diminished from period to period by any
one of or by a multiple of these external factors.
RESULTS OF OPERATIONS
Revenues
Revenues rose 6.1% to $15.2 million. The $0.9 million increase resulted
primarily from a $0.57 million increase in commissions revenue and a $0.36
million increase in advisory services. The increase in commissions reflect
growth in revenues from trading, sales of mutual funds and variable annuities,
and sales of insurance products of $0.23 million, $0.28 million and $0.05
million, respectively. Sales increases from advisory services chiefly reflect
additional revenues from our advisor directed asset managed program of $0.20
million, our money-managed program of $0.12 million, and advisory services in
our mutual funds "The Capital Appreciation Fund" and "The Rising Dividend Growth
Fund" of $.03 million.
A key component of our business strategy is to recruit and provide productive
support to independent representatives who generate large sales volumes and are
motivated to continually grow their business by offering a wide variety of
services and a diversified range of investment products to their clients.
Consistent with the Company's marketing theme of being "in the business of
building your business", we focus on providing added value to our
representatives to enable them to be more productive, particularly in high
margin lines such as advisory services. Support provided to assist
representatives in pursuing consistent and profitable sales growth takes many
forms. These forms include hi-tech trading systems, targeted financial
assistance and a network of communication links with investment product
companies including regional and national conventions that provide forums for
interaction to improve products, sales and client satisfaction.
Percent of Revenue
Quarter Ended Percent
Quarter Ended June 30, June 30, Change
-------------------------------------------------------------------
2005
2005 2004 2005 2004 vs. 2004
------------ ------------ ---------- ---------- ----------
Revenues:
Commission $ 13,368,068 $ 12,795,813 88.0% 89.4% 4.5%
Advisory 1,155,982 799,509 7.6% 5.6% 44.6%
Other fee income 103,438 323,377 0.7% 2.3% -68.0%
Marketing revenue 435,224 304,779 2.9% 2.1% 42.8%
Other income 130,524 91,720 0.9% 0.6% 42.3%
------------ ------------
Total Revenue 15,193,236 14,315,198 100.0% 100.0% 6.1%
============ ============
Commission and advisory
expenses 11,982,282 11,572,118 78.9% 80.8% 3.5%
Gross Profit 3,210,954 2,743,080 21.1% 19.2% 17.1%
Operating Expenses:
Advertising 242,607 204,599 1.6% 1.4% 18.6%
Communications 155,508 131,575 1.0% 0.9% 18.2%
------------ ------------
Total Selling Expense s 398,115 336,174 2.6% 2.3% 18.4%
Compensation and benefits 1,735,128 1,324,607 11.4% 9.3% 31.0%
Regulatory, legal
and professional 473,144 317,832 3.1% 2.2% 48.9%
Occupancy 154,091 137,789 1.0% 1.0% 11.8%
Other administrative
expenses 243,508 245,861 1.6% 1.7% -1.0%
------------ ------------
Total
Administrative
Expenses 2,605,871 2,026,089 17.2% 14.2% 28.6%
Total Operating
Expenses 3,003,986 2,362,263 19.8% 16.5% 27.2%
============ ============
Operating Income 206,968 380,817 1.4% 2.7% -45.7%
Other Expense:
Interest expense 3,334 16,157 0.0% 0.1% -79.4%
Total Other Expense 3,334 16,157 0.0% 0.1% -79.4%
Income before taxes 203,634 364,660 1.3% 2.5% -44.2%
Provision for income taxes 96,408 160,644 0.6% 1.1% -40.0%
Net Income 107,226 204,016 0.7% 1.4% -47.4%
============ ============
Gross margin
Gross margin rose by $0.47 million to $3.21 million for the current period.
Most notably on a comparative basis, the increase included $0.27 million from
trading and $0.16 million from advisory services. It should be noted also that
during the prior period the Company reported a net trade error of $0.36 million.
This year the Company, along with its clearing firm, implemented enhanced
controls to reduce the risk of this from recurring, contributing to an increase
in profit margin from trading during the current period.
The majority of the increase in profit margin from advisory services was the
result of an increase in sales volume from our advisor-directed, asset-managed
programs. This program allows the representative to manage the account while
trading directly on-line for the client utilizing an automated trading platform
provided by the Company. Resulting increases in the representative's trading
sales volume effectively boost the Company's commission revenues and gross
margin. Additionally, by processing more transactions at stable fixed cost, the
enhanced trading technology fosters economies of scale that help limit increases
in operating expenses required to process the increased trade volume.
Profit margins from mutual fund and variable annuity sales contributed to
39.0% of the total gross margin or about $1.2 million compared to 44.4% of the
total profit margin or about $1.2 million during the prior period. As presented
in the following gross margin table, the growth in profit margin resulted
predominantly from trading and advisory services.
Gross Margin Percent of Total
Retention Gross Margin Gross Margin
Gross Margin Quarter Ended Quarter Ended Percent
Quarter Ended June 30, June 30, June 30, Change
----------------------- -------------------------------------------------
2005
2005 2004 2005 2004 2005 2004 vs. 2004
----------- ----------- ------ ------ ------ ------ -------------
Gross Margin:
Commission - Mutual Funds
and Variable Annuities $ 1,252,582 $ 1,216,578 13.0% 13.0% 39.0% 44.4% 3.0%
Commission - Trading 714,655 442,774 19.8% 13.1% 22.3% 16.1% 61.4%
Commission - Insurance
Products 115,587 69,852 99.0% 99.7% 3.6% 2.5% 65.5%
Commission - Underwriting 1,200 600 10.0% 10.0% 0.0% 0.0% 100.0%
Advisory Services and
Administration Fees 523,872 359,200 43.3% 42.4% 16.3% 13.1% 45.8%
Licensing 33,815 253,315 100.0% 100.0% 1.1% 9.2% -86.7%
Marketing 435,224 304,779 49.6% 54.5% 13.6% 11.1% 42.8%
Other income 134,019 95,982 90.8% 99.0% 4.2% 3.5% 39.6%
----------- -----------
Total Gross Margin 3,210,954 2,743,080 21.1% 19.2% 100.0% 100.0% 17.1%
============ ===========
Commission Expenses
Commission payouts to our independent representatives decreased from 83.1% to
81.9% of commissioned revenues. This improvement reflects progress in
management's continuing efforts to improve commission retention rates, including
refinement of our business model emphasizing recruitment of quality
representatives.
Operating Expenses
Operating expenses, which experienced a $641,723 or 27.2% increase, are
discussed in detail below:
Compensation and benefits. The largest component of operating expenses,
compensation and benefits, rose by $410,521 or 31.0%, including increases in
general and officer salaries of $208,000 and $142,000, respectively. These
increases reflect pay increases to members of our management team and staff, and
from the hiring of additional personnel. In addition, bonuses were paid to the
officers on a discretionary basis. Health insurance costs also rose by $36,000.
Regulatory, legal and professional. Regulatory, legal and professional
expenses grew by $155,312 or 48.9%. Legal and accounting expenses increased by
over $80,000 and lawsuit settlements rose by over $42,000. Dues and
subscriptions expenses also experienced an incline of over $40,000. In an
industry embedded with regulation, the Company will continue to incur
significant costs of this nature to promote accuracy and proper operational
technique and to provide appropriate compliance measures and legal defense.
Advertising. Advertising expenses rose by $38,008 or 18.6%, largely due to
increases in general marketing and meals and entertainment expenses
approximating $16,000 and $32,000, respectively.
Communications. Communications expenses increased 18.2% primarily due to
increases in printing and website expenses approximating $6,000 and $17,000,
respectively. These costs are incurred to target new revenue streams by
providing access to information via the Internet and other publications.
Communication efforts and expense, which also include investor/public relations,
conferences and telephone, are believed to be heavily correlated with overall
growth of the Company's business.
Occupancy. Occupancy expenses increased by $16,302 or 11.8%. Rent expenses
grew by over $5,000 due in part to leasing our newest investment center in
Portsmouth, New Hampshire. Depreciation costs also increased by over $10,000 due
to the Company's acquisition of additional fixed assets.
Other administrative. Other administrative expenses, which includes various
insurance, postage, office and computer-related expenses, decreased by $2,353 or
1.0%.
Operating Income
Operating income decreased by $173,849 or 45.7% due to a 27.2% increase in
operating expenses that was only partially offset by a 17.1% rise in gross
margin. Substantial investments in selling and administrative functions,
including additions to management, personnel and service infrastructure, have
been made as part of a concerted strategy to increase revenues and
profitability. This business platform will accelerate recruitment of independent
representatives that are focused on growing revenues, particularly in high
margin lines such as advisory and trading services. As part of this effort, the
Company continued its investment in an automated trading system that enables
sophisticated representatives to enhance client base and activity.
Net Income
Net income decreased by approximately $97,000 thousand, or $.02 per basic
share and $.01 per diluted share, due to the decrease in operating income that
was only partially offset by a related decrease in the provision for income
taxes. The decrease is a result of incurring more operating expenses to
accommodate the increase in revenues and profit margins on a comparative basis
to June 30,2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that achieving its return on equity goals requires the
efficient use of capital. We have financed our operations primarily with
internally generated cash flow.
Historically cash inflows have come mainly from the profitability of the
Company's core services and investment products. For the last several years
profitability typically has followed an annual cycle of relatively average
profitability during the first and third fiscal quarters, relatively low
profitability during the second fiscal quarter (when many representatives and
their clients are on summer vacation), and relatively high profitability during
the fourth fiscal quarter (when many representatives and their clients start a
new business and investment year).
In addition to the annual profitability cycle, uncertainty in the financial
markets can have a negative impact on cash flow. The Company works to minimize
this impact by aggressively recruiting sophisticated representatives who can
offer diversified products that continue to meet the needs of their clients
despite changing market conditions.
The Company takes a proactive approach to minimizing, if not preventing, the
occurrence of other events that may lead to unexpected cash outflows, including
lawsuits, trade errors and fines from regulatory bodies such as the NASD or the
SEC. A key to this approach is ensuring that adequate controls over our
operations and those of our representatives are implemented and periodically
updated. As part of this effort, substantial resources have been committed to
enhancing the capabilities of our compliance team, whose tasks include assuring
that our representatives give proper weight to the circumstances and interests
of their clients when recommending investment options. The Company also
allocates resources to stay current with the many rules and regulations
applicable to our business when assisting in the education and training of our
sales representatives and staff.
As of June 30, 2005, cash and cash equivalents totaled $8.2 million as
compared to $8.6 million as of March 31, 2005. Working capital as of June 30,
2005 was $9.0 million as compared to $9.1 million as of March 31, 2005. The
ratio of current assets to current liabilities was 3.54 to 1 as of June 30, 2005
as compared to 3.31 to 1 as of March 31, 2005.
As of June 30, 2005, the net capital ratio for ICC, the broker-dealer
subsidiary, was 3.63 to 1 as compared to a 2.43 to 1 ratio at March 31, 2005.
The SEC Uniform Net Capital Rule (Rule 15c3-1) requires that we maintain net
capital of $100,000 and a ratio of aggregate indebtedness to net capital not to
exceed 15 to 1.
This SEC requirement is also referred to as the "net capital ratio" or the "net
capital rule." Indebtedness generally includes all money owed by a company, and
net capital includes cash and assets that are easily converted into cash. SEC
rules also prohibit "equity capital" (which, under the net capital rule,
includes subordinated loans) from being withdrawn, cash dividends from being
paid and other specified actions of similar effect from being taken, if, among
other specified contingencies, our net capital ratio would exceed 10 to 1 or if
we would have less than 120% of our minimum required net capital. As of June 30,
2005, the Company had net capital of $1.2 million as compared to net capital of
approximately $1.7 million as of March 31, 2005. This resulted in excess net
capital of $0.92 million and $1.4 million, respectively, for the applicable
periods.
Cash used by operations was $0.04 million for quarter ended June 30,2005 as
compared to cash provided by operations of $0.2 million for quarter ended June
30,2004. Cash outflows for the current period included $0.18 million for
purchasing equipment, technology, and leasehold improvements and $0.68 million
for paying current liabilities (accounts payable and accrued expenses). Cash
disbursements contributing to these current cash outflows included $0.24 million
for legal related matters, $0.10 million for insurance and professional fees,
$0.14 million for membership and NASD dues, $0.11 million for mutual fund
administration costs, and $0.29 million for payroll related items. Finally, a
$0.12 million cash dividend was paid on May 16, 2005 to shareholders of record
as of May 2, 2005.
Cash outflows for quarter ended June 30,2004 included $0.39 million for
payments of taxes, $0.43 million for payment of commissions due, and $0.2
million in accrued expenses. The Company also paid out $0.06 million in
equipment and technology and $0.05 million to the NASD to pay down a note.
ICC made a business decision in fiscal year 2005 to conclude an NASD
investigation into supervisory procedures relating to the period of January 2000
through July of 2002. While we considered disputing the allegations in a formal
proceeding, we estimated the cost of doing so to be prohibitive. Furthermore, we
sought to avoid disruption of our operations. Accordingly, while neither
admitting nor denying the allegations, we consented to a number of findings in
order to resolve the matter in its initial stages.
Repayment of the settlement note to NASD did not have a material effect on
cash flow at any time during the current period. There was no payment during the
current period as the note was fully paid on August 19, 2004. The Company has
implemented and maintains an adequate system of supervisory and regulatory
procedures and does not foresee any material deficiencies in the future in this
regard.
CONTRACTUAL OBLIGATIONS
Contractual Obligations Payments Due by period
- -----------------------------------------------------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
- -----------------------------------------------------------------------------------------------------------------
2006 2007-2009 2009-20010 2011 and thereafter
Short-term loans and
notes payable: $ 2,386 $ 2,386 0 0 0
Operating leases: 650,753 231,315 419,438
-----------------------------------------------------------------------------------------
Total Contractual
Obligations $653,139 $233,701 $419,438 0 0
-----------------------------------------------------------------------------------------
NOTES PAYABLE
At June 30, 2005 and 2004 notes payable consisted of debt to finance insurance
premiums. The annual rate of interest on the outstanding loan, which matures on
July 15, 2005, was 6% at June 30,2005 and 2004.
COMMITMENTS AND CONTINGENCIES
The Company is obligated under various lease agreements covering offices and
equipment. These agreements are considered to be operating leases in accordance
with the requirements under FASB 13 "Accounting for Leases". The terms of the
leases expire between fiscal year 2005 and 2008. Options to renew for additional
terms are included under the lease agreements. The total minimum rental due in
future periods under these existing agreements is as follows as of June 30,
2005:
Year ending March 31, 2006 231,315
Year ending March 31, 2007 243,639
Year ending March 31, 2008 175,799
---------
Total minimum lease payments $650,753
=========
Certain leases contain provisions for minimum lease payments that are
contingent upon increases in real estate taxes. The total lease expenses
amounted to $99,931 for quarter ended June 30 2005 and $95,337 for quarter ended
June 30 2004. The related party leases amounted to $56,418 for the Arlsburg
Trust and Investors Realty, LLC for the quarter ended June 30 2005.
RISK MANAGEMENT
Risk is an inherent part of the Company's business and activities. Risk
management is critical to the Company's financial strength and profitability and
requires robust auditing, constant communications, judgment and knowledge of
financial trends and the economy as a whole. Senior management takes an active
role in the risk management process. The principal risks involved in the
Company's business activities are market, operational, regulatory and legal.
MARKET RISK
Market risk is the risk attributable to common macroeconomic factors such as
gross domestic product, employment, inflation, interest rates, budget deficits
and sentiment. Consumer and producer sentiment is critical to our business. The
level of consumer confidence determines an investor's willingness to spend,
especially in the financial markets. It is this willingness to spend in the
financial markets that is key to our business. A shift in spending in this area
could negatively impact the Company. However, senior management is constantly
monitoring these economic trends in order to enhance the product line to offset
any potential negative impact.
OPERATIONAL RISK
Operational risk refers to the risk of loss resulting from the Company's
operations, including, but not limited to, improper or unauthorized execution,
processing of transactions, deficiencies in the Company's technology or
financial operating systems, and inadequacies or breaches in the Company's
control processes. Managing these risks is critical, especially in a rapidly
changing environment with increasing transaction volume. Failure to manage these
risks could result in financial loss to the Company. To mitigate these risks,
the Company has developed specific policies and procedures designed to identify
and manage operational risk. These policies and procedures are reviewed and
updated on a continuing basis to ensure that this risk is minimized.
REGULATORY AND LEGAL RISK
Regulatory and legal risk includes non-compliance with applicable legal and
regulatory requirements and the risk of a large number of customer claims that
could result in adverse judgments against the Company. The Company is subject to
extensive regulation in all jurisdictions in which it operates. In this regard,
the Company has instituted comprehensive procedures to address issues such as
regulatory capital requirements, sales and trading practices, use and
safekeeping of customer funds, credit granting, collection activities,
money-laundering, and record-keeping.
EFFECTS OF INFLATION
The Company's assets primarily are liquid in nature and are not significantly
affected by inflation. Management believes that the replacement cost of property
and equipment will not materially affect operating results. However, the rate of
inflation affects our expenses, including employee compensation and benefits,
communications, and occupancy, which may not be readily recoverable through
charges for services provided.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the caption
"Market Risk" of this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation by our management in which they or persons performing
similar functions participated, our principal executive and financial officers
have concluded that reasonably effective controls and procedures were in place
as of the end of the period covered by this report to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company operates in a highly litigious and regulated business and, as
such, is a defendant or codefendant in various lawsuits and arbitrations
incidental to its securities business. The Company is vigorously contesting the
allegations of the complaints in these cases and believes that there are
meritorious defenses in each. Counsel is unable to respond concerning the
likelihood of an outcome, whether favorable or unfavorable, because of inherent
uncertainty routine in these matters. For the majority of pending claims, the
Company's errors and omissions (E&O) policy limits the maximum exposure in any
one case to between $75,000 and $100,000 and, in certain of these cases, the
Company has the contractual right to seek indemnity from related parties.
Management, in consultation with counsel, believes that resolution of pending
litigation will not have a material adverse effect on the consolidated financial
results of the Company.
ITEMS 2 - 5. Not applicable.
ITEM 6. EXHIBITS
Exhibit
Number Description Location
- ------ ----------- --------
3.1 Articles of Organization, as amended . . . . . . . . . . .(2)(Exh. 3.1)
3.2 By-Laws . . . . . . . . . . . . . . . . . . . . . . . . .(2)(Exh. 3.2)
4.1 Form of Stock Certificate . . . . . . . . . . . . . . . . (2)(Exh. 4.1)
10.1 Employment Agreement with Theodore E. Charles . . . . . (2)(Exh. 10.1)
10.2 Employment Agreement with Timothy B. Murphy . . . . . . .(2)(Exh. 10.2)
10.3 The 1994 Stock Option Plan . . . . . . . . . . . . . . . (3)(Exh. 10.3)
31.1 Certification of Theodore E. Charles pursuant to
Rule 13a-14(a) . . . . . . . . . . . . . . . . . . . . . . . . . . .(1)
31.2 Certification of Timothy B. Murphy pursuant to
Rule 13a-14(a) . . . . . . . . . . . . . . . . . . . . . . . . . . .(1)
32.1 Certification of Theodore E. Charles pursuant to 18
U.S.C. Section 1350 . . . . . . . . . . . . . . . . . . . . . . . . (1)
32.2 Certification of Timothy B. Murphy pursuant to 18
U.S.C. Section 1350 . . . . . . . . . . . . . . . . . . . . . . . .(1)
- ----------------------------
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Registrant's
Registration Statement on Form SB-2 (File No. 333-05327) filed August
14, 2000.
(3) Incorporated by reference to the indicated exhibit to the Registrant's
Annual Report on Form 10-K for the year ended March 31, 2005.
Any exhibit not included with this Form 10-K will be furnished to any
shareholder of record upon written request and payment of up to $.25 per page
plus postage. Such requests should be directed to Investors Capital Holdings,
LTD., 230 Broadway East, Lynnfield, MA 01940-2320.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVESTORS CAPITAL HOLDINGS, LTD.
By: /s/ Timothy B. Murphy
Chief Financial Officer
Date: August 12, 2005