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| ICH > SEC Filings for ICH > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Management's Discussion and Analysis reviews our consolidated financial condition as of September 30, 2008 and March 31, 2008, the consolidated results of operations for the three and six months ended September 30, 2008 and 2007 and, where appropriate, factors that may affect future financial performance. The discussion should be read in conjunction with the condensed 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 three and six months ended September 30, 2008, (ii) the "prior period" means the three and six months ended September 30, 2007, (iii) an increase or decrease compares the current period to the prior period, and (iv) all non-comparative amounts refer to the current period.
FORWARD-LOOKING STATEMENTS
The statements, analysis, 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, insurance and related services. We operate in a highly regulated and competitive industry that is influenced by numerous external factors such as economic conditions, marketplace liquidity and volatility, monetary policy, global and national political events, regulatory developments, competition, and investor preferences. Our revenues and net earnings may be either enhanced or diminished from period to period by such external factors.
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 brokerage, portfolio tracking facilities and records management.
Investment Advisory Services
The Company provides investment advisory services, including asset allocation and portfolio rebalancing, for its representatives' customers. In the past, investment advisory services were performed by both ICC, doing business as ICA, and EPA. The Company's investment advisory business has been centered in ICA since 2004. EPA limited its business to providing access to advisory services supplied by third parties until it completed a transfer of all assets to ICA on May 5, 2008 and withdrew its advisory registration.
Recruitment and Support of Representatives
A key component of our business strategy is to recruit well-established, productive representatives who generate substantial revenues from a broad array of investment products and services including those with high margins. Additionally, we assist our existing representatives in developing and expanding their business by providing a variety of support services and a diversified range of investment products for their clients. The Company focuses on providing substantial added value to our representatives' practices, enabling them to be more productive in their investment advisory and brokerage businesses.
Support provided to assist representatives in pursuing consistent and profitable sales growth takes many forms, including online brokerage systems, asset management models, training in practice management, targeted financial assistance and a network of communication links with investment product companies. Regional and national conventions provide forums for interaction to improve product knowledge, sales and client satisfaction. In addition, a dedicated business development unit focuses on providing representatives with programs and tools to grow their businesses both through new client acquisition and advancement of existing client relationships. These programs enhance our ability to attract and retain productive representatives.
OUR PROCESS
Check and Application
The majority of transactions are conducted through a check and application process where a client check and an investment company's product application is delivered to us for processing. Our services include principal review and submission to the investment company or our clearing firm.
Online Trading
Through the use of our remote electronic-entry trading platform, registered representatives can efficiently submit a wide range of equity trades online. Trades are reviewed by our principal and our clearing firm before processing.
Bond Trading
The Company's fixed-income trading desk uses a network of regional and primary dealers to execute trades across a broad array of fixed-income asset classes. The desk also utilizes several dealer-only electronic services that allow the desk to offer inventory and to efficiently execute trades.
Asset Allocation
Asset allocation services are available through ICA. The allocation services, for the most part, are executed through our online trading platform. Other allocation services are performed with the respective fund companies directly.
OFF-BALANCE SHEET RISK
We execute securities transactions on behalf of our customers. If either the customer or a counter-party fails to perform, we, by agreement with our clearing broker, may be required to discharge the obligations of the non-performing party. In such circumstances, we may sustain a loss if the market value of the security is different from the contract value of the transaction. We seek to control off-balance sheet risk by monitoring the market value of securities held or given as collateral in compliance with regulatory and internal guidelines. Pursuant to such guidelines, our clearing company requires that we reduce positions when necessary. We also complete credit evaluations where there is thought to be credit risk.
CRITICAL ACCOUNTING POLICIES
In General
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The Company believes that of its significant accounting policies (see Note 1 to the Company's condensed consolidated financials statements contained herein), those dealing with revenue recognition, allowance for doubtful accounts receivable, and taxes involve a particularly high degree of judgment and complexity. Our accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the condensed consolidated financial statements. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts can and do differ from estimates and the differences can have a material effect on the condensed consolidated financial statements. Therefore, understanding these policies is important to understanding the reported results of operations and the financial position of the Company.
Reserves
The Company records reserves related to legal proceedings in "accrued expenses" in the condensed consolidated balance sheet. The determination of these reserve amounts requires significant judgment on the part of management. Management considers many factors including, but not limited to: the amount of the claim; the amount of the loss in the client's account;
the basis and validity of the claim; the possibility of wrongdoing on the part of an employee or representative of the Company; previous results in similar cases; and legal precedents. Each legal proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the condensed consolidated financial statements and is recognized as a charge/credit to earnings in that period. The assumptions made by management in determining the estimates of reserves may be incorrect and the actual costs upon settlement of a legal proceeding may be greater or less than the reserved amount.
KEY INDICATORS OF FINANCIAL PERFORMANCE FOR MANAGEMENT
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 productivity and practice diversification of representatives, top line commission and advisory services revenues, gross margins, operating expenses, legal costs, taxes and earnings per share.
COMPARISON OF THE FISCAL QUARTERS ENDED SEPTEMBER 30, 2008 AND 2007
RESULTS OF OPERATIONS
Percentage of Revenue Percent
Quarter Ended September 30, Quarter Ended September 30, Change
2008 2007 2008 2007 2008 vs 2007
------------------------------ ------------------------------- -------------
Revenue:
Commissions $ 19,464,072 $ 19,967,862 84.4% 86.5% -2.5%
Advisory fees 3,032,044 2,518,253 13.2% 10.9% 20.4%
Other fee income 140,397 143,141 0.6% 0.6% -1.9%
Marketing revenue 295,239 234,806 1.3% 1.0% 25.7%
Interest, dividend and investment 121,593 221,143 0.5% 1.0% -45.0%
------------------------------ -------------------------------
Total revenue $23,053,345 $23,085,205 100.0% 100.0% -0.1%
Commission and advisory fee expenses 18,639,678 18,827,534 80.9% 81.6% -1.0%
------------------------------ -------------------------------
Gross profit 4,413,667 4,257,671 19.1% 18.4% 3.7%
Operating expenses:
Advertising 327,682 428,201 1.4% 1.9% -23.5%
Communications 397,631 336,024 1.7% 1.5% 18.3%
------------------------------ -------------------------------
Total Selling expenses 725,313 764,225 3.1% 3.3% -5.1%
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Compensation and benefits 2,428,305 2,076,612 10.5% 9.0% 16.9%
Regulatory, legal and professional 756,282 320,589 3.3% 1.4% 135.9%
Occupancy 269,064 290,276 1.2% 1.3% -7.3%
Other administrative 465,038 323,071 2.0% 1.4% 43.9%
Interest 9,741 8,572 0.0% 0.0% 13.6%
------------------------------ -------------------------------
Total administrative expenses 3,928,430 3,019,120 17.0% 13.1% 30.1%
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Total operating expenses 4,653,743 3,783,345 20.2% 16.4% 23.0%
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Operating (loss) income (240,076) 474,326 -1.0% 2.1% -150.6%
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Income (loss) before income taxes (240,076) 474,326 -1.0% 2.1% -150.6%
Provision (benefit) for income taxes 251,850 215,277 1.1% 0.9% 17.0%
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Net (loss) income $ ( 491,926 ) $ 259,049 -2.1% 1.1% -289.9%
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Average Production per Representative
Management believes that improving the overall quality of our independent representatives is a key to achieving growth in revenues and net income. We believe that upgrading the business practices of our representatives not only generates more revenue, but assists in limiting the cost of overhead functions and representative noncompliance. We strive to continually improve the overall quality of our force of representatives by:
º assisting representatives to improve their skills and practices,
º recruiting established, high-quality representatives, and
º terminating low quality representatives.
A key metric that we use to assess the quality of our representatives is average revenue produced per representative. Average revenue per representative marginally improved to approximately $33,600 as of September 30, 2008, reflecting productive representatives withstanding a contentious market.
Quarter Ended September 30,
2008 2007 Percentage Change
-------------- ------------- ------------------
Revenue:
Commission $ 19,464,072 $ 19,967,862 -2.5%
Advisory 3,032,044 2,518,253 20.4%
Other fee income 140,397 143,141 -1.9%
-------------- -------------
$ 22,636,513 $ 22,629,256 0.0%
-------------- -------------
-------------- -------------
Number of Producing Representatives 674 696 -3.2%
Average Revenue per Repesentative $ 33,585 $ 32,513 3.3%
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Practice Diversification
The Company, through its recruitment practices and compliance training programs, encourages diversification of the array of investments products and services offered by our independent representatives. First and foremost, this enables our representatives to more fully serve the investment and security needs of their clients, particularly in unsettling volatile markets. Recruitment of representatives who are duly qualified to offer sophisticated investment products to their clients has also resulted in growth of transaction and fee-based business that, in addition to generating relatively high margins, are expected to help the Company weather a down market due to recurring revenues generated by these types of services.
REVENUES
Revenues were consistent with the prior period at $23.05 million, a slight decrease of 0.1%, from $23.09 million. The decrease was led by a $0.51 million, or 20.4%, increase in advisory services offset by a $0.50 million, or 2.5%, decrease in commission revenue. As discussed below, there has been a recent trend of higher growth in our fee-based advisory services, compared to typically lower-margin commission-based services. Management seeks a diversified revenue stream to provide a degree of protection from market risk and continues to emphasize retention and recruitment of representatives who seek to leverage the full range of our technology platforms.
Commissions
Commissions from variable annuities, which continue to comprise the largest component of commission revenue, were essentially flat when comparing the current period to the prior period. However, brokerage revenues decreased by $0.53 million for the comparative periods due to a drop in equity sales that reflected continued turmoil in U.S. financial markets. Commission revenues from direct sales of mutual funds (denoted "Mutual Funds" in the below table) decreased by $0.88 million, in part due to an on-going transition of mutual fund sales to our automated trading platform, rather than direct check and application processing, coupled with a reduction in overall production. Commission revenues from direct participation programs increased by $0.90 million primarily reflecting increased investments in oil and gas programs that became more attractive as petroleum product prices spiked.
Direct check and application investment in mutual funds declined as overall retail investment continued to be constrained by reverses in financial markets and a troubled economy. Our direct check and application business depends largely on new investment dollars. In contrast, our brokerage business produces recurring revenue, principally in the form of interest on money market balances, fees on fund asset balances and margin interest.
The following table details revenue by product type included in commissions:
Percentage
Percent of change 2008 vs.
Product Type 2008 2007 2008 vs. 2007 total change 2007
---------------- -------------- ------------------- ------------- ----------------
Variable Annuities $ 7,868,207 $ 7,870,474 $ (2,267) -0.4% 0.0%
Brokerage (1) 5,851,198 6,385,468 (534,270) -106.1% -8.4%
Mutual Funds 2,178,289 3,059,665 (881,376) -174.9% -28.8%
Direct Participation Programs 3,486,093 2,581,668 904,425 179.5% 35.0%
Other 80,285 70,587 9,698 1.9% 13.7%
---------------- -------------- ------------------- ------------- ----------------
Total Commissions Revenue $ 19,464,072 $ 19,967,862 $ (503,790) 100.0% -2.5%
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1. Revenue designated as brokerage includes revenue from mutual funds sold through our trading platform. Reveneue from direct check and application sales of mutual funds are listed above under "Mutual Funds".
Advisory Fees
Advisory revenues grew by $0.51 million, or 20.4%, despite a bear market, primarily due to recurring non-grid revenue stemming from growth in assets under management. Despite the downward pressure placed on advisory fees by current declines in the market value of financial assets under management, the Company remains focused on growing revenues in this sector to further offset any negative impact on other revenue sources from unpredictable market volatility.
Other Fee Income
Other fee income, primarily comprised of licensing and financial planning fees, were consistent with the prior period's results.
Marketing Revenue
Marketing revenues increased by $0.06 million, or 25.7%, due primarily to an increase in marketing support revenue for our conventions and, in part, from the timing of these events.
Other Income
Other income, primarily interest, declined 45.0% to $0.12 million, as compared to $0.22 million during the prior period. The decrease is directly attributable to a reduction in interest income caused by a decline in related cash balances.
GROSS MARGINS
% of Sales (Retention Rate) % of Total Gross Margin
Quarter Ended September 30 Quarter Ended September 30 Quarter Ended September 30 Percent Change
----------------------------------------------- ------------------------------------------- ------------------------------ ---------------
2008
2008 2007 2008 2007 2008 2007 vs. 2007
----------------------- ------------------- ------------------- ------------------- ------------- ------------ ---------------
Commissions:
Check and Application $ 1,759,236 $ 1,756,535 13.0% 13.0% 39.9% 41.3% 0.2%
Brokerage 1,421,939 1,470,639 24.3% 23.0% 32.2% 34.5% -3.3%
Fixed Insurance 26,935 44,837 100.0% 100.0% 0.6% 1.1% -39.9%
Underwriting 12,006 2,575 22.5% 10.0% 0.3% 0.1% 366.3%
----------------------- ------------------- ------------- ------------
Total 3,220,116 3,274,586 73.0% 77.0% -1.7%
----------------------- ------------------- ------------- ------------
Advisory Services:
A-MAP 402,675 356,663 23.2% 20.8% 9.1% 8.4% 12.9%
Other 393,682 210,856 n/a1 n/a1 8.9% 5.0% 86.7%
----------------------- ------------------- ------------- ------------
Total 796,357 567,519 25.8% 21.8% 18.0% 13.4% 40.3%
----------------------- ------------------- ------------- ------------
Licensing 61,302 64,960 n/a1 n/a1 1.4% 1.5% -5.6%
Marketing 295,239 234,806 n/a1 n/a1 6.7% 5.4% 25.7%
Other Income 40,653 115,800 n/a1 n/a1 0.9% 2.7% -64.9%
----------------------- ------------------- ------------- ------------
Total Gross Margin $ 4,413,667 $ 4,257,671 19.1% 18.4% 100.0% 100.0% 3.7%
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Gross margin increased by $0.16 million, or 3.7%, to $4.41 million for the current period primarily due to a $0.23 million, or 40.3%, increase in gross margin from our advisory services programs.
Commissions
Gross margins from our check and application and brokerage businesses were relatively flat for the comparative periods due primarily to declines in the brokerage and mutual fund areas offset by an increase in oil and gas programs. In addition, the 3.3% decrease posted in brokerage services profit margin . . .
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