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 December 31, 2006
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) 477-4700
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares outstanding of our only class of common stock as of February
12, 2007: 6,160,470
Table of Contents
PART I
- --------------------------------------------------------------------------------
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II
- --------------------------------------------------------------------------------
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS
SIGNATURES
CERTIFICATIONS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Dec 31, March 31,
2006 2006
---- ----
Assets
Current Assets
Cash and cash equivalents $ 5,613,958 $ 7,718,682
Deposit with clearing organization,
restricted 175,000 175,000
Accounts receivable 4,144,997 4,163,658
Note receivable-sale of asset (current) 8,702 8,561
Loans receivable from registered
representatives(current) 534,298 379,222
Marketable securities, at market value 162,140 73,702
Investments(short term) 991,658
Prepaid expenses 158,739 261,888
-------------- -------------
11,789,492 12,780,713
Property and equipment, net 1,276,183 772,498
Long Term Investments
Loans receivable from registered
representatives 198,891 223,019
Note Receivable-sale of asset 747,617 747,617
Equity Investments,at cost 190,000 190,000
Investments(long term) 1,163,106 159,150
Cash surrender value life insurance policies 257,041 181,872
-------------- -------------
2,556,655 1,501,658
Other Assets
Other assets 45,972 22,644
Deferred tax asset, net 955,275 248,314
-------------- -------------
1,001,247 270,958
TOTAL ASSETS $ 16,623,577 $ 15,325,827
============== =============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 1,836,554 $ 1,210,086
Accrued expenses 257,787 648,298
Notes payable - 94,573
Unearned revenues 1,720,264 104,779
Commissions payable 2,609,715 2,432,596
Income taxes payable 63,415 198,026
Securities sold, not yet purchased, at
market value 687 51,386
-------------- -------------
6,488,422 4,739,744
Long-Term Liabilities
Total Liabilities 6,488,422 4,739,744
-------------- -------------
Stockholders' Equity:
Common stock, $.01 par value, 10,000,000
shares authorized; 6,189,238 issued and
6,185,535 outstanding at December 31, 2006;
5,794,246 issued and 5,790,361 outstanding
at March 31, 2006. 61,892 57,942
Additional paid-in capital 9,611,503 8,740,780
Retained earnings 464,185 1,797,789
less: Treasury stock, 3,885 shares at cost (30,135) (30,135)
Accumulated other comprehensive income 27,710 19,707
-------------- -------------
Total stockholders' equity 10,135,155 10,586,083
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,623,577 $ 15,325,827
============== =============
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
2006 2005
------------------------------
Revenue:
Commissions $ 17,982,588 $ 14,944,156
Advisory Fees 1,888,576 1,313,676
Other Fee Income 402,410 384,766
Marketing revenue 427,425 202,639
Interest, dividend and investment 212,627 159,179
-------------- --------------
Total Revenue 20,913,626 17,004,416
Commission and Advisory Fee Expenses 16,498,437 13,204,912
-------------- --------------
Gross Profit 4,415,189 3,799,504
Operating Expenses:
Advertising 138,302 201,912
Communications 123,922 159,127
-------------- --------------
Total Selling Expenses 262,224 361,039
Compensation and benefits 2,203,390 1,537,058
Regulatory, legal and professional 1,830,647 1,137,663
Occupancy 255,928 168,328
Other administrative 286,064 270,890
-------------- --------------
Total Administrative Expenses 4,576,029 3,113,939
Total Operating Expenses 4,838,253 3,474,978
-------------- --------------
Operating (Loss) income (423,064) 324,526
Other (Expense) and Other Income
Gain On Sale of Asset - 91,313
Interest Expense (4,621) (8,992)
-------------- --------------
Total Other (Expense) and Other Income (4,621) 82,321
Net (Loss) Income Before Taxes (427,685) 406,847
Benefit (Provision) for Income Taxes 106,756 (205,363)
-------------- --------------
Net(Loss) Income (320,929) 201,484
============== ==============
Earnings per common share:
Basic earnings per common share (0.05) 0.03
Diluted earnings per common share (0.05) 0.03
Share data:
Weighted average shares used in basic
earnings per common share calculations 6,141,964 5,767,801
Incremental shares from assumed exercise
of stock options 190,062 134,836
Weighted average shares used in diluted
earnings per common share calculations 6,332,026 5,902,637
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
2006 2005
Revenue:
Commissions $ 50,730,928 $ 42,671,689
Advisory Fees 4,901,072 3,769,457
Other Fee Income 598,443 586,644
Marketing revenue 956,371 872,173
Interest, dividend and investment 584,902 467,934
--------------- ---------------
Total Revenue 57,771,716 48,367,897
Commission and Advisory Fee Expenses 46,453,981 38,495,624
--------------- ---------------
Gross Profit 11,317,735 9,872,273
Operating Expenses:
Advertising 639,727 626,575
Communications 324,323 460,561
--------------- ---------------
964,050 1,087,136
Compensation and benefits 6,629,987 4,656,097
Regulatory, legal and professional 3,763,689 2,486,521
Occupancy 721,436 492,310
Other administrative 774,963 699,730
--------------- ---------------
Total Administrative Expenses 11,890,075 8,334,658
Total Operating Expenses 12,854,125 9,421,794
--------------- ---------------
Operating (Loss)Income (1,536,390) 450,479
Other (Expense) and Other Income :
Gain On Sale of Asset 91,313
Interest Expense (20,223) (27,843)
--------------- ---------------
Total Other (Expense) and Other Income (20,223) 63,470
Net (Loss) Income Before Taxes (1,556,613) 513,949
Benefit (Provision) for Income Taxes 468,227 (248,076)
--------------- ---------------
Net(Loss) income $ (1,088,386) $ 265,873
=============== ===============
Earnings per common share:
Basic Earnings per common share $ (0.18) $ 0.05
Diluted Earnings Per Share $ (0.18) $ 0.04
Share data:
Weighted average shares used in basic
earnings per common share calculations 5,907,169 5,759,003
Incremental shares from assumed exercise of
stock options 166,256 156,851
Weighted average shares used in diluted
earnings per common share calculations 6,073,425 5,915,854
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
Common Amount Additional Comprehensive Retained Treasury Accumulated
Stock Paid-In Income Earnings Stock Other
Shares Capital (Deficit) Comprehensive Total
Income (Loss)
-----------------------------------------------------------------------------------------------
Balance at April 01, 2005 5,757,348 $57,573 $8,691,566 - $ 1,463,779 $(30,135) - $10,182,783
===============================================================================================
Stock based compensation 35,398 354 37,330 37,684
Comprehensive income:
Net income 265,873 265,873
Other Comprehensive Income:
Unrealized gain on
securities:
Unrealized holding gains
arising during period
no tax effect 6,986
-------------
no reclassification
adjustment required -
------------- -------------
-------------
Other Comprehensive Income 6,986 6,986
------------- -------------
-------------
Comprehensive Income 272,859 272,859
=============
Dividend payment to
shareholders (115,628) (115,628)
------------- -------------
Balance at December 31, 2005 5,792,746 $57,927 $8,728,896 - $ 1,614,024 $(30,135) 6,986 $10,377,698
===============================================================================================
Balance at April 01, 2006 5,794,246 $57,942 $8,740,780 - $ 1,797,789 $(30,135) $ 19,707 $10,586,083
============
Stock based compensation 394,992 3,950 870,723 874,673
Comprehensive income:
Net loss (1,088,386) (1,088,386)
Other Comprehensive Income:
Unrealized gain on
securities:
Unrealized holding gains
arising during period
no tax effect 8,003
No reclassification
adjustment required -
-------------
-------------
Other Comprehensive Income 8,003 8,003
============= -------------
-------------
Comprehensive Income (1,080,383) (1,080,383)
=============
Dividend payment to
shareholders (245,218) (245,218)
-----------------------------------------------------------------------------------------------
Balance at December 31, 2006 6,189,238 $61,892 $9,611,503 - $ 464,185 $(30,135) $ 27,710 $10,135,155
===============================================================================================
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
2006 2005
---- ----
Cash flows from operating activities:
Net (loss) income $(1,088,386) 265,873
Adjustments to reconcile net (loss) income to net
cash provided by used in operating activities:
Depreciation and amortization 206,456 157,473
Change in deferred taxes (706,961) 20,021
Stock Based Compensation 707,080 21,830
Cash surrender value life insurance policy (75,169) (71,396)
Stock option compensation 96,100 11,614
Change in marketable securities (139,137) (71,052)
Loss on investment (3,311) 3,373
(Increase) in accounts receivable-asset held
for sale 0 (397,903)
Change in operating assets and liabilities:
Decrease(increase) in accounts receivable 18,661 (579,001)
Decrease(increase) in prepaid expenses and
other assets 79,821 (131,181)
(Decrease) increase in income taxes and
payable (134,611) 6,801
Increase in accounts payable 626,468 454,921
Decrease in accrued expenses (390,511) (447,478)
Increase in commissions payable 177,119 324,399
Increase in unearned revenues 1,615,485 1,696,354
------------- -------------
Net cash provided by operating activities 989,104 1,264,648
============= =============
Cash flows from investing activities:
Purchases of property and equipment (710,141) (302,708)
Investments - (150,000)
Changes in Note Receivable (140) -
Loans receivable from registered representatives (130,948) (355,612)
Investments in US Treasury Notes, Bills; etc. (1,984,300) -
------------- -------------
Net cash used in investing activities (2,825,529) (808,320)
============= =============
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005 (CONTINUED)
Nine Months Ended December 31,
2006 2005
---- ----
Cash flows from financing activities:
Payment of Note Payable $ (94,573) $ (9,433)
Payment of dividends (245,218) (115,629)
Exercise of stock options 71,492 4,240
--------------- --------------
Net cash used in financing
activities (218,299) (120,822)
--------------- --------------
Net Decrease in cash and cash equivalents (2,104,724) 335,506
Cash and cash equivalents, beginning of
period 7,718,682 8,618,261
--------------- --------------
Cash and cash equivalents, end of period $ 5,613,958 $ 8,953,767
=============== ==============
Supplemental disclosures of cash flow
information:
Interest paid $ 17,715 $ 27,843
Income taxes paid $ 373,825 $ 217,256
Non-Cash Financing Transactions
Financing Sale Accounts Receivable $ - $ 747,617
- --------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
INVESTORS CAPITAL HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED DECEMBER 31, 2006
(UNAUDITED)
NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Incorporated in July 1995, Investors Capital Holdings, Ltd. ("ICH") is a holding
company whose subsidiaries assist a nationwide network of independent registered
representatives ("Representatives") in providing a diversified line of financial
services to the public including securities brokerage, investment advice, asset
management, financial planning and insurance. Our subsidiaries include the
following:
o Investors Capital Corporation ("ICC") provides broker-dealer services
and investment advisory/asset management services, the latter as a
registered investment advisor doing business as Investors Capital
Advisors ("ICA"). As a registered broker-dealer in all 50 states, ICC
provides services in support of the purchase and sale by
Representatives' customers of corporate, U.S. Government and municipal
securities and mutual funds, variable annuities and variable life
insurance, including market information, an internet-based on-line
trading and portfolio tracking platform and records management. In its
increasingly competitive business environment, ICC has sought to
distinguish itself from competitors by not only competing on price but
by striving to consistently provide superior service and support to
its customer.
o Eastern Point Advisors, Inc. ("EPA") in the past was the primary
provider of investment advisory/asset management services now being
rendered by ICA. In addition, until October 2005 EPA served as advisor
to two mutual funds.
o ICC Insurance Agency, Inc. was established primarily because, in
certain states, a separately licensed insurance entity is required in
order for ICC broker-dealer representatives to sell life insurance and
annuity products to their clients. Accordingly, the Company
established ICC Insurance Agency, Inc., a wholly-owned subsidiary of
ICH that is duly licensed for such purposes in all states in which
such licensing is required. One hundred percent of all revenue
realized by this entity flow through as revenue to ICC.
o Investors Capital Holdings Securities Corporation ("ICH Securities")
holds 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 and nine-month period ended
December 31, 2006 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2007. The balance sheet at March 31, 2006
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, 2006 filed with the Securities and Exchange Commission.
USE OF ESTIMATES AND ASSUMPTIONS:
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.
SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Company revenue recognition policies are summarized below.
Mutual Funds/Variable Annuities. Mutual Funds/Variable Annuity revenue is
recognized upon receipt of commissions related to each sale, which is generally
the date of settlement. The earnings process is substantially complete at the
point that the fund company distributes payment to the Company.
Trading. The Company earns commissions through stock purchase and sale
transactions, mutual fund purchases, government and corporate bond transactions,
fee-based management of investment accounts and ticket charges. The Company also
earns revenue in the form of 12b-1 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 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. Our managed accounts advisory fees are based on the amount of
assets managed per agreement between the Advisor and the Advisor's Client. These
revenues are recorded as and when billed, and any portion remaining uncollected
at the end of the subsequent quarter is charged against earnings at that time.
The Company ceased providing advisory services to mutual funds effective October
18, 2005. Prior thereto, advisory fees relating to the management of mutual
funds were based on average daily net fund assets as specified in the Company's
advisory agreement and disclosed in the funds' prospectuses. These fees were
recognized monthly based on the fund Trustee's administrative fee report
detailing the amounts that were earned for the month. The Company elected to
waive certain of these fees to allow for one of the funds to maintain its cap on
administrative expenses. Per agreement with the trustee of the funds, the waived
fees were subject to a three-year recovery period, at the end of which any
uncollected fees were permanently waived and, consequently, charged against
earnings. The Company's successor, as fund advisor, has agreed to pay to the
Company all such waived amounts over time with interest.
Administration Fees. Administration fees for services rendered to its
Representatives respecting annual NASD license 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 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. The Company performs 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 a loan has been impaired and
the amount of loss can reasonably be estimated, the portion of the loan balance
estimated to be uncollectible is so classified and written off.
Waived Advisory Fees from Mutual Funds. Effective October 18, 2005, the Company
no longer provides advisory services to mutual funds. Prior thereto, as
disclosed in the respective mutual funds' prospectuses, the Company attempted to
recoup waived advisory service fees within a three-year period. See "Note 1 -
Significant Accounting Policies - Revenue Recognition - Advisory Fees," above,
for an explanation of such fee waivers. If management believed that the
likelihood of collecting a waived receivable within the three-year period was
doubtful, the Company provided for an allowance. Determinations whether to write
off such fees were made annually. By agreement, the Company is entitled to
payment of all uncollected waived advisory fees by its successor as fund
advisor.
Advisory Fees on Asset Managed Accounts. Uncollected balances are written off
before the subsequent quarter billing.
Trade Receivables. As prescribed by the SEC, trade receivables usually settle
within three days. If a trade error results, the Company will pursue remedies to
collect on the 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 applies 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.
Recently Issued Accounting Standards
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" (FIN 48), which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." FIN 48 establishes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact the adoption
of this interpretation will have on its consolidated financial statements.
In June 2006, the Emerging Issues Task Force issued EITF 06-5, "Accounting for
Purchases of Life Insurance - Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of
Life Insurance". This EITF discusses whether a policyholder should consider any
additional amounts included in the contractual terms of the insurance policy
other than the cash surrender value in determining the amount that could be
realized under the insurance contract in accordance with Technical Bulletin 85-4
and whether a policyholder should consider the contractual ability to surrender
all of the individual-life policies (or certificates in a group policy) at the
same time in determining the amount that could be realized under the insurance
contract in accordance with Technical Bulletin 85-4. The Task Force reached a
tentative conclusion that EITF 06-5 should be effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact, if any, of EITF 06-5 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
new standard provides guidance for using fair value to measure assets and
liabilities. The FASB believes SFAS No. 157 also responds to investors' requests
for expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. SFAS No. 157 applies whenever
other standards require (or permit) assets or liabilities to be measured at fair
value but does not expand the use of fair value in any new circumstances. SFAS
No. 157 will become effective for the Company as of January 1, 2008. The Company
is continuing to evaluate the provisions of this standard and is not certain of
the potential impact at this time.
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 inter-segment 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 distinct
marketing strategies and varied technological and operational support.
The Company's reportable segments include investment services offered through
ICC and asset management services offered through ICA, including 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 had provided money management services to a variety of investors (See Part
1. Item 1 of March 31, 2006 10-K "Investment Advisory Services") and, until
October 18, 2005, provided asset management and portfolio design services to two
mutual funds. ICA's primary mission is to offer clients investment advisory and
asset management procedures grounded on sound investment principles of asset
allocation, performance monitoring, and portfolio rebalancing.
Under the guidelines of FAS 131, "Disclosures about Segments of an Enterprise
and Related Information", commencing with the quarter ended December 31, 2005,
management reports its segments on a management approach whereby our business is
presented in segments reflecting the way we make operating decisions and assess
performance. Accordingly, ICA is now reported as part of the asset management
services segment. Segments are currently reported based upon the services
provided, whereas they were previously segmented according to legal entity.
In presenting segment data, all corporate overhead items are allocated to the
segments, and inter-segment revenue, expense, receivables and payables are
eliminated. Currently it is impractical to report segment information using
geographical concentration.
Assets are allocated among ICH and its subsidiaries based upon legal ownership
and the services provided. Total period-end assets are presented 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.
December 31,
2006 2005
------------- -------------
Inter-company eliminations $ 1,289,604 $ 2,521,036
Classification items (stand alone) $ (219,565)
Deferred income taxes 25,071 64,962
Income Taxes 177,025 (94,089)
------------- -------------
Total Corporate items and eliminations $ 1,491,700 $ 2,272,344
============= =============
Segment reporting is as follows:
Quarter Ended December 31,
2006 2005
-------------- --------------
Non-interest revenues:
ICC brokerage services $ 18,753,502 $ 15,484,657
EPA, ICA asset management services. 1,948,396 1,365,579
ICH investments (loss) - (6,998)
-------------- --------------
Total $ 20,701,898 $ 16,843,238
============== ==============
Revenues from transaction with other operating
segments:
ICC brokerage services 458,892 $ (41,411)
EPA, ICA asset management services. - 35,843
-------------- --------------
Total $ 458,892 $ (5,568)
============== ==============
Interest and dividend income,net:
ICC brokerage services $ 157,828 $ 113,521
EPA, ICA asset management services. 13,354 8,851
ICH 3,139 225
ICH Securities 37,407 38,581
-------------- --------------
Total $ 211,728 $ 161,178
============== ==============
Depreciation and amortization expenses:
ICC brokerage services $ 70,717 $ 52,282
EPA, ICA asset management services. 691 1,095
-------------- --------------
Total $ 71,408 $ 53,377
============== ==============
Income tax (provision) benefit:
ICC brokerage services $ 238,624 $ (287,050)
EPA, ICA asset management services. (127,473) (86,027)
ICH (4,395) 167,714
-------------- --------------
Total $ 106,756 $ (205,363)
============== ==============
Income (loss) :
ICC brokerage services $ (627,043) $ 281,592
EPA, ICA asset management services. 272,770 84,390
ICH (4,063) (203,059)
ICH Securities 37,407 38,561
-------------- --------------
Total $ (320,929) $ 201,484
============== ==============
Period end total assets:
ICC brokerage services $ 12,738,283 $ 11,721,616
EPA, ICA asset management services. 1,382,027 1,050,666
ICH 2,062,933 664,532
ICH Securities 1,932,034 4,867,041
Corporate items and eliminations (1,491,700) (2,272,344)
-------------- --------------
Total $ 16,623,577 $ 16,031,511
============== ==============
Nine Months Ended December 31,
2006 2005
--------------- --------------
Non-interest revenues:
ICC brokerage services $ 52,191,975 $ 44,147,259
EPA, ICA asset management services. 5,004,175 3,912,215
ICH investments (loss) - (4,135)
--------------- --------------
Total $ 57,196,150 $ 48,055,339
=============== ==============
Revenues from transaction with other operating
segments:
ICC brokerage services $ 1,968,267 $ 727,917
EPA, ICA asset management services. - 121,324
--------------- --------------
Total $ 1,968,267 $ 849,241
=============== ==============
Interest and dividend income, net:
ICC brokerage services $ 429,813 $ 284,882
EPA, ICA asset management services. 45,878 9,381
ICH 3,594 9,377
ICH Securities 96,281 113,428
--------------- --------------
Total $ 575,566 $ 417,068
=============== ==============
Depreciation and amortization expenses:
ICC brokerage services $ 204,386 $ 151,259
EPA, ICA asset management services. 2,070 6,214
--------------- --------------
Total $ 206,456 $ 157,473
=============== ==============
Income tax (provision) benefit:
ICC brokerage services $ 856,619 $ (152,009)
EPA, ICA asset management services. (364,680) (214,510)
ICH (23,712) 118,443
--------------- --------------
Total $ 468,227 $ (248,076)
=============== ==============
Income (loss) :
ICC brokerage services $ (1,804,345) $ 162,905
EPA, ICA asset management services. 661,756 229,886
ICH (42,058) (240,315)
ICH Securities 96,261 113,397
--------------- --------------
Total $ (1,088,386) $ 265,873
=============== ==============
Period end total assets:
ICC brokerage services $ 12,738,283 $ 11,721,616
EPA, ICA asset management services. 1,382,027 1,050,666
ICH 2,062,933 664,532
ICH Securities 1,932,034 4,867,041
Corporate items and eliminations (1,491,700) (2,272,344)
--------------- --------------
Total $ 16,623,577 $ 16,031,511
=============== ==============
NOTE 3. LITIGATION
The Company typically is involved with various judicial, regulatory and
arbitration proceedings concerning matters arising in connection with the
conduct of its business.
An administrative proceeding and investigation pending before the Securities
Division of the Secretary of the Commonwealth of Massachusetts (the
"Massachusetts Proceedings") was settled on December 19, 2006. Reference is made
to the following reports filed with the SEC by the Company for descriptions of
said matters and the terms of settlement, to wit: (i) Report on Form 10-Q/A
(Amendment No. 1) for the quarter ended December 31, 2005 in Part II, Item 1
"Legal Proceedings"; (ii) Report on Form 10-K for the fiscal year ended March
31, 2006 in Footnote 15 "Litigation" to the Company's financial statements; and
(iii) Report on Form 8-K filed December 22, 2006.
At December 31, 2006, the Company was the defendant or co-defendant in various
legal proceedings other than the Massachusetts Proceedings. Management believes,
based on currently available information, that the results of said additional
proceedings, in the aggregate, will not have a material adverse effect on the
firm's financial condition. The Company maintains Errors and Omissions ("E&O")
insurance to protect itself from potential damages and/or legal costs associated
with certain lawsuits and arbitrations 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 $1.30 million
for the quarter ended December 31, 2006 related to legal fees and estimated
probable settlement costs relating to the Company's defense in various lawsuits
including the Massachusetts Proceedings.
NOTE 4. STOCK BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
123(R), Share-Based Payment on April 1, 2006. The adoption of this statement did
not have a material impact on the Company's consolidated financial statements
given that the Company adopted the fair value recognition provisions of SFAS No.
123 effective September 28, 2002 using the modified prospective application
transition method within the provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". A summary of the status
of the Company's employee and director fixed stock options as of December 31,
2006 and December 31, 2005 follows:
Employee 2006 2005
----------------------------- ----------------------------
Fixed Options Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
Outstanding at beginning of year 153,332 $1.02 198,934 $2.46
Granted - -
Forfeited - $0.00 (40,256) $8.00
Exercised - -
Reclassified(non-employee) - $0.00 (5,346) $1.91
--------------------------------------------------------------
Outstanding at period ended 153,332 $1.02 153,332 $1.02
Options exercisable at period ended 152,666 152,666
The fair value of options granted to employees in 2006 and 2005 is estimated as
of the dates of grant using the Black-Scholes option-pricing model and the
following assumptions:
2006 2005
---- ----
Dividend 0.19% 0.17%
Volatility 47.00% 32.00%
Risk-free interest rate 4.85% 4.39%
Expected Life in years 1.00 1.75
The following table summarizes information about employee and director fixed
stock options outstanding as of December 31, 2006:
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------------------------------------------------------------
Weighted-Average
Range Of Number Remaining Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$1.00 150,000.00 No Stated Maturity $1.00 150,000.00 $1.00
$1.91 3,332.00 1.00 $1.91 2,666.00 $1.91
153,332.00 1.00(1) $1.02 152,666.00 $1.02
(1) Includes only stock options with a stated maturity.
Stock Option Grants
The Company had granted options prior to the adoption of SFAS 123(R) and had
previously reported in a footnote disclosure the proforma effect as if we had
reported an expense under the guidelines of SFAS No. 123. There was $0.00
expense reported as a proforma for quarter ended December 31, 2005.
In adopting the SFAS No. 123(R) there was no expense to be reported for the
fiscal quarter ended December 31, 2006.
Restricted Stock Grants
Under the Company's 2005 Equity Incentive Plan (the "2005 Plan"), the Company is
authorized to award options to purchase common stock, and shares of common
stock, to employees, independent representatives and others who have contributed
to or are expected to contribute to the Company, its businesses and prospects.
Under the 2005 Plan, stock options and restricted stock customarily are granted
by the Company in connection with initial employment or under various retention
plans. The Company has not granted any options under the 2005 Plan and has no
current plans to do so. Restricted shares of stock granted under the 2005 Plan
typically vest over a three year period, and unvested shares are forfeitable in
the event of termination of the grantee's relationship with the Company, other
than for death or disability. The compensation cost associated with restricted
stock grants is recognized over the vesting period of the shares and is
calculated as the market value of the shares on the date of grant. The following
activity under the 2005 Plan occurred during the nine months ended December 31,
2006:
Weighted
Average
Grant Date
Fair Value
Shares ($)
---------------------------
Non-vested at
4/1/2006 26,785 $ 3.08
Granted 368,859 3.85
Vested (194,638) 3.64
Canceled (4,689) 3.32
---------------------------
Non-vested at
12/31/2006 196,317 $ 3.96
The Company's net loss for the three months ended December 31, 2006 includes
$30,797 of compensation costs related to restricted stock grants to employees,
and $14,139 for restricted stock grants to independent representatives, under
the 2005 Plan. The Company's net income for the three months ended December 31,
2005 reflects $21,830 of compensation for grants to independent Representatives
related to this plan.
For the nine months ended December 31, 2006 the compensation costs related to
the 2005 Plan includes $618,790 for stock grants to employees and $88,261 for
stock grants to directors, consultants and independent representatives. There
was $21,830 of compensation for grants to independent Representatives associated
with this plan for the nine months ended December 31, 2005.
As of December 31, 2006, there was $777,369 of unrecognized compensation cost
related to grants under the 2005 Plan. These costs are expected to be recognized
over a weighted average period of approximately 4.01 years. The total fair value
of shares vested under this plan during the nine months ended December 31, 2006
was $708,482.
NOTE 5 - NOTE RECEIVABLE
On October 24, 2005, the Company entered into a definitive agreement (the
"Transition Agreement") with Dividend Growth Advisors, LLC ("DGA"). Pursuant to
the Transition Agreement, the Company agreed to terminate its Investment
Advisory Agreement with Eastern Point Advisors Funds Trust (the "Trust")
effective October 18, 2005 to permit the appointment by the Trust of DGA to
supersede the Company as the Trust's Investment Advisor. The Company had served
since 1999 as Investment Advisor for the Funds, which are sponsored by the
Trust, and DGA had provided Investment Advisory Services to the Trust since 2004
pursuant to a subcontract with the Company. DGA entered into a new advisory
agreement directly with the Trust.
Under the terms of the Transition Agreement and an associated promissory note,
the receivable owed by the Funds to the Company was assigned to DGA and DGA
agreed to pay the Company an amount equal to the total of all fees that the
Company had waived or remitted to a fund in the Trust through October 18, 2005.
In addition, DGA has agreed to pay the Company 10 basis points on the assets
raised by the Company's Broker Dealer, ICC at the effective time of transition,
October 18, 2005, subject to "market to market" adjustments. These fees are to
be paid to the Company on a quarterly basis. Although these payments are part of
the agreement between DGA and the Trust, they are not part of the terms of the
note and are deemed totally separate.
The note provides for a principle amount of $747,617 quarterly payments of
interest accruing thereon at a 5.5% annual rate, and a full payment on or before
October 31, 2010. Prepayments are permitted without penalty.
NOTE 6 - CERTAIN RELATED PARTY TRANSACTIONS
The Company typically engages in transactions with a related party, IMS
Insurance Agency, Inc. ("IMS Insurance"), in connection with the promotion and
servicing of fixed insurance products produced by the Company's independent
Representatives. Payments made by the Company to IMS Insurance, when combined
with payments received by the Company from IMS Insurance, totaled $0.00 and
$29,989 respectively, for the quarters ended December 31, 2006 and 2005, and
$4,942 and $102,741, respectively, for the nine month periods ended December 31,
2006 and 2005. Reference is made to the Company's Report on Form 8-K filed
December 22, 2006 for a more complete description of these transactions.
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 December 31, 2006 and March 31, 2006, the consolidated results
of operations for the three and nine months ended December 31, 2006 and 2005
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 this Form 10-Q. Unless
context requires otherwise, as used in this Management's Discussion and Analysis
(i) the "current period" means the fiscal quarter or nine-month period ended
December 31, 2006, (ii) the "prior period" means the fiscal quarter or
nine-month period ended December 31, 2005, (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 brokerage, investment advisory, asset management, financial planning,
insurance and related services. We operate in a highly regulated, litigious 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 or more external factors.
OUR BUSINESS
The Company operates primarily through its subsidiary, ICC/ICA, in the
broker-dealer and investment advisory services segments of the financial
services industry.
Broker-Dealer Services
The Company provides broker-dealer services in support of trading and investment
by its Representatives' customers 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
trading, portfolio tracking facilities and records management.
Investment Advisory Services
The Company provides investment advisory services, including asset allocation
and portfolio rebalancing, for its Representative's customers. In the past,
investment advisory services were performed by both ICC and EPA. To avoid the
duplication of effort involved in supporting two advisory services entities, the
Company has consolidated its investment advisor services in ICC d/b/a ICA.
Recruitment and Support of Representatives
A key component of our business strategy is to recruit more established and
productive Representatives who increasingly generate revenues in higher margin
services and products. Additionally we assist our existing sales force to
further develop and expand their business by offering both a wide variety of
support services and a diversified range of investment products to their
clients. The Company focuses on providing substantial added value to our
Representatives that enables them to be more productive, particularly in high
margin lines such as advisory services and trading/brokerage.
Support provided to assist Representatives in pursuing consistent and profitable
sales growth takes many forms, including: hi-tech trading systems, targeted
financial assistance and a network of communication links with investment
product companies such as regional and national conventions that provide forums
for interaction to improve product knowledge, sales and client satisfaction. A
newly formed business development unit will focus on providing Representatives
with programs and tools to grow their businesses both through new client
acquisitions and the advancement of their existing client relationships. These
programs are also designed to enhance our ability to attract and retain new,
productive Representatives.
OUR PROCESS
Check and Application
The majority of transactions are conducted through a check and application
process whereby a check and an investment company's particular product
application is delivered to us for processing. This includes principal review
and submission to the investment company or clearing firm. Investments in
technology have allowed the firm to move from a process that was previously
paper intensive to a process that is virtually paper free. This has shortened
the transaction cycle, reduced errors and created greater efficiencies. The firm
continues its investment in technologies that will provide more efficient
processes resulting in improved productivity.
Online Trading
Registered Representatives can efficiently submit a wide range of security
investments online through the use of our remote electronic entry trading
platform.
Bond Trading
The Company's fixed-income trading desk uses a network of regional and primary
dealers to execute trades across all fixed-income asset classes. The desk also
utilizes several dealer-only electronic services that allow the desk to offer
inventory and to execute trades. Our fixed income traders work with our
representatives to develop portfolios for clients. This area has seen growth as
interest rates have risen and more investors have become interested in
retirement income.
Asset Allocation
Asset Allocation services are made available through ICA, the Company's
registered investment advisor subsidiary. Our services include the design,
selection and rebalancing of investments on behalf of our advisors clients in
addition to providing the tools, services and guidance that enable our advisors
to provide these investment services directly to their clients. These services,
for the most part, are conducted through our online trading platform. Other
allocation services are performed directly by the fund company.
KEY INDICATORS OF FINANCIAL PERFORMANCE
Management periodically reviews and analyzes our financial performance across a
number of measurable factors considered to be particularly useful in
understanding and managing our business. Key metrics in this process include
statistics for quality Representatives, top line commission and
advisory services revenues, gross margins, operating expenses, legal costs,
earnings per share, and average revenue per Representative.
Three Months Ended December 31, 2006 Compared with Three Months Ended December
31, 2005:
- --------------------------------------------------------------------------------
RECRUITING
The Company experienced a 150% increase in the number of Representatives
recruited compared to the prior period.
Recruiting Statistics Quarter Ended
December 31
--------------------------- Change Percent Change
2006 2005 2006 vs. 2005 2006 vs. 2005
------------- ------------ ------------- --------------
Representatives Recruited 20 8 12 150.0%
- -------------------------
RESULTS OF
OPERATIONS
Percent of Revenue
Quarter Ended December 31, Quarter Ended December 31,
--------------------------- -------------------------- Percent
Change
2006 2005 2006 2005 2006 vs. 2005
------------- ------------- ------------- ------------ -------------
Revenues:
Commission $ 17,982,588 $ 14,944,156 85.99% 87.88% 20.3%
Advisory 1,888,576 1,313,676 9.03% 7.73% 43.8%
Other fee income 402,410 384,766 1.92% 2.26% 4.6%
Marketing revenue 427,425 202,639 2.04% 1.19% 110.9%
Other income 212,627 159,179 1.02% 0.94% 33.6%
Total Revenue 20,913,626 17,004,416 100.00% 100.00% 23.0%
============= =============
Commission and advisory expenses 16,498,437 13,204,912 78.89% 77.66% 24.9%
Gross Profit 4,415,189 3,799,504 21.11% 22.34% 16.2%
Operating Expenses:
Advertising 138,302 201,912 0.66% 1.19% -31.5%
Communications 123,922 159,127 0.59% 0.94% -22.1%
------------- -------------
Total Selling Expenses 262,224 361,039 1.25% 2.12% -27.4%
Compensation and benefits 2,203,390 1,537,058 10.54% 9.04% 43.4%
Regulatory, legal and professional 1,830,647 1,137,663 8.75% 6.69% 60.9%
Occupancy 255,928 168,328 1.22% 0.99% 52.0%
Other administrative expenses 286,064 270,890 1.37% 1.59% 5.6%
------------- -------------
Total Administrative Expenses 4,576,029 3,113,939 21.88% 18.31% 47.0%
Total Operating Expenses 4,838,253 3,474,978 23.13% 20.44% 39.2%
============= =============
Operating Loss (423,064) 324,526 -2.02% 1.91% -230.4%
Other (Expense) and Other Income :
Gain on Sale Of Asset - 91,313 N/A NA NA
Interest expense (4,621) (8,992) -0.02% -0.05% -48.6%
------------- -------------
Total Other (Expense) Other Income: (4,621) 82,321 -0.02% 0.48% -105.6%
(Loss) income before taxes (427,685) 406,847 -2.05% 2.39% -205.1%
Benefit (Provision) for income taxes 106,756 (205,363) 0.51% -1.21% -152.0%
------------- -------------
Net Loss $ (320,929) $ 201,484 -1.53% 1.18% -259.3%
============= =============
REVENUES
Revenues rose $3.91 million, or 23.0%, to $20.91 million as we continue our
efforts to increase top line revenues in commissions and advisory services.
Leading this performance was a $3.04 million or 20.3% increase in commissions
and a $0.57 million or 43.8% increase in advisory services revenue between the
comparative periods. The continued trend demonstrated with this period's revenue
growth from mutual funds, variable annuities and direct participation programs
relative to trading services is consistent with management's plan to diversify
their source of revenue within their brokerage business. Much like a diversified
client portfolio, management believes a diversified revenue stream provides a
degree of protection from market risk.
Average revenue per Representative increased by 25.8%, reflecting management's
emphasis on quality over quantity as we remain committed to our business model
of recruiting established and successful Representatives. We look forward to a
continuation of this trend as we maintain our efforts to increase the
productivity of our existing sales force and further focus our recruiting
efforts on Representatives who are already successful but seek a higher level of
service than they experience from their existing brokerage firm.
Quarter Ended Quarter Ended
December 31, 2006 December 31, 2005 Incease/decrease Percentage Increase/decrease
----------------- ----------------- ---------------- ----------------------------
Revenue:
Commission $ 17,982,588 $ 14,944,156
Advisory 1,888,576 1,313,676
Other fee income 402,410 384,766
----------------- -----------------
$ 20,273,574 $ 16,642,598 $ 3,630,976 21.8%
Number of Representatives 705 728 -23 -3.2%
Average Revenue Per Rep $ 28,757 $ 22,861 $ 5,896.13 25.8%
Commissions
Commissions from variable annuities increased $1.09 million, or 35.8% of an
overall $3.04 million increase in commission revenue compared to the prior
period. Commissions from direct participation programs, which predominantly
include REIT's (Real Estate Investment Trusts) and oil and gas programs,
increased by $1.70 million or 55.9%.
Quarter Ended Percentage Percentage
December 31, Increase/decrease of Total Increase/decrease
2006 2005 2006 vs. 2005 Increase/decrease 2006 vs. 2005
-------------------------------------------------------------------------------------
Commission Revenue:
- -------------------
Variable Annuities $ 6,333,123 $ 5,244,835 $ 1,088,288 35.8% 20.7%
Trading (brokerage)(1) 5,367,976 4,740,136 627,840 20.7% 13.2%
Mutual Funds 2,618,721 2,826,759 (208,038) -6.8% -7.4%
Direct Participation Programs 3,584,515 1,884,861 1,699,654 55.9% 90.2%
Other 78,253 247,565 (169,312) -5.6% -68.4%
-------------------------------------------------------------------------------------
Total Commission Revenue $ 17,982,588 $ 14,944,156 $ 3,038,432 100.0% 20.3%
=====================================================================================
1. Revenue designated as Trading (brokerage) includes revenue from mutual funds
sold through our trading platform.
Commissions from variable annuities continue to comprise the largest component
of commission revenue. Commissions in direct participation programs grew
primarily as a result of increased sales volume in the oil and gas programs. The
Company's commission revenue from mutual funds decreased marginally for the
current period. Although mutual fund commissions decreased slightly this current
period, it continued to constitute the fourth largest component of commission
revenue.
Over recent periods, trading revenue generally has maintained its share of the
revenue. Supporting this historical trend is our recruitment and retention of
Representatives who conduct transactional business as well as utilization of our
clearing firm's trading platform to enable us to conduct more brokerage business
in an efficient fashion. The recent trend of higher growth in fee-based advisory
services compared to commission-based services reflects concerted efforts by
management to grow revenues in the higher margin advisory services area.
Advisory Fees. Advisory services typically provide significantly higher margins
than traditional non-trading broker-dealer products such as variable annuities
and mutual funds. See " - Gross Margins". Accordingly, we have been encouraging
our Representatives to transition more of their non-trading business to advisory
services. Although we do not dictate the nature or extent of advisory services
our Representatives provide for their clients, we continue to make concerted
efforts to attract them to our proprietary advisory services programs through
education, seminars, trade shows and direct telemarketing.
Fees from our Rep-directed asset-management A-MAP Program, where asset
allocation and other investment advisory services are provided directly by our
independent Representatives, continue to be the leading source of revenue in
this category. Revenues from this program, which have been contributing an
increasing proportion of advisory services revenue, grew by $0.53 million or
74.2% to $1.25 million compared to $0.72 million for the prior period. Supported
by our Net Exchange Pro and Pershing direct on-line mainframe trading platforms,
this program is popular with our Representatives because of the opportunities it
provides to deliver to their clients superior asset management services at a
potentially lower cost, and the potential for increased overall investment
performance. Resulting transactional cost savings have been passed on to our
Representatives' clients in the form of lower fees for improved service.
Revenues from our Rep-directed asset managed program, A-MAP, have been
contributing to an increasing proportion of our overall advisory services
revenue growth. Our current success in promoting our A-MAP advisory services
program is due in large part to providing an enhanced online platform to our
Representatives that enables them to perform their asset allocation services in
a more cost effective manner. Resulting transactional cost savings have been
passed on to our Representatives' clients in the form of lower fees for improved
service.
Other Fee Income. Other fee income, primarily comprised of licensing and
financial planning fees, remained relatively level for the comparative quarters.
Marketing Revenue. Net marketing revenues increased by $0.22 million or 110.9%.
Other Income. Other income, consisting primarily of interest and dividends and
gains/losses on investments, increased by $0.05 million. The majority of the
increase came from interest earned on account balances due to an increase in the
average daily balance in our trading accounts.
GROSS MARGINS
Gross Margin Retention Percent of Gross Margin
Gross Margin Quarter Ended Quarter Ended Gross Margin
Quarter Ended Dec 31, Dec, 31, Dec 31, Percent Change
----------------------- ----------------------- ----------------------- --------------
2006 2005 2006 2005 2006 2005 2006 vs. 2005
----------- ----------- ---------- ----------- ----------- ----------- --------------
Commission - (Check and Application ) $1,629,726 $1,264,551 13.0% 12.5% 36.9% 33.3% 28.9%
Commission - Trading 1,307,618 1,372,402 24.4% 29.0% 29.6% 36.1% -4.7%
Commission - Insurance Products 59,798 31,157 97.3% 73.5% 1.4% 0.8% 91.9%
Commission - Underwriting 1,679 2,900 10.0% 10.0% 0.0% 0.1% -42.1%
Advisory Services A-MAP (rep direct) 367,618 111,266 31.9% 29.4% 8.2% 2.9% 230.4%
Advisory Services Other 103,777 352,041 n/a n/a 2.4% 9.3% -70.5%
Licensing 328,951 326,052 100.0% 100.0% 7.5% 8.6% 0.9%
Marketing 427,425 202,639 n/a n/a 9.7% 5.3% 110.9%
Other income 188,597 136,496 n/a n/a 4.3% 3.6% 38.2%
----------- -----------
Total Gross Margin $4,415,189 $3,799,504 21.1% 22.3% 100.0% 100.0% 16.2%
=========== ===========
Gross margin rose by $0.62 million or 16.2% to $4.42 million for the current
period primarily due to a $0.37 million or 28.9% increase in gross margin
derived from our check and application programs. Also contributing to this rise
was a $0.22 million increase from our marketing support programs and $0.05
million from other income. Offsetting these increases was a $0.06 million
decease in gross margins from trading services.
Mutual Funds, Variable Annuities, Etc.
The increase in gross margin from our check and application business came
directly from an increase in sales volume of our variable annuity and direct
participation components. As a result of a $2.79 million increase in sales from
these product types, we achieved an increase of $0.36 million in our profit
margin in comparing the current period to the prior period. Please refer to the
commission revenue chart above for the comparative quarters.
Profit margins from mutual fund sales, variable annuity sales, direct
participation programs and other check and application distribution programs
generated $1.63 million or nearly 37% of the total gross margin compared to
$1.26 million or 33.3% during the prior period. As presented in the previous
gross margin table, margin from our check and application distribution programs
comprised the greatest portion of our overall profit margin and profit margin
from trading was the next leading component in our principal categories. Our
investments in technology have allowed us to process this additional volume
without adding a commensurate level of staff.
Advisory Services
The Company's continued emphasis on A-MAP, our Rep-directed asset managed
program, is clearly reflected in our gross margin table as gross margin from
this program increased by $0.26 million or 230.4%. This gross margin improvement
resulted directly from growth in assets under management in the program due to
lower fees, improved services and increased awareness of this program.
Management's primary focus in the advisory services program has been to increase
client assets under management in the belief that it will generate an increase
in the overall profit margin in advisory services even though the percentage
retention rate may decrease as a result of lower fees. Although our retention
rate from advisory services decreased compared to the prior period, it continues
to exceed the rates generated by most of the other products and services we and
our Representatives provide. (See -"Gross Margin Table", above). Management's
emphasis on delivering our A-MAP Program is reflected in the gross margin table
with a concomitant $0.25 million, or 70.5%, decrease in gross margin in Other
Advisory Services including the older wrap fee programs.
Trading Services
Trading Services profit margin decreased slightly, despite increases in trading
revenues, due primarily to an increasing portion of sales being generated by top
producing Representatives who are entitled to receive a higher than average
percentage of earned commissions ("payouts"). As a result, the portion of
commissions retained by the Company (our "retention rate") dropped from 29.0% to
24.4%. During the current period we retained $1.31 million on $5.37 million in
sales compared to $1.39 million on $4.74 million in sales during the prior
period.
Partially offsetting the increase in payout, the Company experienced a combined
increase of $0.1 million in the margin from our fees on account balances. As a
percentage of Brokerage Revenue Clearing fees went down due to a larger
percentage of trades being conducted on less costly exchanges.
Despite a decrease on a comparative basis from 29.0% to 24.4%, the percentage
retention rate generated by trading services and advisory services continue to
exceed those generated by our check and application business respecting mutual
funds and variable annuities.
Payout and Retention Rates
Payouts to our independent Representatives, as a percentage of all commission
and fee income, increased to 81.4% compared to 79.3% for the prior period,
corresponding to a decrease in our overall retention rate on revenues from 20.7%
to 18.6%. The decrease in our overall retention rate to a large extent is due to
an overall higher quality of Representative that is deserving of a higher
payout. While management carefully monitors the percentage points relative to
our retention we have chosen to focus more on actual dollars of retention. A
consequence of increased competition for higher producing Representatives is an
increase in payouts to the Representatives with the offset being greater overall
contributions to margin and increased firm profitability.
Management is continuing their efforts to improve margin contribution by
recruiting and retaining sophisticated Representatives who offer a variety of
brokerage and advisory products and services that generate a higher commission
retention rate than those obtained from mutual funds and variable annuities. We
experienced higher margins from trading as a result of ticket charges and fees
pertaining to increases in account balances that flow entirely to the profit
margin. From advisory services we receive fees on the asset balance in the
account that flow directly to the firm. Refer to Note 1 --"Revenue Recognition -
Advisory Fees" to our Condensed Consolidated Financial Statements.
OPERATING EXPENSES
Operating expenses, which experienced a $1.36 million or 39.2% increase, are
discussed in detail below:
Compensation and Benefits. The largest component of operating expenses is
compensation and benefits, which increased by $0.67 million or 43.4%. General
salaries, which grew by 28.2%, accounted for $0.31 million of the increase. In
addition, we experienced a $0.27 million increase in compensation paid to
officers. The increase in general salaries resulted primarily from the hiring
and retention of additional personnel in such functions as:
o Trading and Operations -- to continue to provide an increasingly
higher level of service to our sophisticated Representative force as a
differentiator in the face of increasing competition,
o Compliance -- to meet the growing needs within the industry for
internal control, quality supervision and continuing education to our
independent Representatives, as well as to reduce legal and settlement
expenses,
o Representative recruitment -- to enhance our ability to recruit higher
quality Representatives,
o Legal Department -- to help reduce the need for typically more
expensive outside counsel, and to provide additional services to our
representatives and
o other general administrative areas.
Regulatory, Legal and Professional. Regulatory, Legal and Professional expenses
increased by $0.70 million or 60.9%. The largest component of this increase was
a $1.16 increase in legal fees and settlement costs associated with the
Massachusetts Proceedings referred to in footnote 3 to our Condensed
Consolidated Financial Statements. We have taken and will continue to take
measures calculated to limit our ongoing exposure to legal proceedings arising
from our operations. In this regard, there was a $0.46 million decrease compared
to the prior period in legal fees and settlement costs associated with the
Massachusetts Proceedings, which management believes to be atypical of
litigation that will be associated with our on-going business.
The Company's legal expenses, other than those associated with the Massachusetts
Proceedings, significantly decreased for the comparative period as a result of a
risk-based management approach applied on a firm wide basis. Management believes
this result is directly attributable to the Company's efforts to minimize risk
by improving the quality of its associated registered Representatives while
committing significant resources to educate and train our sales force,
efficiently and accurately process their business, and appropriately supervise
their business activities.
The Company's legal accrual increased by $.51 million to $1.30 million as of
December 31, 2006 from $0.79 million as of December 31, 2005 as a result of the
settlement in the Massachusetts Proceeding. The Company also had various
arbitration claims filed against it that warranted an additional accrual
increase. As we operate in an increasingly litigious industry embedded with
regulation, we will continue to invest significant resources to reduce the
likelihood of future litigation exposure by promoting accuracy, ensuring sound
operational techniques and applying appropriate compliance measures.
Advertising. Advertising, including related marketing expenses, decreased by
$0.06 million or 31.5%, reflecting decreased spending on officer travel to
promote and grow the company due to the fiscal constraints imposed by the
above-mentioned Massachusetts Proceedings.
Communications. Communications expenses decreased by $0.04 million or 22.1%,
primarily due to a decrease in printing and website costs offset by an increase
in telephone expenses. The costs savings in printing expenses were achieved by
communicating to our prospective Representatives by emailing our product
literature instead of direct mailing. The Company's website is currently used to
target new revenue streams by providing access to information through the
website and other Internet publications. Communication efforts and related
expenses, which also include investor/public relations, conference, and
telephone, have historically been positively correlated with the overall growth
of our business. Our website and newsletter, "The Capitalist", have become
effective media to communicate to qualified Representatives for recruitment
purposes.
Occupancy. Occupancy expenses increased by $0.09 million or 52.0% primarily as a
result of opening Investment Centers in Braintree, MA, Manhattan, NY and
Bedford, NH and a new Business Center in Miami, FL. Furthermore, we leased
additional space for senior management and our marketing department at a
separate Lynnfield, MA location. The Company also experienced an increase in
depreciation as a result of acquiring additional fixed assets in the form of new
computers for the additional staff, leasehold improvements and additional
furniture and fixtures for the home office in Lynnfield, MA to accommodate the
increased number of employees.
Other Administrative. Other administrative expenses, which include various
insurance, postage, office and computer-related expenses, increased slightly by
$0.02 million or 5.6%. Management continues to mount a concerted effort to
reduce general office and postage expenses through several cost saving methods.
OPERATING AND NET LOSSES
The Company's operating and net losses, compared to the operating and net profit
during the prior period, can be attributed primarily to the Massachusetts
Proceedings and resulting settlement and legal costs. Had we not incurred the
costs associated with these proceedings and settlement we would have reported
operating income of $0.74 million versus an actual operating loss of $0.43
million.
We are continuing to commit significant resources to improving our overall
marketing efforts, and at the same time investing in technology to assist us and
our Representatives to process their business more efficiently. Improvements to
our automated business processes are calculated (i) to reduce reliance on
personnel to process business, thereby fostering administrative cost savings,
and (ii) to improve accuracy and productivity, thereby improving service levels
to our Representatives, whose service expectations we continue to endeavor to
exceed.
We intend to continue to invest in our selling and administrative services
capabilities, including additions to management, personnel and service
infrastructure, as part of a concerted strategy to increase revenues and
profitability. Management firmly believes that a sustained focus on enhancing
our clearing firm's state-of-the-art business platform will facilitate
accelerated recruitment of independent Representatives that are focused on
growing revenues, particularly in high margin lines such as advisory and trading
services. Management believes that continued focus on implementation and
incremental improvement of our business plan help will foster continuing strong
revenue growth and renewed profitability as we transition beyond atypical legal
costs that have been depressing recent financial results.
Nine Months Ended December 31, 2006 Compared with Nine Months Ended December 31,
2005:
- --------------------------------------------------------------------------------
Results reported for the current nine-month period compared to the prior
nine-month period are discussed below to the extent that explanations for
comparative variances in year to date results differ from the explanations for
comparative quarterly results discussed above. Please refer to the comparative
quarterly results analysis for a general explanation of variances concerning the
current nine-month period that are not discussed below.
RECRUITING
There was a 23.7% growth in new recruits in the current period versus the prior
period as management continues to aggressively pursue and attract quality
producing representatives to their firm.
Recruiting Statistics Nine Months Ended
December 31 Change Percent Change
2006 2005 2006 vs. 2005 2006 vs. 2005
----------- ----------- ------------- --------------
Representatives Recruited 73 59 14 23.7%
RESULTS OF OPERATIONS
Percent of Revenue
Nine Months Ended December 31, Nine Months Ended December 31,
------------------------------ ------------------------------ Percent
Change
2006 2005 2006 2005 2006 vs. 2005
-------------- -------------- -------------- -------------- -------------
Revenues:
Commission $ 50,730,928 $ 42,671,689 87.81% 88.22% 18.9%
Advisory 4,901,072 3,769,457 8.48% 7.79% 30.0%
Other fee income 598,443 586,644 1.04% 1.21% 2.0%
Marketing revenue 956,371 872,173 1.66% 1.80% 9.7%
Other income 584,902 467,934 1.01% 0.98% 25.0%
-------------- --------------
Total Revenue 57,771,716 48,367,897 100.00% 100.00% 19.4%
============== ==============
Commission and advisory expenses 46,453,981 38,495,624 80.41% 79.59% 20.7%
Gross Profit 11,317,735 9,872,273 19.59% 20.41% 14.6%
Operating Expenses:
Advertising 639,727 626,575 1.11% 1.30% 2.1%
Communications 324,323 460,561 0.56% 0.95% -29.6%
-------------- --------------
Total Selling Expenses 964,050 1,087,136 1.67% 2.25% -11.3%
Compensation and benefits 6,629,987 4,656,097 11.48% 9.63% 42.4%
Regulatory, legal and professional 3,763,689 2,486,521 6.51% 5.14% 51.4%
Occupancy 721,436 492,310 1.25% 1.02% 46.5%
Other administrative expenses 774,963 699,730 1.34% 1.45% 10.8%
-------------- --------------
Total Administrative Expenses 11,890,075 8,334,658 20.58% 17.23% 42.7%
Total Operating Expenses 12,854,125 9,421,794 22.25% 19.48% 36.4%
============== ==============
Operating (Loss) Income (1,536,390) 450,479 -2.66% 0.93% -441.1%
Other (Expense) and Other Income:
Gain On Sale of Asset - 91,313
Interest expense (20,223) (27,843) -0.04% -0.06% -27.4%
-------------- --------------
Total Other (Expense) and Other
Income (20,223) 63,470 -0.04% 0.13% -131.9%
(Loss) Income before taxes (1,556,613) 513,949 -2.69% 1.06% -402.9%
Benefit (Provision) for income taxes 468,227 (248,076) 0.81% -0.51% -288.7%
------------- --------------
Net (Loss) Income $ (1,088,386) $ 265,873 -1.88% 0.55% -509.4%
============== ==============
REVENUES
The Company continues to grow revenues in the diversified investment sector of
the financial services industry. Our revenues rose $9.40 million, or 19.4%, to
$57.8 million as we continue our efforts to increase top line revenues in
commissions and advisory services. Leading this performance was an $8.06 million
or 18.9% increase in commissions and a $1.13 million or 30.0% increase in
advisory services revenue between the comparative periods. These results reflect
the diversified nature of our revenues.
Average Revenue Per Representative
Nine Months Ended Nine Months Ended Change 2006 vs, 2005 Percentage Increase
December 31, 2006 December 31, 2005
---------------------------------------------------------------------------------
Commission $ 50,730,928 $ 42,671,689 $ 8,059,239 18.9%
Advisory 4,901,072 3,769,457 1,131,615 30.0%
Other fee income 598,443 586,644 11,799 2.0%
------------------ ----------------- ------------------------------------------
$ 56,230,443 $ 47,027,790 $ 9,202,653 19.6%
Number of Representatives 705 728 (23) -3.2%
Average Revenue Per Rep $ 79,759 $ 64,599 $ 15,161 23.5%
Compared to the prior period, our average revenue per Representative increased
23.5%, reflecting our continuing initiative to recruit and retain quality
producing Representatives.
Commissions. Commissions from variable annuities and direct participation
programs provided $7.54 million, or 93.6%, of an overall $8.06 million increase
in commission revenue compared to the prior period. Commissions from direct
participation programs, which predominantly include REITs (Real Estate
Investment Trusts) and oil and gas programs, increased by $3.01 million or
37.4%.
Nine Months Ended Percentage Percentage
December 31 of Total Increase/decrease
2006 2005 2006 vs. 2005 Increase/decrease 2006 vs. 2005
--------------------------------------------------------------------------------
Commission Revenue:
- -------------------
Variable Annuities $ 19,479,259 $14,946,320 $ 4,532,939 56.2% 30.3%
Trading (brokerage)(1) 15,196,897 12,968,013 2,228,884 27.7% 17.2%
Mutual Funds 7,469,907 8,461,624 (991,717) -12.3% -11.7%
Direct Participation Programs 8,194,152 5,183,149 3,011,003 37.4% 58.1%
Other 390,713 1,112,583 (721,870) -9.0% -64.9%
Total Commission Revenue $ 50,730,928 $42,671,689 $ 8,059,239 100.0% 18.9%
================================================================================
1. Revenue designated as Trading (brokerage) includes revenue from mutual funds
sold through our trading platform.
The growth in commissions historically has been dominated by variable annuities.
However, revenue from our brokerage business maintained its share of the revenue
base as the second largest revenue component generated from commissions due, in
part, to recruitment of sophisticated Representatives who are licensed to sell
equities.
Advisory Fees. Fees from our Rep-directed asset-managed program A-MAP, our
leading source of revenue in this category, grew by $1.17 million or 56.1% to
$3.25 million compared to $2.08 million the prior period. Management is
committed to growing assets under management in this program by offering
superior service at costs lower than the Other Advisory Services, primarily the
predecessor wrap fee programs.
Other Fee Income. Other fee income, which primarily is comprised of licensing
and financial planning fees, increased slightly by $0.01 million or 2.0%.
Marketing Revenue. Net marketing revenues increased by $0.08 million or 9.7%.
Other Income. Other income, consisting primarily of interest and dividends and
gains/losses on investments, increased by $0.12 million for the comparative
current period to the prior period. The majority of the increase came from
interest earned on account balances due to an increase in the average daily
balance in our trading accounts.
GROSS MARGINS
Gross Margin Retention Percent of Gross Margin
Gross Margin Nine Months Ended Nine Months Ended Gross Margin
Nine Months Ended Dec 31, Dec 31, Dec 31, Percent Change
------------------------- ---------------------- ----------------------- --------------
2006
2006 2005 2006 2005 2006 2005 vs. 2005
------------ ----------- ---------- ---------- ----------- ---------- --------------
Commissions (Check and
Application) $ 4,506,219 $3,497,355 12.9% 11.9% 39.8% 35.6% 28.8%
Commission - Trading 3,298,600 2,883,151 21.7% 22.2% 29.1% 29.2% 14.4%
Commission - Insurance Products 189,551 224,761 99.0% 94.8% 1.7% 2.2% -15.7%
Commission - Underwriting 19,917 4,407 10.0% 10.0% 0.2% 0.0% 351.9%
Advisory Services A-MAP (rep
direct) 761,736 548,644 26.0% 29.4% 6.7% 5.6% 38.8%
Advisory Services Other 615,204 1,008,978 n/a n/a 5.4% 10.2% -39.0%
Licensing 465,575 414,479 100.0% 100.0% 4.1% 4.2% 12.3%
Marketing 956,372 872,173 n/a n/a 8.5% 8.8% 9.7%
Other income 504,561 418,325 n/a n/a 4.5% 4.2% 20.6%
------------ -----------
Total Gross Margin $11,317,735 $9,872,273 19.6% 20.4% 100.0% 100.0% 14.6%
============ ===========
Gross margin rose by $1.45 million or 14.6% to $11.3 million for the current
period primarily due to a $1.01 million or 28.8% increase in gross margin
derived from our check and application distribution over the prior period.
Trading. The increase in gross margin from trading reflects an increase in
brokerage commissions as well as increased fee income within corporate accounts.
Contributing to this improvement in gross margins from trading was a combined
increase of $0.29 million in the margin from our fee income on account balances.
Another contributing factor was a reduction in clearing costs as a percentage of
Brokerage Revenue due to trades executed on lower cost exchanges.
The retention rate from trading remained relatively level for the comparative
periods, despite an increase in trading sales, primarily due to a greater
portion of sales being generated by top producing Representatives who command
higher payout rates.
Advisory Services. Advisory services profit margin decreased by $0.18 million or
11.6% for the current period compared to the prior period mostly resulting from
the $0.18 million decrease in the loss in margins from asset-managed services
under our former investment advisory agreement with Eastern Point Advisors Funds
Trust that was terminated in October 2005. See Footnote 1 - "Advisory Fees from
Mutual Funds" to our Condensed Consolidated Financial Statements. However, our
gross margin in the Rep-directed A-MAP Program increased by $0.21 million or
38.8% resulting from the increase in investment volume and assets under
management due in part to lower fees.
Gross Margins from the Other Advisory Services was down as a direct result of
Management's strategy to grow assets under management through our Rep-directed
A-MAP Program, as opposed to our older wrap fee programs.
Mutual Funds, Variable Annuities, Etc. Profit margins from mutual fund sales,
variable annuity sales, direct participation programs and other check and
application distribution programs generated $4.52 million or 39.9% of the total
gross margin compared to $3.50 million or 35.4% during the prior period. As
presented in the gross margin table, margin from our check and application
distribution programs comprised the greatest portion of our overall profit
margin. Profit margins in trading made up the next largest component of our
total gross margin for the current period.
Commission Retention
Commission payouts to our independent Representatives, as a percentage of
advisory and commissioned revenues, decreased slightly for the comparative
periods ended December 31, 2006 versus December 31, 2005.Ultimately, management
is continuing their efforts to improve margin contribution even though
commission retention rates decreased resulting from the lower fee base. Through
the continued recruitment and retention of sophisticated Representatives
management is striving to reach their optimum levels of margin contribution.
Sophisticated Representatives can offer a variety of brokerage and advisory
products and services that provide for higher margin contributions and
commission retention rates than those obtained from mutual funds and variable
annuities. We experienced higher margins from trading as a result of ticket
charges and fees pertaining to increases in account balances that flow entirely
to the profit margin. From advisory services we receive fees on the asset
balance in the account that go directly to the firm. Refer to Note 1 --"Revenue
Recognition - Advisory Fees" to our Condensed Consolidated Financial Statements.
OPERATING EXPENSES
Operating expenses, which experienced a $3.43 million or 36.4% increase for the
nine months ended December 31, 2006 compared to December 31, 2005, are discussed
in detail below:
Compensation and Benefits. The largest component of operating expenses is
compensation and benefits, which increased by $1.97 million or 42.4% during the
current period. This change was due primarily to (i) a $0.69 million increase in
stock-based compensation resulting from the issuance of restricted common stock
to employees, directors, and registered representatives under our 2005 Equity
Incentive Plan, and (ii) a $0.81 million increase in general salaries. The
general salaries increase resulted primarily from the hiring of additional
personnel to support continued growth, as generally described in our comparative
analysis of the current quarter, above.
Regulatory, Legal and Professional. Regulatory, Legal and Professional expenses
increased by $1.28 million or 51.4%. The largest component of this increase was
a $0.77 million or 196.51% increase in outside legal fees, and a $1.00 million
settlement of the Massachusetts Proceedings (referred to in Footnote 3 to our
Condensed Consolidated Financial Statements) entered into on December 19, 2006.
Partially offsetting these increases was a $0.73 million decrease in legal fees
and settlements resulting from the non recurrence of commercial litigation
settled in the prior period that was not related to our ordinary business
activities. The Company's legal expenses would have been consistent with the
prior period absent the Massachusetts Proceedings.
Advertising. Advertising, including related marketing expenses, was relatively
flat for the comparative periods.
Communications. Communications expenses decreased by $0.14 million or 29.6%,
primarily due to decreases in printing and website expenses.
Occupancy. Occupancy expenses increased by $0.23 million or 46.5% primarily as a
result of $0.09 million in leasing costs for our new locations. The Company
added Investment Centers in Braintree, MA , Manhattan, NY and Bedford, NH and a
Business Center in Miami, FL. The Company also experienced an increase of $0.05
million in depreciation from aquiring additional fixed assets in the form of new
computers for the additional staff, leasehold improvements and additional
furniture and fixtures to the home office in Lynnfield, MA to accommodate the
increased number of employees.
Other Administrative. Other administrative expenses, which include various
insurance, postage, office and computer-related expenses, increased by $0.07
million or 10.8%.
OPERATING INCOME / LOSS
Operating income decreased by $1.99 million, or 441.1%, due to an increase in
operating expenses of $3.43 million or 36.4%. The most significant contributors
to the increase in operating expenses were a $0.69 million increase in stock
based compensation, a $0.81 million increase in general salary compensation from
the hiring of new personnel, and a $1.77 million increase in legal costs
incurred primarily in connection with the Massachusetts Proceedings and
settlement. Partially offsetting these increases in operating overhead was a
$1.45 million increase in our gross margin, primarily in brokerage business.
The Company would have reported operating income of $0.23 million, versus an
actual $1.54 million operating loss, but for the Massachusetts Proceedings and
settlement. We believe that our brand is defined by, and future profitability is
dependent upon, a commitment to the best interests of our independent
Representatives and their clients. Accordingly we remain focused on a risk-based
management approach in support of our business model of recruiting quality
independent Representatives and allocating the resources we believe are required
to provide them with exceptional customer service, state of the art
technological support, and a nurturing educational and marketing environment.
Concurrently, we strive to minimize risk by improving the quality of our
associated registered representatives while committing the resources we believe
necessary to educate and train our sales force, efficiently and accurately
process their business and effectively supervise their business activities.
Management believes initial fruits of this strategy are reflected in our success
during the current period in recruiting quality Representatives and growing
revenues and gross margins, and we look forward to returning to profitability in
the future.
NET INCOME
Net income for the nine months ended December 31, 2006, compared to the nine
months ended December 31, 2005, decreased by $1.35 million, or $0.23 per basic
and $0.22 per diluted share, as the Company reported a $1.09 million dollar loss
this current period compared to a net profit of $0.27 million in the prior
period. This was the result of a decrease in operating income offset by an
income tax benefit of $0.47 million. The decrease in operating income resulted
from increases in operating expenses, primarily compensation expenses and
expenses related to the Massachusetts Proceedings and settlement, that
outweighed increases in revenues and gross profit margins. But for the expense
associated with the Massachusetts Proceedings and settlement, we would have been
profitable for the nine months ended December 31, 2006.
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.
Cash inflows historically come mainly from the profitability of the Company's
core services and investment products. For the last several years, profitability
has typically 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 enter a new business and
investment year).
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 agencies. A key to this
approach is ensuring that adequate controls over our operations and those of our
Representatives are implemented, tested and periodically updated. As part of
this effort, substantial resources have been committed to enhancing the
capabilities of our compliance team members, whose tasks include reasonably
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 by assisting in the education and training of our
Representatives and staff.
As of December 31, 2006, cash and cash equivalents totaled $5.61 million as
compared to $7.72 million as of March 31, 2006. Working capital as of December
31, 2006 was $5.30 million as compared to $8.04 million as of March 31, 2006.
The ratio of current assets to current liabilities was 1.82 to 1 as of December
31, 2006 as compared to 2.70 to 1 as of March 31, 2006, principally due to cash
disbursements of $1.3 million over the nine month period resulting from the
Massachusetts Proceedings and settlement.
Operations provided $0.99 million in cash for the nine months ended December 31,
2006 as compared to $1.26 million in cash provided for the nine months ended
December 31, 2005. Cash flow from operations, in comparing the current period to
the prior period decreased by $0.27 million.
In comparing cash flow from operating activities for December 31, 2006 to
December 31, 2005, we can see that net income decreased cash flow by $1.35
million as a result of the net loss of $1.01 million for the current period
versus net income of $0.27 million in the prior period. In addition, we issued
stock based compensation in the form of restricted stock which increased cash by
$0.69 million as a non-cash add back adjustment in comparing the current to the
prior period.
Cash outflows from investing activities for the current period comprised of
$2.82 million of which $0.71 million was for purchasing equipment as well as
technology and leasehold improvements. In addition, we experienced cash outflows
of $0.13 million in the form of loans to Registered Representatives, to help
develop their businesses, as well as $1.99 million invested in US Treasury Bills
and Notes.
Finally, from financing activities we paid a $0.25 million cash dividend on June
29, 2006 to shareholders of record as of June 15, 2006.
By comparison, for the nine months ended December 31, 2005, cash used in
investment activities comprised of cash outflows of $0.30 million for purchasing
equipment, technology, and leasehold improvements and $0.36 million used for
granting loans to registered Representatives. Finally, in financing activities
we paid a dividend of $0.12 million on May 16, 2005 to shareholders of record as
of May 2, 2005.
Cash disbursements for the nine months ended December 31, 2005 consisted of
$1.10 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, $0.20 million for loans to registered
Representatives and $0.21 million for income tax 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 disbursements during nine months ended December 31. 2006 included $1.77
million for legal related matters of which $0.82 million was for legal fees
relating to the Massachusetts Proceedings and $0.50 million for the initial
payment pertaining to the settlement of the Massachusetts Proceedings. In
addition, the Company paid out $0.50 million to the NASD for licensing renewals
and routine assessments. The Company also disbursed $0.48 million in corporate
credit card purchases that primarily consisted of travel and entertainment along
with computer related expenses. Finally, a $0.25 million cash dividend was paid
on June 29, 2006 to shareholders of record as of June 15, 2006.
Management believes that the current period net cash outflow is not indicative
of future cash outflow trends but, rather, reflects extraordinary expenditures
to defend and settle the Massachusetts Proceedings that, in nature and scope,
were atypical of legal proceedings that the Company has experienced in the past.
These unprecedented disbursements during the current quarter and year to date
have had a significant negative impact on our brokerage firm's net capital
ratio.
The SEC Uniform Net Capital Rule (Rule 15c3-1) requires that ICC, our
broker-dealer subsidiary, maintain net capital of $100,000 and a ratio of
aggregate indebtedness to net capital (a "net capital ratio") not to exceed 15
to 1. Under the 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, the Company's net capital ratio would
exceed 10 to 1 or if we would have less than 120% of our minimum required net
capital.
In December 2006, ICH infused $1.3 million in capital to ICC to offset the cash
drain resulting from the Massachusetts Proceedings and settlement. Consequently,
as of December 31, 2006 ICC had net capital of $1.16 million (i.e., an excess of
$0.63 million) and a 6.90 to 1 net capital ratio as compared to net capital of
$0.96 million (i.e., an excess of $0.53 million) and a 6.63 to 1 net capital
ratio as of March 31, 2006.
The Company's legal accrual increased slightly to $0.85 million as of December
31, 2006 from $0.79 million as of December 31, 2005 primarily as a result of the
settlement of the Massachusetts Proceedings. The Company also had other various
arbitrations filed against it that warranted a portion of the accrual increase.
During the current period the increase in our legal accrual impacted ICC's net
capital ratio and excess net capital. The Company does not consider this to be a
trend and does not currently anticipate that similar accrual increases will be a
recurring necessity. See Footnote 3 to our Condensed Consolidated Financial
Statements.
The Company currently has ample cash to cover additional accruals and
disbursements that may result from these various arbitrations. Despite the
arbitrations and legal proceedings that increased our legal accrual, the Company
remains focused on committing the resources we believe are necessary to assure
continued growth and effectively manage our business risks.
In its role as Investment Advisor to the Eastern Point Advisors Funds Trust
family of mutual funds, Company disbursements to pay fund expenses that exceed
their respective ceiling caps averaged $0.18 million per fiscal quarter during
the previous fiscal year. As previously noted, the Company agreed to terminate
its management contract with the Trust and, accordingly, the Company received a
relative cash flow infusion of $0.04 million for the nine months ended December
31, 2006 versus a $0.38 million cash outflow for the nine months ended December
31, 2005. See condensed Footnote 5 to our Condensed Consolidated Financial
Statements.
CONTRACTUAL OBLIGATIONS
Contractual Obligations Payments Due by Period
- ------------------------------------------------------------------------------------------------------------------------
Period April 1, 2006- April 1, 2007- April 1, 2010- April 1, 2012
March 31, 2007 March 31, 2010 March 31, 2012 and thereafter
Total less than 1 year 1-3 years 4-5 years After 5 years
Fiscal Years Ended March 31, 2007 2008-2010 2011-2012 2013 and thereafter
- ------------------------------------------------------------------------------------------------------------------------
Operating leases: 1,059,819 144,261 833,278 82,280 -
---------------------------------------------------------------------
Total Contractual Obligations 1,059,819 144,261 833,278 82,280 -
---------------------------------------------------------------------
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 2007 and 2009. 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 December 31,
2006:
Year Ending March 31 ,2007 $144,261
Year Ending March 31 ,2008 530,940
Year Ending March 31 ,2009 213,994
Year Ending March 31 ,2010 88,344
Year Ending March 31 ,2011 49,368
Year Ending March 31 ,2012 32,912
--------------
Total Minimum Lease Payments $1,059,819
==============
Certain leases contain provisions for minimum lease payments that are contingent
upon increases in real estate taxes. The total lease expenses amounted to $0.16
million for quarter ended December 31, 2006 and $0.1 million for the quarter
ended December 31, 2005. The related party leases to Investors Realty, LLC
amounted to $0.09 million and $0.06 million, respectively, for the quarters
ended December 31, 2006 and 2005.
The Company had total lease expenses of $0.46 million and $0.30 million for the
nine months ended December 31, 2006 and 2005, respectively. The related party
leases to Investors Realty, LLC amounted to $0.27 million and $0.18 million,
respectively for the nine months ended December 31, 2006 and 2005.
RISK MANAGEMENT
Risk is an inherent part of the Company's business and activities. Effective
risk management is critical to the Company's financial strength and
profitability and requires robust auditing, constant communications, sound
judgment and in depth knowledge of both pertinent financial trends and the
economy as a whole. Senior management takes an active and committed 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 rates, 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 vital to our business. A
shift in spending in this area could negatively impact the Company. 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 mitigate 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. No
changes in our internal control over financial reporting occurred during the
fiscal quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ICC is required per the rules and regulations of the SEC and NASD (17A-5) AND
(17A-5G) to have adequate controls as a registered broker dealer and investment
advisor. These regulating bodies audit ICC on a regular basis and ensure that it
is in compliance with the rules for a broker dealer and investment advisor. In
addition, ICC supplementally reports on the adequacy of its internal controls in
annual financial statements presented to state securities oversight bodies, we
report on the adequacy of our internal controls.
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 typically vigorously contests the
allegations in these cases and believes that there are meritorious defenses
available in the majority of matters. Counsel in these cases generally are
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.
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)
10.4 The 2005 Equity Incentive Plan . . . . . . . . . . . . . (4)(Exh. 4.5)
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.
(4) Incorporated by reference to the indicated exhibit to the Registrant's
Registration Statement on Form S-8 (File No. 333-43664) filed June 9,
2006
Any exhibit not included with this Form 10-Q 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: February 14, 2007