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ICH > SEC Filings for ICH > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for INVESTORS CAPITAL HOLDINGS LTD | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INVESTORS CAPITAL HOLDINGS LTD


13-Nov-2012

Quarterly Report


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 September 30, 2012 and March 31, 2012, the consolidated results of operations for the three months and six months ended September 30, 2012 and 2011 and, as 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 months and six months ended September 30, 2012, (ii) the "prior period" means the three months and six months ended September 30, 2011, (iii) an increase or decrease compares the current period to the prior period, and (iv) non-comparative amounts refer to the current period.

FORWARD-LOOKING STATEMENTS

This report contains certain "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters that are not historical facts and may include words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "will," "should," "may," and other similar expressions. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by the 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 SEC. 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 these and other external factors.

OUR BUSINESS

We operate primarily through our subsidiary, ICC, as a broker-dealer and, doing business as ICA, as a registered investment advisor, with a national network of independent financial representatives.

Broker-Dealer Services

We provide broker-dealer services in support of trading and investment by our representatives' customers in securities, including corporate equity and debt securities, U.S. Government securities, municipal securities, mutual funds, limited partnerships and other alternative investments, variable annuities and variable life insurance. We also provide related services such as market information, Internet brokerage, portfolio tracking facilities and records management.

Investment Advisory Services

We provide investment advisory services, including asset allocation and portfolio rebalancing, for our representative's customers through ICA.


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Recruitment and Support of Representatives

A key component of our business strategy is to recruit well-established, productive representatives who provide superior service to their clients. Additionally, we assist our representatives in developing and expanding their business by providing a variety of support services and a diversified range of investment products for their clients. We focus on providing substantial added value to our representatives' practices, enabling them to be more productive, particularly in high margin lines such as advisory services and brokerage.

Support provided to assist representatives in pursuing consistent, profitable sales growth takes many forms, including automated trading systems, 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, we provide our 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

Online Brokerage

Registered representatives have direct market access to submit security transactions for their clients through the use of an online brokerage platform for trade execution serviced by Pershing acting as our clearing firm.

Check and Application

Check and application revenue is obtained through a process where a check and a product application is delivered to us for processing that includes principal review and submission to the variable annuity, mutual fund, direct participation or other investment product company. Investments in technology are facilitating our migration over time from a paper intensive to a more paperless process. This shortens the transaction cycle, reduces errors and creates greater efficiencies.

Bond Brokerage

Our fixed-income brokerage 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 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.

Asset Allocation

Asset allocation services are made available through ICA. Our services include the design, selection and rebalancing of investment portfolios on behalf of our representatives' clients. We also provide tools, services and guidance that enable our representatives to provide these investment services directly to their clients. These services, for the most part, are conducted through our online brokerage platform. Other allocation services are performed directly by fund companies.

CRITICAL ACCOUNTING POLICIES

In General

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The Company believes that of its significant accounting policies and litigation and regulatory matters to the Company's condensed consolidated financial statements contained herein), those dealing with revenue recognition, allowance for doubtful accounts receivable, taxes and accrual of legal expenses 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. By 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


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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.

Off Balance Sheet Risk

We execute securities transactions on behalf of our customers on a fully-disclosed basis. 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.

Reserves

We record 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. See "Note 6, Litigation and Regulatory Matters".

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, operating expenses, legal costs, taxes, earnings per share and adjusted EBITDA.


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PRODUCTIVITY OF REPRESENTATIVES

Management believes that improving the overall quality of our independent representatives is a key to achieving growth in revenues and earnings. We believe that upgrading the business practices of our representatives not only grows 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:

assisting representatives to improve their skills and practices,

recruiting higher-producing representatives, and

terminating low quality representatives.

A key metric that we use to assess the average quality of our producing (non-staff) representatives is per capita rep-generated revenue based on a rolling 12-month period. Data for the 12-months ended September 30, 2012 and 2011 are presented below:

                                  Twelve Months Ended                         Change
                       September 30, 2012     September 30, 2011       Dollar      Percentage
Rep-generated
revenue:
 Commission          $        62,737,738    $        67,774,960    $ (5,037,222)     -7.4%
 Advisory                     15,782,395             15,939,915        (157,520)     -1.0%
 Other fee income              1,084,962                681,167         403,795      59.3%
                     $        79,605,095    $        84,396,042    $ (4,790,947)     -5.7%

Number of
representatives               470                    499                (29)         -5.8%

Average revenue per
representative       $      169,373         $      169,130         $        242       0.1%

We believe that the consistency in the per capita rep-generated revenue is a direct result of recent recruitment of higher-producing representatives, and a stronger practice management program, offsetting slowed commission activity.


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        COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011



Results of Operations




                                    Three Months Ended September 30,               Change
                                       2012                 2011             Dollar      Percentage
Revenues:
 Commission                      $     15,779,387    $      15,658,586    $   120,801       0.8%
 Advisory fees                          3,979,313            4,083,036       (103,723)     -2.5%
 Other fee income                         337,226              108,570        228,656      210.6%
 Other income                             226,839              319,721        (92,882)     -29.1%
Total revenue                          20,322,765           20,169,913        152,852       0.8%

Expenses:
 Commissions and advisory fees
expense                                16,126,655           16,231,516       (104,861)     -0.6%
 Compensation and benefits              1,460,708            2,659,815     (1,199,107)     -45.1%
 Regulatory, legal and
professional                              977,627            1,009,451        (31,824)     -3.2%
 Brokerage, clearing and
exchange fees                             364,697              519,511       (154,814)     -29.8%
 Technology and communications            327,240              309,016         18,224       5.9%
 Marketing and promotion                  231,424              337,053       (105,629)     -31.3%
 Occupancy and equipment                  178,191              218,048        (39,857)     -18.3%
 Other administrative                     221,748              266,875        (45,127)     -16.9%
 Interest                                   4,835                8,997         (4,162)     -46.3%
Total expenses                         19,893,125           21,560,282     (1,667,157)     -7.7%

Operating income (loss)                   429,640           (1,390,369)     1,820,009     -130.9%
Provision (benefit) for income
taxes                                     149,420             (513,007)       662,427     -129.1%

       Net income (loss)          $       280,220    $        (877,362)     1,157,582     -131.9%

Adjusted EBITDA:                  $       563,387    $        (374,883)   $   938,270     -250.3%

Adjustments to conform adjusted
EBITDA to GAAP Net income
(loss):
 Income tax provision                    (149,420)             513,007       (662,427)    -129.1%
 Interest expense                          (4,835)              (8,997)         4,162      -46.3%
 Depreciation and amortization            (80,996)             (97,995)        16,999      -17.3%
 Non-cash compensation for
transfer of beneficial interest
to former Chairman                               -            (568,095)       568,095     -100.0%
 Non-cash compensation                    (47,916)             (19,858)       (28,058)     141.3%
 Non-recurring professional fees                 -            (320,541)       320,541     -100.0%

Net income (loss)                 $       280,220    $        (877,362)   $ 1,157,582     -131.9%

ADJUSTED EBITDA

Earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted by eliminating other


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non-cash expense, gains or losses on sales of assets, and various non-recurring items ("adjusted EBITDA"), is a key metric we use in evaluating our financial performance. Adjusted EBITDA eliminates items that we believe are not part of our core operations, are non-recurring items of revenue or expense, or do not involve a cash outlay, such as stock-related compensation and professional fees incurred in connection with the Company's registration statement on Form S-3 that closed on August 2, 2011 and related matters. We consider adjusted EBITDA important in monitoring and evaluating our financial performance on a consistent basis across multiple time periods. We also use adjusted EBITDA as an important measure, among others, to analyze and evaluate financial and strategic planning decisions.

Adjusted EBITDA is considered a non-US GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act. Adjusted EBITDA should be considered in conjunction with, rather than as a substitute for, important US GAAP financial measures including pre-tax income, net income and cash flows from operating activities. Items excluded from adjusted EBITDA are significant and necessary components to the operations of our business; therefore, adjusted EBITDA should only be used as a supplemental measure of our operating performance.

Second quarter Adjusted EBITDA, was $0.56 million, an increase of 250.3% from a $0.37 million loss before interest, taxes, depreciation, amortization, non-recurring professional fees, and non-cash compensation in the comparative quarter. This increase is primarily due to the rise in operating income in the current period.

REVENUE

Revenues increased modestly by $0.15 million or by 0.80 % primarily due to an increase in other fee income.

Revenues from commissions increased by 0.80% or by $0.12 million as a result of our direct business in sales from variable annuities offset by a decrease in commissions from brokerage.

Our advisor-directed managed assets program continues to contribute the majority of advisory services revenue; however, revenues decreased by $0.16 million in the A-MAP program. This decrease was offset by an increase in the A-MAP FT program, another representative directed asset managed program performed for a flat fee rate.

Other fee income increased primarily as a result of technology gross charges earned, as well as licensing fees, annual administrative fees, and financial planning fees.

The decrease in other revenue, which consists of net marketing revenues and interest income, resulted primarily from a decrease in marketing allowances for events.

EXPENSES

Total expenses decreased by $1.67 million, or 7.73 %, principally as a result of decreases in compensation and benefits, plus reductions is all other major expenses.

Commissions and advisory fees paid to our representatives represent a percentage of revenue of our broker-dealer; accordingly, much of the $0.10 million decrease in commissions and advisor fees payout reflects a decrease in our ratio of commission payout as compared to the total of representative-produced revenue.

The decrease in compensation and benefits is attributable to the cost management initiatives the Company implemented in January 2012, offset by increased health benefit costs and one-time separation costs associated with former employees. Also, a final payment was made in August 2012 to our former Chairman satisfying the terms of a one-year post-retirement consulting agreement.

The decrease in regulatory, legal and professional expenses was driven principally by a decrease in nonrecurring professional fees related to our registration statement on Form S-3 and related matters which were completed in the prior period. Offsetting this decrease was an increase in legal settlements, and an increase in legal fees incurred to resolve a legal dispute with our Landlord, specific to our tenancy at 230 Broadway Lynnfield, MA.


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We will continue to incur legal fees and settlement costs as we operate in a litigious, regulated industry. In addition, from time to time regulatory agencies and self-regulatory organizations institute investigations into industry or firm practices, that also may result in the imposition of financial or other sanctions. We invest significant resources to mitigate litigation and regulatory exposure by promoting sound operational procedures and obtaining comprehensive insurance coverage.

Costs for brokerage, clearing, and exchange fees declined which correlated to the decrease in overall trading volume and from our termination of a quarterly reporting service contract with our clearing firm.

Technology and communications remained relatively flat for the comparative periods, but marketing and promotion expenses declined as a result of canceling some of our advertisements we had in financial services publications.

Occupancy and equipment expenses also declined as a result of expiration of an office lease agreement in Topsfield, Massachusetts. Finally, other administrative expenses declined from savings on postage and delivery, office supplies, and other general office related expenses.

We had an income tax provision of $0.15 million for the three months ended September 30, 2012 as compared to $0.51 million income tax benefit for the prior period. The income tax rates for the 2012 and 2011 periods do not bear a customary relationship to effective tax rates primarily as a result of the increase in the permanent differences created by various accruals for each of the periods presented, particularly regulatory assessments, costs that were associated with our registration statement filing, and non-deductible executive compensation.

OPERATING AND NET INCOME

Results of operations were positively impacted by reduced operating costs in all categories. Specifically, we had reduced total compensation costs as the Company realigned its operating expenses with its top line revenues and profit margins. The Company reported $0.43 million in operating income as compared to $1.39 million of operating loss for the prior period. The Company's net income was $0.28 million, or $0.04 per basic and diluted net income per share, compared to net loss of $0.88 million, or $0.13 basic and diluted net loss per share, for the prior period.

The Company's net profit of $0.28 million was principally the result of decreased compensation costs, as well as an ongoing evaluation of strategic costs. The Company implemented specific expense reductions during the fourth quarter of last year to lessen exposure to operating losses while applying resources to sustain our recruiting and technology initiatives, all the while addressing growing compliance requirements. The Company is focused on growing revenues via recruiting new representatives to our corporate advisory platform ICA, as well as organically, therefore we continue to expand offerings in our internally developed CapitalCONNECT technology platform and related practice management programs.

         COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 30, 2012 AND 2011








                                   Six Months Ended September 30,               Change
                                       2012              2011            Dollar       Percentage
Revenues:
 Commission                      $    31,867,893    $   32,575,093     $  (707,200)     -2.2%
 Advisory fees                         8,089,985         8,266,088        (176,103)     -2.1%
 Other fee income                        676,330           211,963         464,367      219.1%
 Other income                            491,082           559,494         (68,412)     -12.2%
Total revenue                         41,125,290        41,612,638        (487,348)     -1.2%

Expenses:
 Commissions and advisory fees
expense                               32,736,807        33,326,157        (589,350)     -1.8%
 Compensation and benefits             3,039,968         4,762,840      (1,722,872)     -36.2%
 Regulatory, legal and
professional                           1,853,258         2,285,240        (431,982)     -18.9%
 Brokerage, clearing and
exchange fees                            702,798         1,024,971        (322,173)     -31.4%
 Technology and communications           624,218           681,944         (57,726)     -8.5%
 Marketing and promotion                 472,698           644,754        (172,056)     -26.7%
 Occupancy and equipment                 364,299           448,679         (84,380)     -18.8%
 Other administrative                    438,778           627,646        (188,868)     -30.1%
 Interest                                 13,803            16,941          (3,138)     -18.5%
Total expenses                        40,246,627        43,819,172      (3,572,545)     -8.2%

Operating income (loss)                  878,663        (2,206,534)      3,085,197     -139.8%
Provision (benefit) for income
taxes                                    336,760           (73,460)        410,220     -558.4%

       Net income (loss)          $      541,903    $   (2,133,074)      2,674,977     -125.4%

Adjusted EBITDA:                 $     1,147,384    $     (729,434)   $  1,876,818     -257.3%

Adjustments to conform adjusted
EBITDA to GAAP Net income
(loss):
 Income tax provision                   (336,760)           73,460        (410,220)    -558.4%
 Interest expense                        (13,803)          (16,941)          3,138      -18.5%
 Depreciation and amortization          (164,017)         (204,305)         40,288      -19.7%
 Non-cash compensation                   (90,901)          (67,927)        (22,974)     33.8%
 Non-cash compensation for
transfer of beneficial interest
to former Chairman                              -         (568,095)        568,095     -100.0%
 Non-recurring professional fees                -         (619,832)        619,832     -100.0%

Net income (loss)                 $      541,903    $   (2,133,074)   $  2,674,977     -125.4%


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ADJUSTED EBITDA

See information, above, regarding the relevance, calculation and use of adjusted EBITDA set forth in the comparison of the three month periods ended September 30, 2012 and 2011.

REVENUE

Revenues decreased by $0.49 million or by1.20% primarily due to a reduction in commission revenue while advisory fees had slightly decreased compared to the prior period. The decline in commission revenue is attributed to lower trading volume resulting from investor's cautious sentiment due to ongoing negative market conditions. This decline in brokerage revenue was offset by an increase in our direct business.

Our advisor-directed managed assets program, A-MAP, where investment advisory services are provided directly by our independent representatives, continues to contribute the majority of advisory services revenue. As mentioned in the three months ended analysis, A-MAP revenues declined offset by an increase in A-MAP FT.

Other fee income increased for reasons consistent with details that were explained in the three months ended analysis.

The decrease in other revenue, which consists of net marketing revenues and interest income, resulted


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primarily from an increase in marketing allowances from product sponsor programs reflecting an increase in sales volumes of investment company products offset by a decrease in net marketing allowances for events.

EXPENSES

Total expenses decreased by $3.57 million, or 8.20 %, principally as a result of decreases in commissions and advisors fees paid to our representatives, . . .

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